New Clause.—(ALLEVIATION OF ESTATE DUTY ON FAMILY BUSINESSES.)

HC Deb 23 June 1953 vol 516 cc1697-734

(1) Where in determining the value of an estate in respect of which estate duty is payable on the death of a person dying after the commencement of this Act, industrial buildings or machinery and plant have to be valued for any of the purposes of estate duty and the value thereof is reflected directly or indirectly in the value of any property passing or deemed to pass on the death, to that extent and on that proportion of the value of the said property, the rate of estate duty charged shall be subject to reduction of like amount to that applicable to the agricultural value of agricultural property as provided by subsection (1) of section twenty-eight of the Finance Act, 1949.

(2) For the purpose of this section: industrial buildings" means any industrial building or structure or any part thereof as defined by section two hundred and seventy-one of the Income Tax Act, 1952; machinery and plant" means machinery and plant in use for the purposes of any trade or business.—[Sir W. Wakefield.]

Brought up, and read the First time.

Sir Wavell Wakefield (St. Marylebone)

I beg to move, "That the Clause be read a Second time."

This Clause deals with the alleviation of Estate Duty on family businesses. There are five questions which I should like to put to the Committee and which I shall also try to answer. If I answer them satisfactorily I hope that this new Clause will receive the sympathetic consideration of the Chancellor and the support of the Committee. The first question is, what is the purpose of this Clause; the second, is it practicable; the third, is it desirable; the fourth, is it necessary, and the fifth, what are the objections, if any? If I can satisfactorily answer those questions I hope that we may see this Clause included in the Bill.

The purpose of the Clause is to provide an immediate measure of relief to those family manufacturing businesses where the death of the principal occurs. Sections 46 to 59 of the 1940 Finance Act provided for valuation by assets for the purpose of Estate Duty. This method of valuation undoubtedly bears very hardly on family manufacturing businesses, and certainly causes uncertainty. Arising from that uncertainty, much anxiety exists in the minds of those running family businesses as to what may lie in store for them in the future should a death occur.

I shall deal with this matter at greater length later on, but at this stage it might be convenient if I drew the attention of the Committee to the fact that the forerunner of Section 55 of the Finance Act of 1940 was Section 34 of the Finance Act of 1930. The essential point of the 1930 Act was that genuine industrial and manufacturing concerns were expressly excluded from its penal provisions. The main object of Section 55 of the 1940 Act was to strengthen the 1930 Act which, in some respects, had been found to be ineffective against calculated evasion or avoidance, particularly in the case of investment companies.

It was not the genuine manufacturing concern which had practised such avoidance, because those concerns were not affected by the Act of 1930. The fact remains that Section 55 of the 1940 Act was so widely drawn as to bring the genuine industrial manufacturing concerns within its net, with grave consequences to private family manufacturing businesses.

It would not be out of place if, at this juncture, I pointed out that when Section 55 of the Finance Act of 1940 was put on the Statute Book it was done with very little discussion and with inadequate examination, for the very good reason that that discussion took place in the same week as the evacuation from Dunkirk and, as everyone knows, at that time we were more preoccupied in struggling for our survival. I would draw the attention of the Committee to the fact that another kind of survival is now being fought for—the existence and continuance of the family business, upon which much of the building up and the greatness of this country's commercial expansion and activity depended in years gone by.

I am sure that hon. Members on both sides of the Committee would agree that it would be a real national tragedy if, because of our preoccupation with the nation's survival 13 years ago, legislation were passed which caused the death of one of the economic pillars which enabled our country to survive at that time. It was the initiative of the individual in the little boat which enabled the miracle of Dunkirk to take place, and it has been the initiative and enterprise of the small family businesses upon which the greatness of our commercial past has been built.

There is no doubt that the future prosperity and success of our commercial expansion still depends upon the initiative, capacity and the successful operation of the small businesses, the family businesses and partnerships, and those who might properly be described as small manufacturers. If the Chancellor will give sympathetic consideration to this Clause, and if the Committee will give it their support, the genuine manufacturing concern will be given a much needed and welcome relief in respect of those fixed assets which have been specified, such as buildings, plant, machinery and equipment. This can be done without touching on the many complications involved in any amendment which would otherwise be necessary to Section 55 of the 1940 Finance Act.

4.30 p.m.

This Clause applies to all the smaller manufacturing concerns, whether owned by limited companies, partnerships or individuals. An obvious parallel is the special treatment enjoyed by agricultural land. In 1935, agricultural land was exempted from the increase in the general rates of Estate Duty imposed in that year, and has been exempted from subsequent increases in the general rates of duty.

The present position is that under the Finance Act, 1949, agricultural land pays a duty of 55 per cent. of the general rate. I think I am correct in saying that the object of that special treatment was to maintain capital invested in the agricultural industry. I think it is true to say that that object has, to a considerable extent, been achieved with great advantage to agricultural production, to the well-being of our farms and to the nation as a whole.

I suggest to the Committee that it is just as important today to achieve the same objective in respect of the small manufacturing business where it is essential to maintain its capital resources intact. For that reason, I submit that there is complete justification for including this Clause in this Finance Bill.

By his Budget statement and in this year's Finance Bill, the Chancellor has shown the need for increased production, initiative and incentive and for the ploughing back of profits into industry in order to improve efficiency and to make ourselves competitive in the overseas markets. I suggest to the Chancellor that by adopting what is proposed in this Clause he would be furthering his own stated aims and his own policy. I go further, and say that if he does not do this he will prevent and hinder the very things he desires to achieve.

I do not see how anybody can be expected to go on ploughing back profits into his business, purchase new machinery, expand buildings and develop his activities when he knows full well that, if he were suddenly to die, the more he had ploughed back into fixed assets, the more likely is his family to be left destitute owing to the high rate of Estate Duty and the way it is calculated at the present time under Section 55 of the 1940 Act. If this new Clause were accepted it would undoubtedly ease the situation.

On Monday, 8th June, a very interesting article appeared in the "Financial Times" dealing with death duties and the private company, which the Chancellor may have seen. The article pointed out how very much better these things are done in the United States of America where death duties on private family businesses are calculated in such a way as to avoid the anomalies and hardships experienced in this country. While, perhaps, this new Clause would not do away with many of the existing anomalies, nevertheless it is true to say that it would greatly assist in overcoming the anxieties and difficulties which face the family business at the present time.

I now come to my second question, which is whether the introduction of this new Clause is practicable. Although it is not suggested that fixed business assets should be freed from death duties altogether—this new Clause only suggests partial exemption—nevertheless, it may not be a bad idea to see what, if any, adverse consequences there would be for the rest of the community if complete exemption were granted. It appears that approximately one-fifth of the total amount received in Estate Duty represents the duty levied on the assets of private companies and other small trading concerns.

In actual cash that one-fifth amounts to between £30 million and £40 million per annum. I suggest that the subtraction of this amount from the tax revenue would not necessitate the imposition of a counteracting burden on other sectors of the community since death duties are treated as a transfer of capital from the private to the public sector. Therefore, how much or how little is transferred is quite irrelevant.

Since less than half of this amount is affected, it would mean that some £15 million of capital would be retained in the private sector instead of being transferred to the public sector. I suggest that the national economy would benefit far more from the retention of this comparatively small sum of capital in the private sector than from its transference to the public sector. It would seem, therefore, that what is proposed in this new Clause is quite practicable.

I now come to the next question of whether it is desirable. Three years ago almost to this very day I moved a new Clause, somewhat similar to the present one, during the discussions on the Finance Bill of 1950. It is recorded in HANSARD what I said on that occasion about the desirability of giving a measure of relief to the small manufacturing businesses. At the same time, I pointed out the advantage which would undoubtedly result to our national economy as a consequence of so doing. Everything I said on that occasion has been more justified in the intervening years.

I would remind the Committee that according to the statistics of the Ministry of Labour, about 56 per cent of those employed in the manufacturing industry work in organisations employing fewer than 500, but more than 10 people. There is, of course, quite a large number working in businesses which employ fewer than 10 people, but I do not think that statistics are available in their case.

It is desirable that steps should be taken to see that small manufacturing businesses are not eliminated from our economy. I am sure that all hon. Members will agree that the small family business is an economic form of organisation for the production of a wide range of specialist goods, particularly in the craft industries where sentiment plays an important part and where personal attachments and interests are vital factors.

A considerable amount of our future export trade will undoubtedly depend on speciality and quality products such as this type of family business produces. I am sure the Committee will agree that only in this way shall we succeed in maintaining and expanding our hold on overseas markets which the Chancellor has said is so necessary to our well-being. Just as in the forest it is continually necessary to plant young trees to replace the older ones, so, in our industrial progress, the same sort of requirement is necessary. We continually need to have a number of small and energetic businesses available to replace those which decay. It would be a great tragedy if that were prevented from happening owing to a system of penalising death duties.

I feel that I can carry the Committee with me when I say that a family business is also the home of industrial experiment. British ingenuity and inventiveness are second to none, and although our big businesses, the large combines and public industrial undertakings, do a great deal to further research and development, nevertheless an important part is played by our small family businesses in many directions in experimenting with and developing new processes and inventions. It is in this direction that we are behind in comparison with the U.S.A.

I now come to my fourth question: is the Clause necessary? Because of their deep concern about the effect of the present scale of death duties on small manufacturing concerns, the National Union of Manufacturers asked the "Economist" Intelligence Unit to undertake an independent examination of the position within recent months. A very interesting memorandum has been produced by the unit. It is full of figures and statistics with which I do not propose to weary the Committee. I believe that many hon. Members have copies of the memorandum, and I know that the Chancellor of the Exchequer has studied the document.

As a result of the investigation the unit said that it would appear that some alleviation of the burden of death duties on private companies, partnerships and other small businesses is vital. In referring to sets of figures on pages 7 and 8 of the memorandum the unit said: These figures are sufficiently startling in themselves, but unhappily they do not do more than touch the fringe of the real gravity of the problem facing the small business today. The unit also said: The impression thus remains that something over 25 per cent. of small businesses with assets of £10,000 in individual hands must have their activities eaten into when their owners die, even on the Inland Revenue figures, and this percentage might be very greatly increased if allowance were made for the factors that we have outlined above. Towards the end of the report it is stated: This study demonstrates a very high proportion of the small businesses in this country must have their production interfered with or their forms of organisation changed as a result of the approach or fact of death of their main owners. Moreover, as small businesses which have been built up in the days of high (post-1939) taxation come under the hammer of death duties, it is likely to be found that larger percentages of the small business man's assets are tied up in trading assets, so that more and more businesses will have to be broken up or sold. When this factor is taken into account it seems probable that more than half the small businesses now operating in this country will be affected by death duties in one way or another. By a strange coincidence, at lunch today I was sitting next to a colleague who said that his brother had died recently and that it seemed almost certain that his nephew would have to wind up an important family business which was of great value in the county where it was situated.

In the concluding paragraph of its report the unit said: The real hardship lies in the very stultifying effect upon the development and growth of an important sector of the community. The case histories that have been considered in this memorandum show only too well that this retardation is caused not only by the existence of duties when death actually occurs and not only in the disruption of management and the activities of the firm when counter-measures are taken before the death occurs, but also in the uncertainty and hesitation produced long before the death takes place whether or not steps are taken to lessen the existence of duty beforehand. Decisions to renew old or obsolete equipment, to open up a new line or market, to establish a new factory or to develop a new project are frequently postponed if the possibility of death duties threatens. 4.45 p.m.

It seems to me that the statements which I have read out are sufficiently clear and emphatic, coming, as they do, from a most careful, authoritative and impartial examination of the position, to show beyond doubt that it is indeed necessary to have a Clause such as my hon. Friends and I are proposing. The statements have shown that the introduction of the new Clause is an immediate necessity. It is constantly pressed upon the country that increased productivity is the only permanent solution to our current economic troubles and that only more intensive capital investment will enable productivity to rise to any appreciable extent. If the development of that portion of the manufacturing sector of the economy where the need for higher productivity is most apparent continues to be restricted by present fiscal legislation, the improvement which could be achieved will be greatly delayed and it may well be prevented from ever taking place.

My last question is: what, if any, are the objections? The objections were raised by the Solicitor-General in the Socialist Government in 1950 and by the Economic Secretary in 1951. I have dealt with them this afternoon, and they were also dealt with in the report by the "Economist" Intelligence Unit, and there is now no need for me to trouble the Committee further on the matter.

I hope I have made clear what the purpose of the Clause is, and shown that, if it were introduced, it would be practicable, that it is both desirable and necessary, and that any objections which there may have been in the past are now without substance because of the evidence provided in the report, which is available for all to see and which I have not time to give the Committee this afternoon. I hope I may have the sympathy of the Chancellor and the support of the Committee for the new Clause.

Mr. Austen Albu (Edmonton)

Every case must have some truth and some justice in it. In his speech, which I thought was long even for this Committee, the hon. Member for St. Marylebone (Sir W. Wakefield) mentioned the well-known case for the proposed Clause, but at the same time he repeated a large number of myths and non-sequiturs than I have ever heard in a single speech since I have been a Member of this House.

It seemed that the hon. Gentleman was not at all clear in his own mind as to the purpose for which he was moving the Clause. At one time he was trying to wring tears from our eyes for the destitute families of businessmen after the businessmen had died. At another time he was telling us that the whole economy of the country would come to ruin if we were unable to reduce the weight of Estate Duty on family businesses, which, he said, play such a substantial part in our economy. Among the complete myths in the hon. Gentleman's remarks was the one that we are in any way dependent on those businesses. It is true that there are a large number of small businesses in the country, but a very large part of them are not making a major contribution towards our economy, especially towards our exports. Particularly is this the case with new scientific developments, experiments and so on.

Mr. George Odey (Beverley)

Will the hon. Gentleman state on what foundation he bases his statement about the export trade?

Mr. Albu

I make it on the basis of figures which any hon. Member can look up for himself, with which I shall not weary the Committee now. If the hon. Member for St. Marylebone will examine the mere figures of the number of companies in this country he will easily discover that only a very small part of the export trade can possibly be dependent upon family businesses.

The hon. Gentleman argued again that the export trade of this country is dependent upon some sort of special, high-quality goods in the specific field of the small family business. No one denies that these businesses contribute a very small part of our production and exports. If we are to have that argument, I suggest to the hon. Gentleman that it is better not to exaggerate it, and then his case may be received rather more favourably.

Sir W. Wakefield

Does the hon. Member suggest that the prolonged work and exports achieved in the North American market of the private family business of Jaguar Cars is any exaggeration?

Mr. Albu

Not at all. Let us have some sense of proportion. Jaguar car exports are very valuable. The hon. Gentleman was talking as if the whole of the business of this country was dependent on the family business. Let us see what is the real situation and what the hon. Gentleman is really asking for.

Nobody in the Committee denies the necessity to encourage the small business, to encourage somebody to start, as in the case of Jaguar Cars, a new line of production and, if he can, build it up. I have frequently in the Committee in previous years moved Amendments to try to encourage the small business—the man who is trying to build up a business with insufficient capital and with all the difficulties with which a small business is faced in raising money, particularly under present financial conditions.

That, of course, is a rather different matter. It is not what the hon. Gentleman was asking for, although a large part of his speech appeared to be doing so. What he is asking for is something quite different. He is asking that the heirs of a businessman should be treated differently from the heirs of other people. He is asking that the duty that should be paid on the estate of a businessman should be less than the duty paid by other people. I do not want to go into exact details of the way in which the Inland Revenue assess the value of an estate when it passes. It may be that some minor adjustments are required, but that is not what the hon. Gentleman was asking for. He was asking for a very substantial reduction in the Estate Duty to be paid. There may be a number of reasons put forward in favour of this.

The hon. Gentleman referred to the destitute families of these businessmen. There is no evidence at all that as a result of the present level of Estate Duty on family businesses their heirs are destitute or become destitute. It may well be that they have to take certain action which they do not want to take in order to avoid becoming destitute, but they do not become destitute merely by the operation of Estate Duty, and, in my opinion, it is wrong to exaggerate the case in that way.

I suspect that what the hon. Gentleman wants to do is to reverse the present direction of taxation, particularly the taxation of inherited wealth. There is a continual pressure from the other side of the Committee that this should take place —so that the ownership of wealth shall be maintained in the hands which at present have it and that it should be handed on from generation to generation.

I agree that the present levels of Estate Duty and death duty generally are high, but there is no evidence whatsoever at the present time that they are so high that there has been any very substantial change in the distribution of the wealth of this country over the last 50 years. I would rather see them very much higher. Those who sit on this side of the Committee are convinced that there has to be a radical redistribution of wealth.

The final argument used on the other side of the Committee, in conjunction with the personal arguments—and one is never quite certain whether the argument is because of the personal sufferings of the individual or the requirements of the national economy—is on the ground of economic policy: that these businesses will not be built up, that they will be destroyed and that the national economy will suffer accordingly if there is not a substantial reduction of Estate Duty.

The hon. Gentleman in practically the whole of his speech was, I think, referring to industrial businesses because he made several references to the valuation of the fixed estate and so on. No one is going to suggest that because of the level of duty the physical assets are destroyed. It may be true that the continuing ownership may have to pass, and we all know that it is frequently the case that it is necessary to turn a private family business which has been a private company into a public company sometime before the death of the founder in order to raise the cash to pay the Estate Duty. But none of the figures published so far, either those of the Board of Inland Revenue last year or the figures published by the chambers of commerce or by the "Economist" really give any reason to believe that the real control of a company of that sort passes on the death of the owner.

In the vast majority of cases, undoubtedly more than 50 per cent. of the value of the equity will remain in the hands of the heirs, but even in the case where it does not, the proportion that does remain is certainly sufficient to maintain the control of the business in the hands of the heirs. We all know that in recant years the Industrial Commercial Finance Corporation have set up a special body to assist this particular type of business. If we consider the matter further, one has to consider how long it is desirable that a manufacturing business should remain in the hands of one owner.

I am not referring to the question of the inheritance of wealth and whether wealth should be redistributed or passed on from one generation to another, I am referring to the economic desirability of maintaining a business in family hands. I am quite convinced that it is quite undesirable that a business should remain in the hands of one family for more than one or two generations.

I have already said that I think that in the present situation it will remain in the control of the second generation and in most cases in the control of the third. There are many businesses in which we know control can be maintained by all sorts of methods and by not involving the holding of any very large proportion of the total financial capital of the company. Even in cases where those methods are not resorted to, I think that it is pretty clear that the control will go over a generation or two even under present conditions. Is it desirable that it should go on for ever?

I think that one of the biggest defects in British industry, particularly in our older industries, has been nepotism. The hon. Gentleman has probably seen referance in Manchester to the effects of nepotism in the textile industry. I do not think there is much disagreement in the Committee—I should be surprised if there were—that one of the biggest handicaps to the Lancashire cotton textile industry was its continuous family ownership.

What frequently happens in businesses of this kind is that the main interest of those who have to manage it in the second or third generation is the maintenance of the income of a large number of people who play no part in it whatsoever—of a group of families, old aunts and so on. They play no part in the business and take no interest in it, and their only concern is that they should be able to maintain their incomes at a time when the value of money is falling and they want to get a higher return. This is one of the reasons why so many of our industries have been starved of capital, have not had sufficient profits ploughed back and the physical assets of the industry have been run down. I do not think that anyone who knows Lancashire would deny that.

5.0 p.m.

I must say that when I had to go round Lancashire before the war trying to buy things, or to initiate the making of something, such as a piece of machinery, and went to some of the businesses supposed to be leading manufacturers of certain types of equipment and materials, and which were being run by the second or third generation, I was not surprised that Lancashire was in the state it was before the war. I suppose that today the majority of the businesses in Lancashire which are successful, and have modern plant and equipment, and new ideas and research, are probably not family businesses at all, but large companies.

Frequently it is the case in family businesses that not only is there frustration among those engaged on the technical and managerial side who are not themselves members of the owning families, but the members of the families themselves are not particularly qualified, and hold their positions in the businesses merely because of the ownership of shares. I think that to reverse the present trend would be not only unjust, and not only, from the point of view of this side of the Committee, against the whole of the development of the redistribution of wealth that we so badly need in this country, but probably also economically disastrous.

Everybody agrees that new businesses must be allowed to start, and I have no objection to the founder of a business making a fortune, but I see no reason why his children and his grandchildren should be entitled to receive the benefit of his enterprise and initiative and brains irrespective of whether they have themselves the initiative and the brains to carry on the business. That is really what the hon. Gentleman is asking for. It is inconceivable that, if a family business is floated as a public company, and if other capital is brought in, and the shares are sold on the Stock Exchange, whoever buys in will not keep the sons and the grandsons as managers if they are doing that job efficiently. If they are not doing it efficiently it is time they went.

The arguments which the hon. Gentleman used were very largely myths, and it is very important that we should understand what he is asking for and the reasons for which he is asking it. I have no doubt that, in his usual manner, the Economic Secretary, who, I suppose, is to reply to the debate, will refuse this new Clause. In view of the terms in which I have opposed it, he will, no doubt, make some platitudinous references to the general support of the Chancellor of the idea, but I say categorically that I entirely oppose the idea on any ground whatever, whether on the ground of equity or on the ground of economic policy, and I hope, therefore, that the Economic Secretary will not only refuse the new Clause but will not even offer it any consideration whatever.

Mr. Odey

I do not propose, in supporting the new Clause, to follow very far the somewhat sterile arguments of the hon. Member for Edmonton (Mr. Albu). It is three years ago that my hon. Friends and I brought this matter before the Committee—three years ago to the very day: and I need hardly say I am more hopeful on this occasion that our plea will be listened to and acted upon than I was three years ago. The hon. Member for Edmonton has opposed this new Clause on two grounds. One is the ground of national economy. As I hope to show to the Committee as I develop my argument, on the ground of national economy there are the soundest possible arguments for adopting this new Clause.

Private family businesses represent two thirds of British industry. By their very foundation they have been the whole basis upon which British industry has been built up. I do not believe that the Committee has realised the size and extent of the problem. I have no personal interest in the matter whatever. On the contrary, my entire business career has been spent in the service of a public company, and in that service I have purchased a number of private businesses. I am quite certain that those private businesses would not have come upon the market, and that I should not have been able to acquire them had it not been for the penal effect of the present rate of death duty.

Mr. Albu

When the hon. Gentleman bought those family businesses did he keep the managers and directors in their offices?

Mr. Odey

I am very glad the hon. Gentleman has asked me that question. Whenever I have acquired a family business, and that I acquired only on account of the incidence of death duty, or, otherwise, it would not have been in the market, I have gone to the utmost lengths to retain the family in the business. Why? Because the great advantage of those family concerns is that they retain within them that deep personal interest between the employer and the employee which a large combine can never fully replace. That is something the hon. Member will be well advised to keep in mind.

Let me remind the Committee of the incidence of this tax, this duty on industrial concerns. On an estate of £40,000 it is 28 per cent. It rises by a graduated scale, so that on an estate of £100,000 it rises to 50 per cent. In this new Clause what we are seeking is to put industrial concerns on the same basis as that at present enjoyed by agriculture.

There have been two surveys made of this problem, one by the Inland Revenue in 1951, which totally failed to grasp the full import of the problem. I do not blame those who made the survey for that, for the simple reason that we cannot judge this problem by the cases of businesses that have actually had to be liquidated and, in some cases, wound up. There are many other cases of businesses which have been forced on to the market because of the very threat of what the payment of the death duty would involve. The other record is the one to which my hon. Friend the Member for St. Marylebone (Sir W. Wakefield) referred, and that was compiled by the "Economist" Intelligence Unit.

I put the problem to the Committee as a practical business man. When the owners of private businesses become more concerned about the situation that is going to arise in their businesses when they die, than they are concerned about the future growth and development of their businesses, we are confronted with a very serious position. It is a very large section of British industry which is confronted with that position.

We talk about increasing our productivity. What is the combined effect of the high rate of surcharge in relation to this high rate of death duty? The taxation on income is something which we have been accustomed to in this country. I myself consider that it is carried in the high rates of Surtax to such an extent that it robs men of initiative, particularly those who, by virtue of the income that they are able to command, presumably possess the best brains.

No one can deny that the very highest rates of Surtax produce a certain disinclination to effort, to put it mildly, and in this Estate Duty position we get an even more deplorable state of affairs for the simple reason that the owner of a private business can very easily get to the stage where, owing to the rate of taxation, he has no inducement from the income point of view to continue to exert himself. Rather than develop his company he is often well advised to content himself with preserving the status quo.

We on this side of the Committee have always believed in private enterprise. Hon. Members opposite are entitled to their view that public ownership is the proper basis for the future prosperity of this country. We on this side do not believe it, and we have got a lot of evidence to support our view. If that is so, surely the least we can do is to see that private enterprise functions under conditions which encourage all those engaged in it to exert the very maximum effort that they can. Unless that is done, how can we hope to maintain the living standards of our people?

It is for that reason and on broad economic grounds that I appeal to the Chancellor of the Exchequer to give most earnest consideration to the plea put forward on behalf of this Clause.

Mr. Grimond

Yesterday the right hon. Gentleman the Member for Blackburn, West (Mr. Assheton) drew a distinction between the defence of old capital and the creation of new capital. He was speaking of the reduction of taxation, the rise in the interest rates and the encouragement thereby given by the Government to men to make and save a little money. I think it is in that direction that the Government should move further just now, and should attempt to encourage new savings and investment. I would not say that the protection of the existing capital structure of industry, which is the purpose of this new Clause, is the most vital consideration at the moment. But I have no doubt that there is in the minds of the Committee the very high rate of taxation on present earnings in industry coupled with the very high rate of Estate Duty on the death of the owner.

This particular question has got to be considered from two or three points of view as, indeed, was suggested by the hon. Member for Marylebone (Sir W. Wakefield. First of all, there is the point of view of hardship inflicted on the family. Anyone who has had anything to do with negotiations over Estate Duty will know that it is a very hazardous business to secure a valuation of the assets and agreement as to the figures. But it is not that particular side on which I want to address a few remarks to the Committee.

The more important side of this matter is the effect on the general economy of the country, and it was to that aspect that the hon. Member for Edmonton (Mr. Albu) addressed himself when he spoke just now. I have some sympathy with him on the general question as to whether it is desirable to perpetuate for too long the control of a business by one family. I quite agree that, even in the very small experiences I have had, family control often leads to very good labour relations, labour relations which are not found when control of the business passes outside the family. On the other hand, I do not think that there would be much agreement with any proposition that the State should artificially encourage the control of a business by one family generation after generation.

It is a little unfortunate, I think, that the whole debate has been carried on in terms of family businesses, because it seems to me that what is vital is to protect the small business which is sometimes a family business but not always. One point in favour of reducing the rate of Estate Duty is the fact, as was suggested by the mover of the new Clause, that it is by no means always the family that suffers. It can be the new manager who has just been taken in, the new partner who is just applying himself to the business. They are likely to suffer as well or more than the family. As the hon. Member for Beverley (Mr. Odey) pointed out, the management of the business is apt to be disrupted and it is by no means always at the expense of the family.

5.15 p.m.

Then again I think it is too readily accepted that death duties are perhaps the chief way in which businesses are brought into the market. It is quite true that very often big monopolies are built up on the bones of the small family business. I regret that, and that is one of the serious consequences of the high rate of Estate Duty. It does encourage the monopoly, but on the other hand, if the rate is reduced, it may not necessarily give rise to a situation where the business will continue in the family from generation to generation. That will by no means necessarily be so. As long as there is competition in the open market the family will have to maintain a high standard of management. Therefore while on the one hand high Estate Duty tends to encourage monopoly, on the other, if it is reduced, it does not necessarily mean family management for all time.

But I rather feel that the whole matter needs to be looked at from the wider point of view. It seems to me in the first place that the need, rather even than a reduction in the death duties, is that attention should be given to the fact that loans are now offered for the express purpose of ameliorating the effect of such duties on small businesses. I do not think we have had long enough to wait to see how this works. It is a matter that should be watched carefully for a time.

Then I also feel that some further consideration should be given to the proposal for graduated death duties from generation to generation. If a man is to be encouraged to build up a new business he may very naturally want to put his son into it. He will want to feel that even if his son is not going to inherit the whole of the business, he will want him to have a fair chance to share in it. But I agree with the hon. Member for Edmonton that there is not the same sort of incentive in regard to the grandson and great-grandson. I know that graduated death duties have been often considered, and there are administrative difficulties to overcome, but something on those lines might be looked at again.

The alternative to the private business is the public company. I thought that the hon. Member for Edmonton was arguing that that was the better form of control. I am surprised at this because I seem to have read criticism by the Labour Party, and indeed I thought by the hon. Member, of the divorce between the management and the inert mass of shareholders which public companies involve. In some respects I agree with this point of view. If we are not satisfied with the family business nor with the structure of public companies, there is very little left in the way of an organisation for business. It may well be that company law should be looked at again and some new form of business organisation encouraged. I think, however, that that would be outside the scope of this Amendment.

One further point was mentioned by the hon. Member, that control could be kept on the sale of companies by creation of a special class of shares. But if this is done, I believe that such shares will be valued at a very high figure. Therefore it is not so easy as he made out for the family to keep control of the business by creating a small and special class of shares. He will find that they would have to pay extremely heavily for those shares because they would be highly valued by the taxation authorities.

I conclude by reiterating that there are other considerations beside the incidence of these particular duties which need consideration, such as taxation, company law and the general structure of death duties. I agree, however, with the hon. mover in his desire that the Government should look at what is happening to the small as well as the family businesses, and should direct their attention to the serious tendency for big monopolies to grow and grow throughout most forms of industry.

Mr. Malcolm McCorquodale (Epsom)

We ought all to be grateful to my hon. Friend the Member for St. Marylebone (Sir W. Wakefield) for giving us the opportunity of discussing one of the most important matters facing British industry at present. May I hastily declare my interest in that I find my living in a family business. I was glad to hear my hon. Friend emphasise the vital importance to the life and vigour of British industry which the small and family businesses contribute. I agree with the hon. Member for Orkney and Shetland (Mr. Grimond) that the emphasis is on the small and family business.

It is a truism to say that nearly all the great businesses of today were started as family businesses from family sources, and the initiative and enterprise contributed today in industry is still largely contributed from those same sources. My hon. Friend referred to the admirable report of the "Economist." It is perfectly true, as that says, that a healthy competitive economy is only possible if some small trees are growing up in the forest to replace the larger ones that may well decay.

I believe it is also true that modern taxation methods, and especially the incidence of Estate Duty, are slowly killing the idea of the private and family business as against the great public joint stock company. Whether that is a good thing or a bad thing may be open to doubt, but I think it is a bad thing. I also agree with the main point made in the "Economist" report, which I trust most people have read, in which this question is asked: Does the present trend towards the amalgamation of small family businesses into big impersonal ones really matter? The answer was that, whatever the views on that may be, surely this is a problem which is of crucial importance to the wellbeing of the nation at the present time. That, I believe.

I am glad that the question has come up of the interest of the personnel in industry in this matter. I remember well that when the private company with which I am associated wanted more capital in order to purchase another family business, because of the reasons referred to by the hon. Member, we sought to raise a debenture in the public market. This necessitated our private business being turned into a public company, and that was done.

Within a week I had representations from important sections of the trade unions represented in our business expressing grave alarm at what they had read, namely, that our private concern had been changed into a public company. They asked, did that mean that we were going through all the paraphernalia of quotations on the Stock Market? Would the personal interest be lost? I was able to assure them that this was a purely temporary measure in order that our debentures could be issued and, a fortnight later, we were able to revert to our status as a private company. To my mind the interesting point was the immediate reaction of those representing the personnel working in our industry, and the alarm expressed that the family personal interest might be lost.

Of course there are exceptions but, by and large, I am sure that industrial relations in private family concerns are much more direct, and therefore almost inevitably more cordial, than in the larger and more impersonal concerns and great public companies. As we argue so much about productivity, and as productivity depends almost entirely on good industrial relations, apart from modern equipment, this is of vital importance at the present time. I believe it would be a tragedy if the small and family concerns lost the battle owing to the action of this Committee and of successive Governments in taxing them out of existence. I believe we would find that the most grievous injury would have been inflicted upon the entire community and upon our standard of living.

I am not arguing that the methods suggested by my hon. Friend are necessarily the correct ones or whether some other methods should be evolved. However, I would join with the hon. Member for Orkney and Shetland in saying that I believe the time has come when serious thought should be given to this matter, and the question assessed so that we can have all the facts at our disposal. So far as I can judge from the section of industry to which I have devoted all my life, I believe that the family business can compete successfully every time with the great public corporation if put on equal terms. If they can compete in that way, it means that they are more efficient, and everything which improves the efficiency of our industry is of lasting benefit to everybody who lives in this country.

Mr. Mitchison

I rise to make only two short points. The first is in reply to the right hon. Gentleman the Member for Epsom (Mr. McCorquodale). Whatever there may be in his last observation, it can only have a limited application. No one can seriously pretend that family coalmines were a success in this country. [HON. MEMBERS: "Oh."] I will not be drawn into an elaborate discussion. It is sufficient to say that we should not have the coal we are now getting, and we should not have the excellent labour relations we are now getting, if we had continued with family coalmines.

Mr. McCorquodale

I would not dispute that the state of the coal industry before the war was in any way perfect, but certainly I would not be brave enough to claim that it is perfect now under public ownership.

Mr. Mitchison

I made no such claim. I was only saying that it was rotten before the war and that it is better now.

My next point is equally short. There is some reality in many of the difficulties which hon. Gentlemen opposite have in mind. I shall not go into the larger economic questions beyond saying that, broadly, I agree with my hon. Friend the Member for Edmonton (Mr. Albu) that many of those difficulties could be avoided if the Revenue were empowered to accept shares in suitable cases in satisfaction of death duties. I believe that, in the social and economic interests of this country to be a course that sooner or later we shall adopt. I think it would help the country, it would help the workers in businesses and, in the long run, it would lead us forward instead of leading us back. There is grave danger of our being led back if effect were given to the suggestions made from the benches opposite today.

5.30 p.m.

Mr. Robson Brown (Esher)

I am very glad to follow the hon. and learned Member for Kettering (Mr. Mitchison) and to hear his sympathetic attitude to this matter. He did not reveal that attitude on the question of coalmining, but he made some observations showing an understanding of the problem, and I believe that there are many hon. Members opposite who also understand it.

I have had some experience of small businesses and large-scale enterprises, and I can say quite categorically that in my experience—which endorses what has been said this afternoon by my hon. Friends—the good will and understanding between the employees and management in small businesses far transcends that in great combines. There is a family touch which not only applies to the shareholding of the companies concerned, but also to the employees.

One suggestion put from the other side of the Committee is that the family business or small business tends to hand down authority and responsibility from generation to generation in a sort of feudal fashion, giving no opportunity for anyone else to have a say in the organisation. But the facts are quite the contrary. The more astute, the more wideawake and more able young man is put over the sons or grandsons in the business. I can give the hon. Member for Edmonton (Mr. Albu) evidence of that from all over England.

I want to dissociate my mind from the family business as opposed to the small business. It is said that there is no sentiment in business, and I do not believe that in this Committee we should have sentiment in regard to national finance nor be actuated, even by natural sympathies, for families suffering the impact of death duties. Although those sufferings are very real, we have to look at the matter dispassionately. The position is that, in the small business, at a particular time in the founder's life he has to decide whether he is to plough back into the business any profits left to him for expansion or modernisation, or to put them on one side in the bank, where they will lie sterile, against the day of his death so that the money can be used to pay death duties and the business may be perpetuated. I say that is a lamentable state of affairs which should not be allowed to continue on national economic grounds, and grounds of efficiency.

It has been said many times, except by the hon. Member for Edmonton, that the small business is the foundation of our economic structure. The evidence is perfectly clear when we take the single statistic that about 80 per cent. of all employees in British industry are working in factories which employ less than 50 employees. That is a remarkable figure and shows the strength, vigour, virility and competitive capacity of the small businesses of the country.

Mr. Albu

Did the hon. Member say that 80 per cent. of the employees in industry work in firms which employ less than 50?

Mr. Brown

That is correct.

Mr. Albu

Would the hon. Member mind quoting the source?

Mr. Brown

The source is available, and I will give it to the hon. Member if he comes to see me. The hon. Member can shake his head, but I would not make such an assertion without the evidence. It holds good with what was said by my hon. Friend the Member for Beverley (Mr. Odey), who quoted the fraction as two-thirds, which is very near that figure. There is not a single great combine or organisation in our country which has not its root in some small organisation or combination of small organisations.

We are in a very grave and dangerous position of having the industrial economy of our country brought into the control of too few hands. We on this side believe that in connection with great combines, and we are doubly opposed to it on the question of nationalisation. The most important aspect of this matter can be illustrated in reference to a small tree. The small acorn grows into the great oak, but if we take the little acorn and cut it into smaller pieces it will never grow. All over the country year by year small businesses are being broken up. They are being wiped out and their employees go. That is a serious state of affairs.

I believe that the arguments advanced from this side of the Committee are conclusive. This is a much more deep-rooted and formidable matter than, I believe, our Front Bench realise. I hope that a definite assurance will be given that my right hon. Friend will carefully consider the matter and bring forward, perhaps in the next Finance Bill, positive and constructive proposals.

We look at the young man who at a particular moment in his life has to balance the advantages of launching out on his own as an independent man, taking all the risks and hazards of building a small company, or of merging into some great organisation. I frankly and firmly believe that it is well for our country if the young, virile, active and adventurous young men have the encouragement to build up family businesses.

Mr. Frederick Lee (Newton)

There have been a lot of sweeping statements by hon. Members supporting this Clause to the effect that large enterprises have a less favourable record in their relationships with employees than family businesses have. It is no part of my argument to try to detract from the good relationships which exist in many small businesses. They are very desirable, but it is quite wrong for hon. Members to assume, for the purposes of their present argument, that large businesses necessarily mean bad relationships between employees and employers. I can quote a very large firm with 25,000 to 30,000 employees where there has never been a strike in 50 years.

Mr. Odey

Surely that was not the suggestion. What has been suggested is that a private family business is able to have a personal influence over its employees which a large combine, however well run, cannot possibly apply.

Mr. Lee

I do not accept that as being completely true. There are some small firms where undoubtedly it applies, but there are others in which, because of the general lack of capital and because of the inability of the employer to keep abreast of modern developments, conditions are really atrocious. A short time ago we discussed the foundry industry, and it was agreed on all sides that it was in the small foundry that conditions were deplorable. One could find the same in other industries.

The right hon. Member for Epsom (Mr. McCorquodale) said that most of the great businesses today started as family businesses. That may well be, but it is wrong to argue from that that those small family businesses were broken up, or had to go into amalgamation merely because of the incidence of taxation. It is not true to say that it was merely with the advent of the Labour Government that small businesses broke up; there was precious little private enterprise in a whole series of businesses for us to eliminate, even if we wanted to do so. Many of us have a sort of nostalgic feeling for the family business. In my area, where the right hon. Member for Epsom lives, and in which he has a factory, there is a feeling of real affection for that firm of which he is a distinguished member. I should be the last to detract from that sort of thing. But do not let us argue, as a consequence, that it is the case in all private businesses and is not the case in big businesses.

If the new Clause were accepted, the effect would be a very large diminution in the revenue going into the Treasury. Hon. Members opposite often argue that the Welfare State is based on the taxation of industry to an extent of something like 70 per cent. If this Clause were accepted, the Government would have two alternatives before them. One would be to take the revenue from other sources instead of from the present source, and the other would be finally to destroy the whole of the Welfare State. This Clause, therefore, is an argument either that there should be increased taxation on other sources—the general body of taxpayers—to make up for the decrease in revenue from this source, or that there should be an appreciable drop in revenue, and the Welfare State would go in consequence. There are no other possible choices.

If we, on both sides of the Committee, are committed to maintaining the new system of social security and welfare— I do not think hon. Members opposite maintain it as well as they ought—then this Clause, whether hon. Members opposite mean it or not, would strike a death blow at the basis of social security which we have established in this country. The only alternative would be a considerable increase in the levels of taxation on the general public, and the Opposition have pledged that they will not take such a step. I put it to the Chancellor that he has no alternative but the rejection of this Clause if he is not to fly in the face of all that has been said on both sides of the House in the last three years.

The hon. Member for Esher (Mr. Rob-son Brown) argued that the rates of taxation are stultifying industry and especially small industry and are therefore having a detrimental effect upon production. That, too, flies in the face of all the facts. During the life of the Labour Government, when we were criticised for the high level of taxation on industry, production increased at a pace unprecedented in British industrial history. There was no question of bankruptcy; the word almost passed out of existence in this country. I do not ask the hon. Member to take my word for this. Let him look at the statistics, at the high record of production obtained in those days and at the fall in the number of bankruptcies in British industry during the same period. The basis of his case is in direct contradiction to the industrial facts in this country since the end of the war.

Mr. Robson Brown

Does not the hon. Member recall that there was a sellers' market throughout the whole of that period, a most extraordinary, artificial situation, in which failures were almost impossible? People had to stretch themselves to the limit to make mistakes. Hon. Members on both sides of the Committee are anxious for a lively, strong, healthy economy so that we can support a virile and useful Welfare State, and my whole argument is that the small business is the foundation of it.

Mr. Lee

I do not doubt the hon. Member's good intentions towards the Welfare State, but I am trying to show that the effects of the Clause would be to strike a mortal blow at the basis of the Welfare State. I base my argument on the facts as we have them before us, and I will not repeat them. Those facts are in entire contradiction to the case made by hon. Members opposite on the level of taxation and on production levels. I hope the Chancellor will not accept the new Clause.

5.45 p.m.

Mr. Douglas Jay (Battersea, North)

It is an admirable thing that this subject has been raised this afternoon if only for the reason that we have not discussed death duties during the examination of the Bill, but I must add that, very much for the reasons given by my hon. Friend the Member for Newton (Mr. Lee) and, in his very virile speech, by my hon. Friend the Member for Edmonton (Mr. Albu), we hope the Government will not accept the Clause.

It is true, of course, as the hon. Member for Beverley (Mr. Odey) said, that there are a large number of family businesses in British industry. It is also true, in many cases, that it is an excellent thing that there should be. I may say, in his presence, that the right hon. Member for Epsom (Mr. McCorquodale) is an ornament of the type of business we should all like to see, but it is also true that in some cases the family business is not necessarily the most desirable type of organisation. It would be foolish to argue that it always is or that it always is not.

Moreover, that is not the issue; the issue is whether death duties are taxing these businesses out of existence, or, as one hon. Member said, wiping them out. I do not believe that the evidence adduced today or at any time so far establishes this to be the fact. We have to distinguish, as the hon. Member for Orkney and Shetland (Mr. Grimond) said, between the family business and the small business. I agree with him that we must make that distinction, for there are many large family businesses in this country. It is the small business with which hon. Members opposite are mainly concerned this afternoon.

Of course, the rate of death duty on the small business is not so exceedingly high as to have these very damaging consequences. If the total value of the business is of the order of £10,000 or £20,000, the rates are not penal. If we look at the larger businesses, however, where admittedly the rates are very high, surely there is not such a strong case on grounds of hardship. In the first place, the owner of the larger family business may very well have other assets and investments which will go a long way to meet the liabilities for death duties. If that is not so, the larger business is in a much stronger position to borrow for death duties as has been done in a great many cases. Indeed, a company for this special purpose has recently been formed in the City.

If all those expedients fail, it is possible, in order to avoid hardship, for the family business to sell its property to some other larger business, as the hon. Member for Beverley suggested. We may or may not think that is a good thing on grounds of general public policy—it could be argued for a long time—but at least it shows that there is yet another possibility open to the small business in those circumstances. Indeed, in answer to a question, the hon. Member for Beverley showed that even when that happened the family connection and the family relationships with employers were often maintained. He said that in a case with which he was familiar the family relationship with the business was not broken.

Mr. Odey

Would the right hon. Gentleman also consider, in this connection, the case of businesses which are neither sold nor going into liquidation but which just get into a state of stagnation because there is no incentive to develop? That is the point upon which the Clause is based.

Mr. Jay

If the hon. Member rests his case mainly on that, he will have to advance more evidence that there are a substantial number of such cases. So far we only have his assertion.

My mind is influenced on this subject by the inquiry which the Inland Revenue made into this whole matter a few years ago. The hon. Member for Beverley said, in a rather sweeping way, that the Inland Revenue report failed to grasp the grave import of this whole matter—or something rather vague and sweeping of that kind. But I think any hon. Member who reads that report, even allowing for a margin of doubt and for the fact that there may have been some changes since the time it was published, cannot come to the conclusion that family businesses are being taxed out of existence by the high scale of death duties. That report showed there was a very small fraction, a tiny minority of cases in which anything of that kind occurred.

Mr. Robson Brown

I agree with much that the right hon. Gentleman has said, but circumstances have entirely changed since that examination was made.

Mr. Jay

Again we have merely the assertion of the hon. Member for Esher (Mr. Robson Brown) about that. No doubt it is interesting, but I do not think sufficient evidence has been adduced to persuade hon. Members of the fact.

Let us assume, however, that there is a small residue of cases where there is a real difficulty. I agree with my hon. and learned Friend the Member for Kettering (Mr. Mitchison) in seeing no objection in principle in such cases to the Inland Revenue taking some shares in payment for death duty. Indeed, my hon. and learned Friend was showing himself to be a convert to an idea which I put forward about 15 years ago. It has never yet found great favour with any Government, but I think we shall have to consider it again in the future.

There is less case for the relaxation or alleviation of death duty than almost any of the taxes we have discussed. Had I to choose between assimilating the rates of death duty on businesses to those at present falling on agricultural values or bringing up the agricultural rates, I think I would see a very strong argument for doing the latter. But, without discussing that issue further, I repeat that we hope the Government will not accept this new Clause.

Mr. Maudling

There is little doubt as to the importance of the issues raised by this new Clause. There are economic and, to some extent, human factors involved in this problem. I agree with my right hon. Friend the Member for Epsom (Mr. McCorquodale) that the small family business has been, and remains, an integral part of our economy. I am not relying entirely on statistics because they can be made to prove different things, but I am always surprised when statistics are produced which show what a large proportion of British industry is carried by small concerns, as was shown by the figures produced by my hon. Friend the Member for Esher (Mr. Robson Brown).

Surely the point is that the big businesses of the future are the small businesses of the present. That is one of the important things. The other is that even if small businesses do not contribute very largely to exports—and in many lines of both visible and invisible exports they do not make a direct contribution —they are an integral part of the total economy on which our production and exports are based.

The right hon. Member for Battersea, North (Mr. Jay) rather underestimated the matter. He said that in the case of the small businesses the duty was not high. We may have different ideas of what rates of duty on a company represent a substantial disincentive to that company to expand. The right hon. Gentleman said in the case of the large company, where the rates of duty were high, the proprietor very often has assets outside with which to meet them. But that is not the case, though it is a point so often put forward. We are particularly concerned with the case of the family business where all the family money has been ploughed back into the business, and where there are no outside assets.

This may sound strange coming from a representative of the Treasury, but I would remind the Committee that, important as it is, the Inland Revenue document is not the latest work on the subject. There is the report of the "Economist" Intelligence Unit which, as one would expect, is an admirable report providing a great deal of interesting and factual information on this important problem. So I think the importance we should attach to the matter is greater than hon. Members opposite seem prepared to admit.

There are two points of difficulty. One is the rate of duty and the other is the assessment upon which that rate is made. So far as the rate of duty is concerned that is tied up with the rate of direct taxation on income as was rightly pointed out by my hon. Friend the Member for Beverley (Mr. Odey). It is a combination of the two factors of direct taxation during life and Estate Duty on death that between them present such a serious problem.

The other serious problem is the assessment under this famous Section 55 of the 1940 Act, about which I shall have something to say later. I would say to the hon. Member for Edmonton (Mr. Albu), who appeared to write off completely the hardship caused by the operation of death duties, that he should pay account to the argument often advanced that in many cases the assessment of the duty under Section 55 is greater than the amount which could be realised by the sale of the business. If that be so, undoubtedly hardship can be caused.

I said there is an inter-relation between Estate Duty and Income Tax and Surtax. This year my right hon. Friend was able to make a substantial reduction in direct taxation which undoubtedly has been of great benefit to business concerns. But he was not able this year to make a reduction in Estate Duty. Therefore, the plea put forward is that there shall be some relief from it for those people whose estate takes the form, broadly speaking, of shareholdings in private businesses. The claim is that estates taking that form should be taxed at a substantially lower rate than the estates which take the form, for example, of shares in public companies.

That is a claim for special discrimination in taxation, which is not inevitably ruled out, but which, I would suggest, is a matter we should approach always with great caution. If our taxation system is to be maintained in its full efficiency it is important that there shall be no anomalies, or the impression that some people are getting more favourable treatment than others. The agricultural relief has been referred to, but I think those references reinforced the argument that any distinction in special relief granted may well breed further claims for further special relief and consideration. I would point out that the analogy between the agricultural relief and this problem is not a good one.

This Clause is discriminatory, in that relief is provided only for manufacturing businesses and not business generally. I think it would be difficult to sustain this discrimination indefinitely because it is wrong to follow the old fallacy that the only people who contribute to the nation's economy are those who make something. Those who distribute and sell also have a real claim. It would be impossible to extend relief of this kind to business generally which, incidentally, were it done would multiply by five the cost of the concession for which my hon. Friend is asking. In any case, I doubt whether this concession would prove anything like enough for the purpose which my hon. Friends have in mind. Indeed, I believe the National Union of Manufacturers at one time suggested this relief as an interim measure, and the impression which I got was that my hon. Friend who moved this new Clause also regarded it as an interim measure and considered that it would not go the whole way to solving the problem that he has in mind.

6.0 p.m.

What is the argument for giving special treatment to the assets of an estate when those assets take this form—viz., of ownership of a private business? The argument is the argument of the importance of the small family business. I will not repeat what I said at the beginning, but I agree entirely on the great importance of the family business in our economy. I think it is important to emphasise, as one or two hon. Members have done, the fact that there are two words here—"small" and "family." We must be clear what we are thinking about when we talk about the small family business. As far as the small business is concerned, I would have thought that, choosing between a reduction in direct taxation and a reduction in Estate Duty, by far the greater benefit would be obtained by reductions in direct taxation of the kind which my right hon. Friend has introduced this year.

Turning to the family firm as a firm, the argument is made—and it is a most important argument, from the point of view of our economy—that in present circumstances, with the combination of direct taxation and Estate Duty, adequate capital is often not forthcoming for the expansion and development of the business. That is a serious and important argument. In the present circumstances businesses cannot be expanded, for adequate capital is not forthcoming for that expansion. It means that adequate capital is not coming from the same family source.

I should like to examine whether money is at present available to small businesses as such from other sources. It is often said that when small family businesses, for reasons of Estate Duty, and so on, have to be wound up or sold they have to be sold to their competitors. We have had examples given today, and the hon. Member for Orkney and Shetland (Mr. Grimond) referred to the un-desirability of small companies being gobbled up by competitors. That undoubtedly is an important factor, and it is desirable that sources of finance should be available for private companies, which do not emanate from competitors of the private companies and which, so far as possible, enable the family management to be maintained and the shareholdings to remain in the hands of fairly neutral shareholders.

There have been certain developments of that kind recently. The Charterhouse group have established an organisation for providing finance in those circumstances. Also, there has recently been formed a company known as the Estate Duties Investment Trust—known, I am afraid, as "Edith"—which is designed particularly with the purpose of functioning as a source of fresh capital which is required by companies facing this Estate Duty problem. It will come from a neutral source, a source which will be content to leave in operation and in control the family management and the family executive.

I was very interested in what my hon. Friend the Member for Beverley said about his practical experience of the desirability of leaving the control of a company in the hands of a family when the family has been so used to doing it, even where the shareholding has passed over. I suggest that there is an argument for saying that this method of finding additional finance for small companies which are suffering from the weight of direct taxation and Estate Duty is in one way better than Estate Duty concessions in that it is more selective, because the company which wishes to raise fresh capital from one of these institutions will have to show that it is efficient and that its prospects of continuing a profitable existence are good, whereas an Estate Duty concession would go indiscriminately to every company.

There are, of course, differences between family concerns. I do not wish to get involved in this sterile argument as to the relative merits of public and private companies. I am quite certain that that kind of argument would lead us nowhere. It is clear to anyone with experience of industry that there are in this country many family businesses which are first-rate businesses. There is within family businesses a certain corporate spirit and atmosphere which undoubtedly cannot be reproduced elsewhere, and that is a strong argument for doing all one can to assist the family business. On the other hand, that is not always the case. I think it must also be recognised that there are occasions when the continuation of family control is not necessarily conducive to the efficiency of the undertaking.

What it amounts to is this. On the question of the weight of duty, there have been considerable arguments advanced by my hon. Friends, but are they arguments of sufficient weight to induce my right hon. Friend to give to this class of asset a substantial special discriminatory concession which is not given to other business assets or to shares in private companies? I am afraid that I have to say that my right hon. Friend does not at the moment consider that the case for the special discriminatory treatment has been made out.

I should like to say a little more about death duties, and particularly about the operation of Section 55 of the 1940 Act, because undoubtedly that is a matter of the greatest importance. I was interested in the emphasis attached to it by my hon. Friend who moved this new Clause. There are reasons why the shares of small tightly-controlled private businesses should not be valued on their earnings or distribution, because in many cases the distributions over a period of years have no relation to the true value of the business. The object of the Inland Revenue is to try to arrive at an assessment of the business equivalent to what would have been paid by a buyer in the open market. Therefore, the Section provides that in the case of these closely controlled private companies one does not look at the distribution of dividends but at the net asset value.

I should like to say a word or two about the net asset value because there is a certain amount of misunderstanding about this point. It is generally thought that what happens is that the assets are valued piecemeal as physical assets and that that is the valuation on which Estate Duty is to be paid. But I am informed that that is not the case, because assets are valued not just as physical assets but as the assets of that particular company. If it can be shown that the valuation reached by a valuation of assets puts a greater value on the total shares of the company than is justified by the earnings record and profits prospects of that company, then allowance is made by the Estate Duty office for what is called negative goodwill. I may say that that is an expression with which Treasury Ministers are very familiar.

The point is that it is not purely the value of the assets as assets, but the value of the assets in the light of the position of the company, which is taken as the basis of the valuation under Section 55. There is undoubtedly a widespread feeling that the valuation under Section 55 is not fair. Here is a matter on which there is genuine dispute between the Inland Revenue authorities, who consider that the valuations reached are roughly equivalent to those which would be reached in an open market, and people who feel that the valuation is too high.

I have recently received interesting evidence, from people concerned in the provision of finance in these matters, that the great obstacle to the provision of finance is that the valuation of a company on the assets basis under Section 55 may be different from the valuation of the company as an investment prospect. For those reasons, my right hon. Friend has started a review of the death duties and of these anomalies that are arising, and particularly of the anomalies that are said to arise in the case of Section 55. Estate Duty was first introduced in 1894, and since then it has not received the attention of any body of persons and has not been thoroughly reviewed.

My right hon. Friend has, therefore, started and will press ahead with the review of these anomalies, and in particular under Section 55. He does not propose to appoint a committee for the purpose. He proposes to conduct this review himself with the assistance of his official advisers, but, undoubtedly, recourse will be had to outside independent experts who are able to provide helpful information on the subject, and my right hon. Friend has asked me to say that he would be very glad at any time if hon. Members who are interested in this problem and have further practical information to offer will furnish him with it. Clearly, there is a widespread feeling that Section 55 is not working justly. On the other hand, there are strong arguments for saying that, in fact, the injustices are exaggerated, but this is a matter which must be thoroughly investigated, and my right hon. Friend has already started a review to that end.

I have endeavoured to explain why my right hon. Friend cannot accept this new Clause. He has considered it, as he considered the representations of the National Union of Manufacturers and other interested bodies, as well as those of hon. and right hon. Members of the House, with very great care, but he does not feel that the case has been made out for this special relief of Estate Duty for private industrial concerns. On the other hand, he feels that there is a very strong case for reviewing the operation of death duties in this regard, and, particularly, in regard to Section 55 of the Act of 1940. In those circumstances, it is my hope that my hon. Friend, after having had a full discussion on the matter, will consider withdrawing the new Clause.

Mr. Jay

The hon. Gentleman has made a statement which appears to go rather beyond the subject of the debate. He says that the Chancellor has decided to carry out a review of these anomalies arising in connection with death duties. Can he tell us what is the scope of the review, and whether it will refer purely to anomalies arising out of assessment for death duties? Will it apply to small or family businesses? Can the hon. Gentleman be a little clearer as to how wide it will go?

Mr. Maudling

The review will cover the anomalies which have arisen, or which are said to have arisen, in the assessment of death duties over the whole range, but with particular reference to this problem of Section 55 of the 1940 Act.

Sir W. Wakefield

In view of the statement made by the Economic Secretary, and the assurance given that some action will be taken in this matter, I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.