This Transcript Is Issued on the Understanding That It Is Taken from a Live Programme As It Was Broadcast

THIS TRANSCRIPT IS ISSUED ON THE UNDERSTANDING THAT IT IS TAKEN FROM A LIVE PROGRAMME AS IT WAS BROADCAST. THE NATURE OF LIVE BROADCASTING MEANS THAT NEITHER THE BBC NOR THE PARTICIPANTS IN THE PROGRAMME CAN GUARANTEE THE ACCURACY OF THE INFORMATION HERE.

MONEY BOX

Presenter: PAUL LEWIS

TRANSMISSION: 19th APRIL 2008 12.00-12.30 RADIO 4

LEWIS: Hello. In today’s programme, pressure grows on the Government to help 5 million low income people who pay more tax from this month. The Royal Bank of Scotland will ask its shareholders for £10 billion and admit its true losses from the credit crunch, as the Bank of England steps in with more help. We report on the scheme to make all your money safe, just in case there is a banking disaster. And we debate the moral case for inheritance tax.

But first, as we heard in the news, there’s growing unease among Labour MPs about the tax changes which started this month. We have reported several times since they were first announced, more than a year ago, that a cut in the basic rate of income tax will be paid for by scrapping the 10% starting rate on low earnings and pensions. Although most taxpayers will be better off, about 5 million on low incomes will pay more tax after the changes. Labour MPs at last seem to be waking up to the effects of the change. Des Turner is Labour MP for Brighton Kemp Town, one of Labour’s most marginal seats. He told the BBC this week that the 10% tax band had come up on the doorstep during local election campaigning.

TURNER: Yes it has, quite understandably, because it has been done in such a way that has exposed a lot of people on low incomes to pay more tax, which is totally inconsistent with everything that we’ve done since 1997 - that every budget has been weighted in favour of the less well off. That is very saddening, to say the least of it. I think some of us are at a loss to understand how this has happened.

LEWIS: Last night five ministerial aids, for whom 100% loyalty normally goes with the job, publicly expressed their concerns. Another had threatened to resign, but changed her mind, apparently after a transatlantic phonecall from Gordon Brown. Then, in a move which surprised everyone, Angela Eagle, a junior minister in the Treasury, hinted last night that change may be on its way. Asked about the cut on Radio 4’s Question Time, she initially defended the policy.

EAGLE: 16 million households were made better off by the package of tax changes in last year’s budget …

DIMBLEBY: I’m sorry …

EAGLE: … and the largest gains were made by the bottom 30%. So that is a progressive overall situation and that’s what budgets are about: making those choices. It’s not easy.

LEWIS: But then she gave this audience pleasing answer to David Dimbleby’s final question.

DIMBLEBY: Is there going to be a compensation package?

EAGLE: We’re listening and we’re looking and you must watch this space.

LEWIS: Well the Treasury is playing down her statement, but it has given hope to campaigners that the Government may be recognising the strength of feeling among Labour backbenchers. Frank Field MP was the first welfare reform minister under Tony Blair. On Monday he’ll table an amendment to the finance bill as it goes through Parliament to compensate people who’ve lost out. I asked Frank Field what the amendment did.

FIELD: Nobody - I hope anyway - I’m certainly not interested in wrecking the budget. Nor is it, I believe, practicable to put the 10p back. What it

is practicable to do is to pay those who’ve actually lost out cash payments. What the amendment will do, which I think will be moved on Monday week, will say that the Government is abolishing the 10p, but that clause giving them the power to do that cannot come into effect until the Government has published a package to compensate people who’ve lost out; and more than that - that Parliament approves the package. So it’s after a double lock on the Government.

LEWIS: And how would that work? How would you identify those groups and give them the money without giving it to everybody?

FIELD: We would actually operate through the Inland Revenue through the records that they’ve got now. They know perfectly well who previously was on 10p and who would, given their level of income, would have benefited from the 10p now and therefore they would single out those, I would argue, 5.3 million. The Government might argue that if everybody claimed the tax credits to which they’re eligible, then that number would fall to somewhat over 4 million. So between those two figures, they need to come up with a compensatory package. It will obviously be crude. If I was doing it, one would come out with average payments, so some would gain and some would lose, but there would be serious compensation for them.

LEWIS: And how much would it cost?

FIELD: It’s very difficult to do the figures. I’ve been tabling questions over the last year and the Government keeps giving rather bizarre reasons why they can’t provide the information. But if you take that we’ve got 4 million plus and the average payment is around £4 a week, we are talking about a compensation package in excess of £800 million, which is a very large sum of money but substantially less than reintroducing the 10p, which would overwhelmingly benefit those who properly benefit from the cut in the standard rate from 22 to 20.

LEWIS: And how long would it last because of course this isn’t a loss just for this year, although people are already now feeling it in their pay package? This is a loss that’s going to carry on forever.

FIELD: Well it will carry on for some time for many people. But budgets can only make changes for one year - so the package would run for one year but we would, as you rightly allude, we’d need to return the following year. But as incomes rise, hopefully fewer people would be eligible.

LEWIS: But the Government’s made it very clear this week, hasn’t it? Ministers have been almost queuing up to say we are not going to change this.

FIELD: Well I beg the Government to just draw back in that I do think what’s different between this and any other dispute that backbenchers have had with their government, this strikes at the very essence of what we joined the Labour party for and that is to protect the poorest and particularly the poorest in work. We’ve made so much about our welfare to work strategy. My guess is that as the days unfold and people make their views known, the Government will see that while they might have got the figures wrong on the losers and gainers over the abolition of the 10p, the sums will be much simpler to do on whether they’ll get a majority the following week when this amendment (I hope) may be called. And in those circumstances, why not come forward with that compensatory package and start claiming some of the credit rather than being pushed into it?

LEWIS: Frank Field MP. And earlier, of course, we heard Jonathan Dimblebly on Any Questions, not his brother on Question Time as I said. Apologies for that. Live now to John Whiting, a partner with PricewaterhouseCoopers. John, I hope I’ve got your name right.

WHITING: Yes.

LEWIS: How practical is Frank Field’s plan?

WHITING: It’s feasible. Let’s term it that, Paul. It would require a lot of administrative effort because it’s not a routine that the Revenue & Customs would normally do because, let’s face it, everybody who pays tax benefits to some extent from the 10p rate. You’ve got to winnow through that, try and find out those who

are really just losing, look at those on low incomes, perhaps get rid of the 65 pluses who of course are compensated by higher personal allowances. Big administrative effort, no easy answer, and I suspect whatever you ended up doing you’d compensate a few people who perhaps didn’t need it; you’d miss a few people who did it. It’s a rough and ready possibility.

LEWIS: Yes. I mean listeners have already been emailing us suggesting that they could raise personal allowances perhaps just for the over-60s. Would that work?

WHITING: Well that again would help because one of the cadres of people who do lose out by this are the early retirees - perhaps women who’ve retired at 60, people who’ve stopped working in their late 50s - so you could do that. And, again, you’d have to bring it in on a basis that started to claw back perhaps the higher allowances if your income was raised. Similarly, you could perhaps bring in a 10p band for everybody, but that again was clawed back if the income rose, and that again brings additional complexity.

LEWIS: Yes. Could we just have a simpler system where people who thought they’d lost out applied for compensation?

WHITING: Well that’s perhaps the perfect solution in one sense because what you do is perhaps potentially march into the Revenue and say, “Here is the evidence that I have lost out. Here’s my figures for last year, here’s my figures for this year. I am losing out by £153. That is what you owe me.” Now of course that’s administratively complex. It’s also going to take a lot of effort.

LEWIS: John Whiting, thanks very much. And we’ll keep you in touch with developments on that.

Now, are the banks finally admitting the scale of their losses in the crisis we call the credit crunch? This week, Citigroup, the world’s biggest bank, admitted losing $5.1 billion in one quarter; and next week Britain’s second biggest bank is expected to admit to around 5 billion pounds of losses last year and to ask its shareholders to

stump up twice as much, around £10 billion. Royal Bank of Scotland, which also owns NatWest, won’t confirm these reports, but its AGM is on Wednesday and the bank has said it will be issuing a statement. Last night it also became clear the Bank of England’s going to step in and make up to £50 billion available to all Britain’s banks. Well with me is Ralph Silva. He’s banking analyst at Tower Group. Ralph Silva, are the banks finally confessing the scale of their mistakes?

SILVA: I’m not sure if they know the scale of their mistakes. I think they’re confessing what they know and I think that’s what we’re seeing in the past few months.

LEWIS: That’s even more worrying if they don’t know.

SILVA: It certainly is. They have had an exuberant time, a decade almost of making enormous amounts of money, and it’s gotten so complex that the banks simply don’t have an idea of the total scale of this.

LEWIS: So Royal Bank, we believe, is going to come out and say maybe 4, 5 billion pound losses, ask its shareholders for £10 billion. What’s it going to use that money for?

SILVA: Well first there’s a safety margin built in there because they’re not sure that this is going to go away this year. It’ll probably last throughout the year. And, secondly, just to make sure that when they do make writedowns that they’re not going to exceed any of the regulations. There’s a regulation called Capital Adequacy, which in the very simplest terms it’s the amount of money that the Government insists a bank keeps in cash form. And quite frankly RBS is very close to that limit, so they need to actually put some level of area there. And of course their investors are going to lose out a bit on this, but there’s a queue of people lining up to buy this position.

LEWIS: Yes because shareholders, as I understand it, they’re offered extra shares. But of course that dilutes the shareholding and they have to pay something for these extra shares, so the dividends are going to be lower than they

have been in the past.

SILVA: Of course. Not only their dividends - and we expect the dividend payouts to actually decrease as a whole from an industry perspective - but their individual positions do deteriorate. But there is no shortage of people who want to actually take a piece of RBS. It’s a high quality bank.

LEWIS: Well it’s certainly been seen as that, hasn’t it? Are other banks in the UK going to follow suit? Are they going to be going back to shareholders for more money and maybe admitting even bigger losses than they have already?

SILVA: Well there are certainly going to be more losses announced by British banks. There’s no question about that. Are they going to be as big as the RBS rumours? Likely not simply because most of the other British banks are heavily reliant on retail banking. And having a lot of retail deposits means that you’re not as heavily reliant on the capital markets, and in other words you’re not as susceptible to these problems.

LEWIS: Of course Northern Rock was scuppered by that, wasn’t it? Royal Bank of Scotland is in nothing like that position surely?

SILVA: Oh can’t even compare the two. Royal Bank of Scotland is an extremely high quality bank that’s having a problem in one area and one area only.

LEWIS: And of course its Chief Executive, Fred Goodwin - he was known as Fred the Shred, wasn’t he, with all the cuts he made and the efficiencies - is his reputation rather tattered by this admission?

SILVA: You know I can tell you last week’s Lottery numbers; I can’t tell you next week’s Lottery numbers. He did a phenomenal job to the point where we got now and I think he’s dealing with it in a fairly reasonable way, so let’s give him a little bit of credit.

LEWIS: Now the Bank of England, we understand, will be making £50 billion available for British banks to borrow to increase the flow of money, the liquidity in the market. Is that going to sort out what remains of the credit crisis?

SILVA: It is such a small amount of money that the answer is quite simply no. And the other problem of course is they can’t just give it to British banks. They have to give it to all banks that are registered in the United Kingdom, which means some American banks and Asian banks will also have access to that, so it will not all end up exactly where they want it.

LEWIS: And many of those of course which have much bigger losses than the British banks?

SILVA: Many. Actually if you look at the British banks, although they have suffered they haven’t suffered anywhere near the American banks.

LEWIS: And briefly, Ralph, what next for the credit crisis? Are we even at the end of the beginning or maybe the beginning of the end?

SILVA: Credit crisis is an issue of conference. The only thing we see coming that’s going to change that is the US elections, which historically - no matter the victor - has had a positive effect on the capital market. So November is what we’re looking at the recovery.

LEWIS: Ralph Silva of Tower Group, thanks very much.

Now banks, as Ralph said, are also raising money from customers by keeping up the high rates of interest being offered on their savings accounts. The problems at Northern Rock though have made savers very conscious that banks can fail. The Government increased the amount protected in cash deposit accounts to £35,000 per person per separate financial institution, but in the last few weeks a number of adverts have appeared in a national newspaper for a new service called the Trustee Deposit Scheme. It promises to make sure all your money is protected without limit. The advert caught the eye of Money Box listener Colin from Northamptonshire.

COLIN: My wife and I recently inherited a sum of money, considerably more than £35,000. Being ignorant of details like which outfit belongs to who when it comes to compensation and where to get the best rates and be safe, we were interested in the Daily Telegraph advert for a Trustee Deposit Service. It does seem on the face of it to be an answer for the likes of us, but my questions are how does it work, is it a safe way to go or are they scaremongering, and are there any pitfalls?

LEWIS: Well Money Box listener Colin posing questions there, which I put to the man behind the Trustee Deposit Service: Julian Penniston Hill, Chief Executive of a company called Intelligent Money.

PENNISTON-HILL: We don’t offer anything that an individual couldn’t do for themselves. There’s no enhanced level of protection and there’s nothing within the service that you couldn’t do for yourself. We just simply ensure it is done. We segregate their money into amounts no greater than £35,000, and place these amounts with the institutions paying the highest level of interest at any given time. When one account stops receiving the highest level of interest - for example an introductory bonus ceases to be payable - we will then move that money to the next best paying interest account.

LEWIS: And what do you charge people for this service?

PENNISTON-HILL: One half of one percent a year.

LEWIS: So for someone with £100,000, that would be £500.

PENNISTON-HILL: £500 a year.

LEWIS: What will customers know about where there money is?

PENNISTON-HILL: Well there’s two methods for an investor to use this service. One is the trustee base where we actually set up a trust fund and we run their money

for them. They have no involvement in the switching of accounts and they receive a statement every 6 months to inform them of their trust fund. But it won’t break down every account they’re actually held in because we’re obviously moving accounts around quite regularly, so to keep somebody on top of that at any given time would be tremendously difficult to do. The other is the service outside of a trust where we actually complete all the forms for them, send them off to the clients to sign and open the accounts themselves, so they’ll receive their statements in exactly the same way as they would normally.

LEWIS: And just to be clear again about the fee. Whether you’re in the trust or out of the trust, it’s still the same - one half of one percent?

PENNISTON-HILL: It is, exactly. We’re doing the same level of work whether it is written in trust or outside of trust, so we charge the same thing.

LEWIS: How often will you move money?

PENNISTON-HILL: We’ll be monitoring the accounts on a daily basis, but we’ll apply a great deal of commonsense so we’d only make a move where the enhanced rate of interest justified them being out of deposit and earning no interest for the period of the move.

LEWIS: How will you choose the best?

PENNISTON-HILL: We’ll only consider any bank that’s authorised and regulated by the Financial Services Authority. Secondly, we will simply choose the accounts that pay the best rate of interest providing they offer instant access; or if people want to take their interest as income, providing they pay monthly income.

LEWIS: And if it’s instant access, how instant will that be from the client’s point of view?

PENNISTON-HILL: If it’s within the trust fund, they need to give us written notification that they want the money to be accessed.

LEWIS: Well this isn’t instant access then, is it?

PENNISTON-HILL: No, within the trust fund we won’t accept any requests that aren’t in writing. They can fax to us a request to encash money and we’ll encash it that day and send it to them.

LEWIS: Right, so it’s going to take a little while. It’s not like nipping down to the building society and taking the money out, is it?

PENNISTON-HILL: No it isn’t, not within the trust fund no. But if you opt for the service outside of a trust fund, then you simply contact the society themselves.

LEWIS: And if a bank where money is invested was to fail, would you do all the negotiating with the compensation scheme on the customer’s behalf?

PENNISTON-HILL: No, that’s entirely up to the customer. We’re simply ensuring that all of their money is protected to enable them to then seek compensation.

LEWIS: Julian Penniston-Hill. And you can hear a longer version of that interview on our website where you can also find the extended interview I did with Jonathan Clark from the Financial Services Compensation Scheme a few weeks ago.

News emerged this week that the entrepreneur Anita Roddick, who died last September, left nothing in her will to her children. All her £51 million fortune went to her charitable foundation to give away. She had described inherited wealth as “obscene” and that view was echoed this week in a paper by the Left of Centre Fabian Society. It set out what it called “the moral case” for inheritance tax and proposed changing it to taxed gifts throughout life as they do in Ireland. I asked the General Secretary of the Fabian Society, Sunder Katwala, what was moral about inheritance tax.

KATWALA: I think some form of tax on inheritance is essential if the tax system is to be fair. I think there’s an obvious unfairness if you work and you earn money, you are taxed; but unearned inheritance and gifts, which are about the accident of birth and it’s good luck, they’re untaxed.

LEWIS: So you’re suggesting that even during life if someone receives a gift, that money is taxed if it’s above what level?

KATWALA: The level would be a matter for debate, but we’re saying you could start with a tax free threshold of £80,000 or so and then have a set of tiers. The idea that it should apply to all gifts would get us out of the position where it’s a voluntary tax for the very rich who can have tax avoidance whereas the quite affluent pay it.

LEWIS: So that £80,000 limit before any tax was levied, would that be on a single gift or on gifts throughout your life?

KATWALA: That would be gifts throughout life.

LEWIS: You’d have to add them up during the course of your life?

KATWALA: You’d have a tax free allowance maybe of £2,000 a year for gifts, but if you were receiving gifts in excess of £2,000 in any year they would count towards this.

LEWIS: Well Professor David Myddelton, the Emeritus Professor of Finance and Accounting at Cranfield School of Management, is listening to that. David Myddelton, do you think there’s a moral case for inheritance tax?

MYDDELTON: No, not really. I mean I think there’s a practical case against it, which is it doesn’t raise much money, so what it’s trying to do is hurt the rich or the semi-affluent and not to help the poor. It doesn’t actually help the poor at all, so I don’t see where the moral case is.

LEWIS: But there are an awful lot of taxes that bring in as little or less than inheritance tax. I mean the tax on beer and cider brings in about the same, but that doesn’t mean we should scrap it, does it?

MYDDELTON: Well hang on, you haven’t taken into account the costs of collection and all the hassle costs. Don’t forget lots of people worry about inheritance tax who in the event never end up actually paying it, so the compliance costs and the taxpayer worry costs are actually enormous.

LEWIS: And what do you think about the practical suggestion of adding up the gifts throughout your life and taxing you as soon as you exceed those amounts?

MYDDELTON: That strikes me as a very academic proposal from someone who doesn’t have experience of the real world. Are people genuinely supposed to keep records for 30 or 40 or 50 years, keeping a cumulative total of how they’re doing? That seems unworkable to me. And you know what about something like inflation? How are you going to take that into account over 50 years?

LEWIS: Sunder, how do you react to that - this is just a tax created by some academics in an ivory tower; they don’t really know what they’re talking about in the real world?

KATWALA: Well it was designed based on the Irish example and they’ve had it since 1976, so you’d have to account for the gifts. If you’re receiving more than £2,000 a year in cash gifts, then you would have to account for them. The idea it doesn’t raise anything, I mean we’re talking about three and a half billion pounds, which is one percent of all taxes, but there’s a broader argument about doing away with that. You could say let’s do away with that, we don’t want it, but you would have to certainly say we don’t mind about the level of social immobility in this country and we’d rather there was less social mobility. And in a country that’s got the least social mobility of any other advanced country, along with the United States, that would be a very strange thing to say and the opposite of what all of the politicians of all of the parties say, even those who want to reduce inheritance tax.

LEWIS: How does this help social mobility though because if people feel that if they do go out and earn or make a lot of money, it’s all going to be taxed when they die, surely that’s going to reduce their incentive to go out and do things?

KATWALA: Well the idea that people are worrying about it and so on, if you’re paying inheritance tax you must have received in the end after the tax several hundred thousand pounds. It’s a good problem to have. And the idea there’s some great incentive effect, I think just doesn’t stack up. But there is a problem of social mobility. If you think about it, people tend to marry people from their own social class. People in their fifties tend to inherit, not people in their twenties. Couples who’ve got married will probably inherit the properties of both of their parents. And then we look and we see that mortgages at the moment, you have to have 10% for the deposit. You will only own a house in this society if your grandparents owned a house and inheritance tax, getting rid of it, would just be a way of entrenching that.

LEWIS: And David Myddelton, do you think inheritance tax plays any part in social mobility?

MYDDELTON: Not really. I mean it seems to be some sort of hunger for equality, which I don’t fully understand. I mean why is equality supposed to be so desirable? Why have you got to reduce the wealth of the rich? I like wealthy, independent people. I don’t want to increase the power of the Government still more by increasing taxes. I want to reduce taxes and get rid of them.

LEWIS: But scrapping it immediately would mean a penny on income tax, wouldn’t it?

MYDDELTON: Well it wouldn’t. I mean you’re making the assumption for some unknown reason that the Government’s revenue has to be maintained at what it currently is. Now most of us don’t live that way. Most of us have to live within our means. I wouldn’t mind the Government cutting out some of the waste that it’s incurring the whole time.

LEWIS: Right, so cut expenditure to enable you to pay for scrapping inheritance tax?

MYDDELTON: Cut expenditure to get the Government much, much smaller. The Government is far too big. Inheritance tax is just another tax that we could well do without.

LEWIS: So that’s the simple answer from you: scrap inheritance tax?

MYDDELTON: Absolutely.

LEWIS: Sunder Katwala, your reaction is scrap inheritance tax but replace it with something more complicated?

KATWALA: Basic principle of society. Unless you want to say the society’s too socially mobile, let’s make it more difficult to be socially mobile, let those who have keep it and have more, let housing wealth be inherited by the generations, let the people who can’t get a foot on the ladder never get there. If that’s your vision of society, at least argue for it honestly but let’s stop the double taxation, the death tax argument, and say this is a fair way to make a contribution when you have a windfall gain. You’re still keeping many, many tens of thousands of pounds.

LEWIS: Sunder Katwala from the Fabian Society and also Professor David Myddleton from Cranfield School of Management. Now you can have your say on inheritance tax, its morality and those Fabian plans on our website, bbc.co.uk/moneybox.

That’s it for today though. You can also find out more there or from the BBC Action Line - 0800 044 044. On our website you can download the programme onto your computer or get a podcast sent to you every week. Apologies for the problems last week with the podcasts; they’ve now been resolved. I’m back on Monday with Money Box Live taking calls on pensions. Back next weekend with Money Box. Today the producer was Lesley McAlpine and I’m Paul Lewis.