My Lords, the noble Lord, Lord Wakeham, has taken me back to those long nights we used to spend on the Finance Bill in the House of Commons. We would go in at around three o’clock in the afternoon and come out at seven o’clock or eight o’clock the following morning. I worked for something like eight years on those Finance Bills in the 1980s and I always remember Peter Rees, who came here subsequently, standing in his braces early in the morning asking for his breakfast in between amendments. They used to bring it in for him on a plate. However, he is no longer with us.
When I decided to speak on this Bill, I went to the Printed Paper Office and was given a copy of the Bill. I have never seen a Finance Bill as large as this in my life. When I was in the Commons the Finance Bill was about half an inch wide, now it is more than an inch wide. I do not know what is going on, so obviously something is happening which I do not quite understand.
I want to concentrate on three issues. The first is inheritance, the second is stamp duty and the third is the treatment by HMRC of private landlords. Inheritance tax is referred to in Clause 30 but is limited to dealing with rules on residence. No reference at all is made to stamp duty, although it is a hot subject in the country because of people’s concerns about the way the current system, with its surcharge, is operating. Private landlords are dealt with in Part 4 of Schedule 4, but it seems to deal only with losses on property as against profits and their taxation.
I shall start with inheritance. I should make it absolutely clear that I am totally opposed to the system as it currently operates. I am opposed to the seven-year tapered relief arrangement. Indeed, some years ago I was asked by family members to help arrange a will that would take advantage of the seven-year arrangement, but as a matter of principle I refused to do it. In my own case, I would not dream of doing it in my will. I very much favour the 10% reduction for those who make charitable donations, which in effect reduces the rate from 40% to 36%. We have taken advantage of that within my own family. I am also, as are we all, pleased with the arrangements for inter-spouse transfer free of tax. However, I believe that we could raise far more money under the inheritance tax arrangements.
I have spent some time looking at what happens in Germany, which has a very successful economy. I suspect that we could learn a lot from Germany in many areas of taxation and industrial strategy. The Germans pursue a system which for years I have been arguing for, whereby the tax is paid by the beneficiaries, not by the deceased’s estate. If we were to go down the German route, we would then pay in the UK context tax on inheritance at a person’s marginal tax rate, but we would have a differential threshold for family, friends or charities. We could have a different threshold for each group of recipients. But the recipients of a will would pay the tax at their marginal rate over and above the threshold. This has one great advantage: it really does lead to a wider distribution of wealth. Those who want to minimise their tax liability will spread their estates more widely so that more people benefit. If they are on a low marginal rate or not paying any tax, they may well gain from the arrangement I am advocating.
However, I think that overall it would actually lead to a far greater tax take. I have tabled Questions about this matter, but the Treasury has never done any work on it. I think it is somehow fearful of upsetting the public, but I do not think that it would. A lot of people in this country are worried about the effect of inheritance tax on the property market. It is grossly inflating the price of housing. I know that over the years my own party has been fearful about looking at this, but it is the way forward and we should look at what is happening in Germany and to what extent it works.
I turn now to the issue of stamp duty and the surcharge. I understand that it was introduced to slow down growth in the buy-to-let market, but its operation has consequences for the wider property market. The surcharge is slowing down the market, particularly here in London. We all know that when the market in
property slows down in the United Kingdom, it always starts in London and then it radiates out. How we affect the property market in London can undermine confidence nationally, so I think that we should reconsider that surcharge. People are caught in a trap when buying and selling. If you buy a house, having not sold your existing house, you end up with the house you are purchasing being treated as your second home for stamp duty purposes.
In a Daily Telegraph article, Sam Meadows put it this way:
“An additional 3pc surcharge on second properties was introduced last year as a measure aimed to slow the growth of buy-to-let. But it quickly drew criticism, including from those home-movers who buy their next property before selling their current one. Under a ‘replacement main residence’ rule, people who do this who must pay the higher stamp duty rate upfront. They are then eligible for a refund if they sell their former home within three years. Government figures, released today, reveal HMRC has had to give refunds on 10,700 transactions at an average cost of £11,869. Lucy Brennan, a partner at accountancy firm Saffery Champness, said having to make a payment of that size could prevent families from moving on to their ideal property”.
There is every evidence that the system is damaging the property market, and the Government should look at it in the Budget, even as early as next week.
This reminds me of the import deposit scheme that, as some Members may remember, was introduced in the 1969 Labour Budget, nearly 50 years ago. Under that scheme, importers had to pay an additional sum of money to the Revenue—what was then Customs and Excise. The idea behind that was to restrain, to some extent, the increasing level of imports into the United Kingdom. The effect was that the Government were effectively gathering in money, which was then offset when it later had to be repaid. Firms were set up to buy the liability to pay the import deposit levy, so importers ended up paying interest on the money they were borrowing to pay the scheme. Of course, they got the money back in the end, over a six-month period, I think. So, stamp duty is operating in very much the same way—being collected, then being given back.
There are two ways to deal with that. If the Treasury does not want to spend a lot of money, it could extend the time to sell property from three to five years. That is one way to deal with it; on the other hand, the more expensive—but preferable—option would be to cease upfront payments of the surcharge.
Finally, I want to move to the question of landlords and their payment of tax to HMRC. I want to pray in aid to a report produced by the London Borough of Newham, which I got hold of this week. I do not know if the Minister has seen the report, but I advise Treasury officials to dig it out. It states:
“the primary purpose of Newham’s licensing scheme is foremost to protect tenants. We have shown that private rented sector licensing has ancillary benefits in ensuring landlords meet their tax responsibilities both to local and central government … Through the data collated by our private rented sector licensing regime, we have been able to assist HMRC in assessing tax compliance by landlords. It is our understanding that a significant number of Newham’s landlords are of interest to HMRC, where there are discrepancies between declared income and our records. Based on research Newham conducted, which was independently evaluated by the Institute for Public Policy Research (IPPR), we estimated that the amount of undeclared tax by landlords in London alone back in 2014 could be as much as £183.1 million.
The rapid growth of the private rented sector and escalation in rent levels since means that the amount of undisclosed tax is now potentially even greater. The Treasury currently estimates that the national tax gap from rental income is £590 million”.
So, Newham is stating a figure of nearly £200 million in London alone, and the Treasury is stating £590 million nationally. I think that £590 million is a gross under- estimation of revenue lost because HMRC does not have the resources to follow up in the way that Newham Council can in the case of private landlords.
The report then states:
“Newham emailed all licensed landlords in partnership with HMRC shortly after introducing the scheme, advising landlords how they could get their tax affairs up to date. As a result, it is our understanding that a number of landlords on our register voluntarily disclosed previously undeclared rental income. Newham has also provided HMRC with the details of all registered landlords in the borough. It is our understanding that this uncovered a significant number of landlords who may not be declaring their income”.
Why do the Government not promote this idea of a registration scheme for landlords nationally, for every borough, whereby they could link up with HMRC and increase the tax take from private landlords? I was put on to this by a chap called Mr Gunston, who wrote to me last week. I had asked the noble Lord, Lord Bourne, a question on this matter. Mr Gunston said:
“Clearly Lord Bourne had not read the report by the London Borough of Newham that of the 26,254 landlords on its Houses in Multiple Occupation register, some 13,000 had not registered with HMRC for tax self-assessment. You will be aware that it is a requirement for all landlords receiving annual rent of £2,500 or above to register for tax self-assessment with HM Revenue and Customs. Given that this is just one London Borough, if replicated across London and the remainder of England, it would suggest that there is a significant problem of landlord tax evasion and the loss of significant tax revenues. In an era of limited government finances and a large government debt, clearly Lord Bourne needs to take the issue of tax evasion and tax avoidance more seriously”.
I was not expecting the noble Lord, Lord Bourne, to give me an immediate answer at the time, but I think he may wish to refer to my modest contribution to the debate.
All I am saying is that there is a lot more money to collect out there. When we hear of reductions in resources available to HMRC, that fact is worrying. The Government should act on the basis of information I have provided, which I would have thought HMRC is aware of but unable to deal with at the present time.
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