§ Sir Henry d'Avigdor - Goldsmid (Walsall, South)I beg to move, in page 14, line 23, at the end to insert:
Provided that disposal of an asset shall not include its disposition or destruction through act of God, force majeure, compulsory purchase and other causes outside the control of the tax payer; and provided further that it shall include the non-exercise of an option or other right to acquire or dispose of chargeable assets.
§ The Deputy-ChairmanWith that Amendment can be discussed the Amendment to Clause 10, page 13, line 38, after "interest)" insert:
and any land used for the purposes of husbandry only, farm house, farm building or farm cottages which are compulsorily acquired by any authorityand that in Schedule 9, page 51, line 14, at the end insert:Provided that where money is paid under such a contract conferring an option and the option is not exercised, such money and any commission that is unconditionally payable in accordance with the contract shall be treated as losses allowable for the purposes of Case VII.
§ Sir H. d'Avigdor-GoldsmidI make no apology for having read the Amendment in full. My right hon. and hon. Friends and I attach considerable importance to it. We think that where a taxpayer disposes of property against his will and by force majeure he should not thereby incur a charge for tax. I make no apology either for the element of tautology in the drafting of this Amendment. I was most anxious to see whether it would attract any attention from the other side of the Committee, and I am glad to see that one representative of the Liberal Party is present and that the Opposition Front Bench is as usual well filled.
There is here an interest not exclusive to this side of the Committee, because hon. Members on both sides are aware that compulsory purchase by local 356 authorities for housing purposes affects many people of humble means, and not only people of one political affiliation. I think, therefore, that we might have had better support from the other side of the Committee on this important point relating to the rights of the subject.
The obvious point that arises here is compulsory purchase by local authorities for the purpose of clearance. This is something with which we are all familiar and I need not labour it. There are other elements about which I shall say more. There is the compulsory purchase of shares under Section 209 of the Companies Act, 1948. This is a rather more sophisticated matter, and arises when a buyer has obtained 90 per cent. or more of the capital of a company and can require the holders of the remaining 10 per cent. of the shares to sell to him on the same terms as he acquired the other 90 per cent. Here again there are unwilling sellers being forced by force majeure to dispose of assets in circumstances which, as the Clause is drawn, would attract tax.
There is also the case of the person who is unlucky enough to have his house destroyed by fire. It is possible that, having over-insured, he might as a result of that accident come into possession of a larger sum of money than he originally paid for the house. These are things which occur, and I am sure my right hon. and hon. Friends will have no difficulty in expressing their view that these things should be outside the basis of taxation.
The second leg of the Amendment is slightly different. It refers specifically to options. I know that options are dealt with later in this Measure, but I bring them in here because I think it would be useful if the Government declared their intention in regard to options because there may be consequential changes to be faced later if their attitude is other than entirely negative.
9.45 p.m.
In the case of an option on a transfer of shares, if the option is exercised and the shares purchased and subsequently resold the price of the option is counted as an expense of the transaction. That seems perfectly clear logic and quite unexceptional. There are other cases which 357 are not quite so clear. Suppose the option is not exercised. Had it been exercised it would have been allowed as an expense. Surely it remains as an expense although it is not exercised. Contrary to the views expressed by hon. Members opposite during the last few days, shares do go down as well as up. In fact I would wager that more options are bought and not exercised than those which are exercised. That is not something subject to proof.
The Government should give us a clear reply about whether they have considered allowing an option as an expense whether it is exercised or not exercised. It should be allowed as a loss in connection with the assessment. Another rather more complicated case arises concerning options which companies sometimes give to their employees. There is a judgment of 1961 which renders those options liable to tax under Schedule E if the option has a value at the time it is granted, if, in other words, it is an option to purchase shares a: market price. An employee granted an option of this sort who has paid tax on it and finds later that it is not worth while exercising it because the value of the share has gone down, instead of going up as had been hoped, is then in a position of having been assessed for tax on an option which he has not been able to exercise. Surely there is a good case in equity for him to claim a rebate of taxation in respect of tax he has paid on an option which he did not exercise.
I raise these points in language which I hope will be intelligible to both sides of the Committee, not that I think there is the tiniest chance of the Parliamentary draftsmen being able to accept them but because they form a useful peg on which to rest an argument which goes very deep. It concerns the rights of the people of this country, not rich men, but every owner of property, however humble, which is liable under this Clause for taxation in respect of matters in which he himself has been subject to force majeure.
§ Mr. Ronald BellWhat I say three times is true. On this occasion, I think that I must have struck the right moment 358 for making the observations I sought to make earlier.
I wish to support everything said by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), especially about compulsory purchase. I am less entitled to speak of the intricacies of options than he is. The wrong which will be done if the owner of land has to pay tax under this new arrangement because the property has been compulsorily purchased is, I think, quite obvious to everyone.
A man who possibly did not need to sell the property and make a capital profit at all, whose intention was to remain the owner of it—in the case of a Harm perhaps to go on farming it—because a Department of State or local authority, against his will, takes the property from him, is made to pay at the full rate of Income Tax or Surtax on the notional profit which has been made. I think that this was clearly not within the original intention of the Government in putting forward the Bill, but it may be a consequence which they find it a little difficult to avoid.
I suppose that it may be said that sometimes there are voluntary transactions in the shadow of compulsory purchase orders and that it may be a little difficult to distinguish between the voluntary sale which has been made by negotiation with a Department of State or the local authority and the case where negotiations have broken down and the transaction takes place under the compulsory powers. I can see that there is a practical difficulty there. It might mean that in nearly all cases property would be bought compulsorily within three years of its purchase and there would not be a negotiated settlement.
I do not think that is a very serious consideration, or that it matters very much, since the price now paid on a compulsory purchase is the fair market price, which should not differ substantially from the price that would be paid by voluntary negotiation between the acquiring authority and the seller. If the making of the exception proposed by my hon. Friend in his Amendment were to mean that invariably we had the compulsory purchase procedure adopted in the not very numerous cases where 359 property was taken within three years of being acquired, I would not think that that was any major inconvenience.
The present charge is conceived, certainly in the method of its computation, as being levied upon something which is "an adventure in the nature of trade". I take those words from Clause 12 of the Bill. It cannot be said that a man whose property is taken from him by a Department of State against his will is engaging in an adventure by way of trade. If that is a fair argument, then something in the nature of my hon. Friend's Amendment should be accepted by the Government. Otherwise, to take one example, a man who has bought a farm and wants to be a farmer, and has it taken from him compulsorily by a Department of State or a local authority, perhaps in time of inflation, may find that there is a paper profit. He has to pay at the full rate of tax on that paper profit and then has to buy a farm with assets which have been depleted by perhaps 30 per cent.
That is a real and substantial injustice. It is no good the hon. and learned Member for Kettering (Mr. Mitchison) shaking his head. I do not know whether he means it is not an injustice, or that it would not happen.
§ Mr. MitchisonAs the hon. Member asks me, I would say that I doubt whether he would be disposing of his property.
§ Mr. BellWhat the hon. and learned Gentleman is saying is that the acquisition by compulsory purchase would not fall within the ambit of the tax. If what the hon. and learned Gentleman says is borne out by my hon. Friend, and the Solicitor-General says that it is not necessary because such transactions would not be caught by the tax, I am sure that my hon. Friend would be delighted not to proceed with his Amendment, but I have no such confidence. My own reading of the Bill, which I advance in all humility, is that such transactions will be caught as the Bill is at present drafted.
Mr. Glenvil HallI think that I have followed the hon. Gentleman's argument correctly. As I understand it, in his illus- 360 tration the individual would purchase the farm to live there. If that is so, the Clause would not bite.
§ Mr. BellThe right hon. Gentleman is mistaken. The exemption for dwelling-houses does not extend to unlimited land appurtenant to them. Indeed, it extends only to a limited cartilage of one acre. I am not at all sure that it would extend to one acre of farmland. It is for land to be enjoyed with the house, land in the nature of a garden. It is certain that an ordinary farm of about 90 acres would not come within the exemption in favour of a dwelling-house. I think that is beyond doubt. [HON. MEMBERS: "No."] Naturally, I stand to be corrected, but I do not think that I am wrong. If a person who bought a farm with the intention of farming it had it taken from him within three years, and if general farm prices had risen by 20 or 30 per cent, in that district in that period, he would have to treat it as a profit and pay full Income Tax and possibly Surtax on it. He would then have to buy a farm with the depleted assets which he had left.
That is the position under the Bill as drafted. It is plainly unjust. I can see that certain practical difficulties would be encountered in any attempt to solve the problem, but I say that they are not insuperable and that the effort should be made in common justice to people who find themselves in such difficulties.
§ Mr. H. Rhodes (Ashton-under-Lyne)The hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) said that he hoped that the Amendment would attract the attention of the Opposition. It has attracted the attention of one Member of the Opposition—me. In the past I have taken a good deal of notice of the hon. Member's speeches and agreed with many of them, but I cannot agree with him now. When I saw the words "compulsory purchase" in the Amendment my mind went back to an occasion before Christmas when the Bank of England sold a property. The property was the St. Luke's property, which used to be the old Mint. The Bank sold this property some weeks before Christmas to Oddenino's Investment Company for £900,000. The property was resold at the beginning of this year for £1,500,000.
361 I raised this matter in the House. The Minister who I expect will reply to the Amendment, the Economic Secretary, said this:
I am informed by my right Friend the Minister of Agriculture that it was not until some months after the Bank had contracted to sell the site that he was advised that it might be suitable for the Covent Garden Market Authority."—[OFFICIAL REPORT, 25th January, 1962; Vol. 652, c. 396.]It would be outside the limits of order if I attributed any blame to the Minister of Agriculture or to the Bank of England for their ineptitude in not being aware of legislation which was before the House of Commons. It is not my purpose to do that tonight. I want rather to direct the attention of the Committee to the item compulsory purchase "in the Amendment.It so happened that the L.C.C. bought the property from Oddenino's Investment Trust. As this property was required for the new Covent Garden Scheme, the L.C.C. had compulsory powers, but it did not exercise them. Despite the fact that the price for the building at the beginning of the year had been £1½ million, showing a clear profit of £600,000 in a few weeks, the L.C.C. did not press for acquisition by compulsory purchase. Why was that? The reason was that it got a better price without.
If it had not so been able to get a better price the L.C.C. would be shown in a very bad light indeed, and it could be accused of ineptitude, but in such circumstances, were this Amendment accepted, that Trust would have held back for a better price, so that the L.C.C. in exercising its powers of compulsory purchase would have paid a higher price. Although I do not expect the Economic Secretary to refer to ineptitude on the part of anybody involved in that transaction, I hope that my argument is strong enough to induce him to reject the Amendment.
§ 10.0 p.m.
§ Mr. BarberThis Amendment concerns a number of important and difficult issues. They are important because they raise a point of principle —Ithis has, I think, been recognised on both sides of the Committee—and they 362 are difficult because, if we were to adopt even in part the suggestions made, we should have to give most careful consideration to the consequences of doing so.
The proviso that my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) wishes to insert falls, as he indicated, broadly into two parts—the part concerned with what one might call involuntary disposal, and the part concerned with options that are not exercised. I should like to adopt his approach to the matter and deal with it in those two separate compartments; in other words, to deal first with involuntary disposal.
I want, at the outset, to clear away one point. I would remind the Committee of the terms of the first leg of the proviso which my hon. Friend wishes to insert:
Provided that disposal of an asset shall not include its disposition or destruction through act of God, force majeure, compulsory purchase and other causes outside the control of the tax payer …To some extent, the terms of the proviso are unnecessary because, under the Bill as drafted, the destruction of an asset, which is specifically referred to in the Amendment, does not involve its disposal. To take the case where a property is purchased, and where the three-year period applies, and the property is destroyed by fire within that period, that destruction will not, in itself, give rise to a charge under Case VII. Furthermore, if one assumes, as did my hon. Friend in the case he gave, that the property was insured and that the insurance money exceeded the cost of the acquisition of the property, the mere fact that the property was destroyed by fire and that the insurance moneys received were greater than the cost of acquiring the property, would not, in itself, give rise to a charge under Case VII. I ask, therefore, what is left of the effective operation of the first leg of my hon. Friend's Amendment? The answer is, I think, the very important category of involuntary disposals which are at present within the scope of Case VII and which this proviso would take outside.363 This raises a point of both principle and practicability. The point of principle is this. My right hon. and learned Friend has explained why he is not in favour of a conventional capital gains tax and why this part of the Bill is concerned in the main with transactions of a speculative character. I say "in the main" because it simply is not practicable in trying to identify what transactions are of a speculative character to rely on the test of motive. He has, therefore, followed the practice of a good many European countries and has incorporated a time test.
As I understand it, the point behind the first leg of the Amendment is that the motive is clear and that the transactions are not of a speculative character because they are involuntary. This point merits our most careful consideration. I am a little surprised that on a matter concerning compulsory purchase there is no representative of the Liberal Party here. However, there are two types of compulsory acquisition which immediately come to mind. The first is the compulsory acquisition of shares under Section 209 of the Companies Act, 1948, and, of course, the compulsory acquisition of land. Different considerations apply to each.
Regarding the former, the compulsory acquisition of shares, I would remind the Committee that Section 209 of the 1948 Act enabled a company which had acquired 90 per cent. of the shares held by another company, with the agreement of the majority of its old shareholders, to compel a dissenting minority to do the same as the assenting majority had agreed to do. I am sure that the Committee will agree, in the context of the proposals in the Amendment, that there would be no ground for exempting a person who at the time of buying the shares knew that the other company was proposing to take them over. He would, after all, have bought the shares in the knowledge of what was to take place. The fact is that in these cases where there is compulsory acquisition within six months of the purchase of the shares, the odds are strongly in favour of the person concerned having had some knowledge.
It follows that in the vast majority of cases—perhaps not in every one—persons who are compelled to dispose of 364 their shares under this Section will be those who bought the shares in the anticipation of that event and have done so for whatever profit it would give them. There is another important aspect to be considered, and I am sure that my hon. Friends will see the force in it. To exempt those who dispose of their shares could have awkward effects on arrangements for company amalgamations, for those who agreed to dispose of them in connection with the amalgamation would be liable to be taxed while those who refused to agree would not be subject to tax on any profit they made. I do not see how one could exempt them all. The charge in such cases is likely to be of very limited application because of the way in which paragraph 12 of the 9th Schedule operates.
I now turn to the compulsory acquisition of land. My right hon. and learned Friend had already given a great deal of consideration to this point before the Bill was published and I must remind the Committee of some of the very real difficulties which are involved in providing exemption in these cases. I want to be fair and to present the other side, too.
The first and most obvious difficulty is that which was mentioned by my hon. Friend the Member for Buckinghamshire, South (Mr. Ronald Bell). If, for example, a local authority wished to acquire a piece of land and agreed to a mutually satisfactory purchase price, as frequently happens, and the land was conveyed within the three-year period, tax would be due, but if the vendor's next de-or neighbour declined to sell his land, required for the same project, and the machinery of compulsory purchase was brought into operation, he would avoid tax. The result would be that where there were compulsory powers of acquisition in the background nobody would enter into a voluntary sale, if it was within the relevant period, and everybody would insist upon his land being compulsorily acquired.
It follows that if we did what our hon. Friend suggests we would have to provide exemption not only where land is compulsorily acquired but also where land is disposed of voluntarily but where there are compulsory powers of acquisition in the background. The Committee 365 will immediately see that this goes beyond the terms of the Amendment and —I put it no higher—it would not be easy to translate it into legislative form. But we are looking at this aspect already.
§ Mr. Ronald BellIs there any difficulty in going through the form of compulsory purchase and having an agreed price? This is not unusual. There is often consent to compulsory purchase and then agreement about the price and one merely goes through the drill. There is no disadvantage. I should have thought that that would be a solution to this difficulty.
§ Mr. BarberI was trying to point out that if we travelled along the lines of the Amendment and did not go further it would surely mean that it would pay a person not to enter into a voluntary sale and to insist that he was compulsorily acquired. This seems to me to be a relevant consideration. If we were able to meet my hon. Friends on this very important point, we would all like to do so in such a way that, by virtue of our fiscal legislation, we would not force people to insist upon compulsory acquisition when they would otherwise not do so. That was the only point I was trying to make.
I am sure that my hon. Friends will not under-estimate these difficulties, but I want to be frank and to say that I see the force of the argument of my hon. Friend the Member for Buckinghamshire, South that in a bona fide case where a person buys land as an investment and, quite out of the blue and against his wishes, it is compulsorily acquired, such a case is not in the nature of speculation. This is a very appealing argument. I am trying to present the case perfectly fairly.
There is another point in favour of my hon. Friends which I do not think has been raised. It is that if the law remains as it stands in the Bill there would seem to be an incentive for a person who is approached by the local authority to hold out and employ delaying tactics for a sufficiently long term to take the trans action outside the three-year period. This is an aspect which has been mentioned from the benches opposite and which we have to consider very carefully. 366 I hope that the Committee will agree that I have tried to present fairly both the difficulties and the arguments in favour of an amendment. I cannot make any promise, but I can give the firm assurance to the Committee that in the light of what has been said this evening we will look at the matter again between now and Report and see whether anything can be done to exclude from the charge the bona fide case of the disposal of the land where there are compulsory purchase powers.
10.15 p.m.
I am sorry to be so long, but the Amendment covers two rather different points. I turn now to the other aspect of the matter, the effect of providing loss relief in respect of the non-exercise of an option. The charge imposed by the Bill is limited to gains on the acquisition and disposal of assets within the prescribed time limit. Similarly, the losses which can be set against such gains are losses arising on the acquisition and disposal of assets within the time limit. If money is paid for an option to acquire an asset and the option is exercised, then the money paid for the option will be brought into account in arriving at the purchaser's cost if he is chargeable by reference to an acquisition and disposal within the time limit, and, of course, the same will apply to the seller's receipt on disposing of the asset if he is chargeable.
If the option is simply allowed to lapse, the man who has given money for the option gets no relief for it, and—this is important, in view of the way the Amendment is worded—the man who has received the option money is not charged in respect of it. There has been no acquisition and no disposal of the asset and, so far as the option itself is concerned, the person who acquired the option has not disposed of it but has allowed it to lapse.
As I understand it, the Amendment is designed to make the non-exercise of an option to acquire or dispose of chargeable assets a disposal for the purposes of the legislation, so that the person who had acquired an option and did not exercise it would have a loss, allowable under Case VII, equal to the cost of the option. But the Amendment does not impose a charge on the person who receives money for granting such an 367 option. Logically, I should have thought, that, if there were relief for the person who pays for an option and does not exercise it, the person who receives the money for the option should be charged on it. I am sorry that this is rather complicated, but I must explain the matter in detail.
Even, however, if this further step were taken, it would be difficult to secure a result consistent with a scheme for taxing short-term gains on the acquisition and disposal of assets. It would be unreasonable to charge the man who received money for an unexercised option under which he might be required to sell an asset he had held for many years. From this point of view, the granting of such an option might be a convenient way of proceeding to sell his assets, and it would not, therefore, be right to charge the option money as being a short-term receipt on its own.
Since this means that only some option money should be chargeable as receipts, it would be inconsistent to allow relief for all option money laid out on unexercised options because, equally, some options might have been taken with a view to acquiring a long-term investment and then abandoned. Clearly, there is no means of distinguishing between money paid for unexercised options which ought to be allowed and those which ought not to be allowed.
I am sure that the Committee will see the force of this argument. I assure my hon. Friend that we have looked at the matter with very great care. To return to the first leg of the Amendment, which deals, broadly, with involuntary disposals such as disposals by compulsory acquisition, I hope that, in view of the assurance I have given, my hon. Friend will not press the Amendment.
§ Mr. MitchisonI have not much to add to what the Economic Secretary has just said. If the words "disposed of" and "disposition" are to be used all through the Bill as they are, it ought to be made perfectly clear whether what is referred to is a voluntary act or the mere alienation of property including alienation under compulsion. There is no definition of "dispose of" which I can find, and most of the Bill is consistent with either use of the expression.
368 Next, as to the point about compulsory purchase, this is to be looked at again and, no doubt, we shall hear more of it in one shape or another at a later stage. I much appreciate the hon. Gentleman's point that we do not want to set a premium on people who drive local authorities to compulsory purchase instead of arriving at a reasonable bargain, or on those who delay so long in coming to terms that the ordinary public functions of the local authority are impeded. I think that we must bear that in mind.
I find very great difficulty in seeing what is meant by the acquisition and disposal of an option, as such, and that is really what we are talking about. I agree with the hon. Gentleman that there is no logical distinction between those who pay money for an option and those who receive it. If it is to be brought into account on one side of the ledger, then, also, it should be brought into account on the other side. When I find that hon. Members opposite seek to bring it in only as a loss, I look not to their logic, but to their politics.
§ Sir H. d'Avigdor-GoldsmidI think that my hon. Friend the Economic Secretary has dealt very fairly with the Amendment, and, on the compulsory acquisition side, I thought that the points he made were good. I think that we take particular comfort from the fact that he will look at the matter again in connection with compulsory acquisition of farm land—the point mentioned by my hon. Friend the Member for Gloucestershire, South (Mr. Corfield).
There is, however, one point with which he did not deal at all, and that concerns an option not bought for a cash payment, where option money is paid, but where an employee has received from his employers the grant of an option, and has been taxed on it, under a decision which, I am told, is that in the case of Abbott v. Philbin, in 1961. This is a very real point, because it is not remotely covered by what he said on options generally, when speaking of options being bought and sold. This is the option given on which the taxpayer has paid the tax on its value and subsequently has not exercised it because it did not prove to be of value. That seems to me to be a point deserving of 369 attention, but which he did not mention, and if my hon. Friend will give me an assurance that he will look at it I shall be pleased to withdraw the Amendment.
§ Mr. BarberI am sorry that I did not refer to that point, but I did not give any consideration at all to the point before I heard my hon. Friend, because I did not think that it was covered in the second part of the Amendment. I will certainly look at it; indeed, I would 370 be most grateful if the Committee would allow me to look at it further with my right hon. and learned Friend the Attorney-General before giving the Committee an answer.
§ Sir H. d'Avigdor-GoldsmidIn view of that reply, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
371§ Sir H. d'Avigdor-GoldsmidI beg to move, in page 16, line 36, at the end to add:
save that a person disposing of land by letting it for a term of twenty-one years or more shall not be chargeable under Case VII in respect of any income arising from the letting which is otherwise taxed.This is an Amendment concerning a rather difficult technicality. I should like to draw the attention of the Committee to subsection (11) on page 16 of the Bill, which begins by saying:Except as provided by section twelve of this Act, a person disposing of land by letting it for a term of less than twenty-one years shall not be chargeable under Case VII.I do not need to bother the Committee with the rest of that Clause. The fact is that this is not a taxing Clause in itself in respect of land let on leases for twenty-one years or more, but, at the same time, there is a supposition from this exemption that land let on leases of twenty-one years or more will be considered as disposed of, for the purposes of Case VII, and if the disposal through the granting of a lease comes within three years of the acquisition of the land, tax will be levied. We are not told how the tax will be levied, but presumably the Revenue will capitalise the lease granted. I am glad to see my right hon. and learned Friend the Attorney-General shaking his head, because I have had to proceed by guesswork for the sad reason that no information has been afforded us on this Measure except this clue that transactions of less than twenty-one years would not be caught. I am dealing with transactions of twenty-one years or more, and, if the intention of my right hon. and learned Friend in shaking his head is to convey the impression that leases of twenty-one years or more granted within three years are not caught, I need say no more.
§ The Attorney-GeneralMy hon. Friend talked about the capitalised value of the lease. That is not brought in, and I will explain why in due course.
§ Sir H. d'Avigdor-GoldsmidI should be wasting the time of the Committee if I made a long speech which my right 372 hon. and learned Friend proposes to rebut. I would rather listen to his explanation.
§ The Attorney-GeneralI appreciate that what my hon. Friend the Member for Walsall, South (Sir H. d'AvigdorGoldsmid) is concerned about is whether, in computing the gains of tax under this provision, one capitalises the rents due under a lease for twenty-one years or more. I can tell him emphatically that that cannot happen under the Clause as it stands. There will be no question of bringing the capitalised value of the rent received under a lease into a Case VII computation.
Clause 12 (1) lays down that, where there is a chargeable disposal, the gain is to be computed as it would be far Case I of Schedule D in the case of
an adventure in the nature of trade",and so the principles applicable to traders in land will apply for Case VII. When a trader grants a lease, for however long a period, the capitalised value of the rent payable under the lease cannot be brought into his accounts as a trading receipt. All that can be brought in is any premium payable for the lease. I need not go into the reasons for that at present.It follows from what I have said that if any person comes within the scope of Case VII on disposing of land by way of lease, he will, like the trader in land, be liable only if and to the extent that he receives a premium for the lease. The position is different in relation to the case in which ownership of land is transferred in consideration of a permanent rent charge secured on the land. That has to be capitalised in the case of a trader, and so it would be here. But that is a very different point from the point raised by the Amendment.
I hope that I have satisfied my hon. Friend that his fears are not justified and that the position is as he wishes it to be.
§ 10.30 p.m.
§ Mr. Graham PageI do not know whether the fears of my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) have been soothed, but I am afraid that mine have not. I am not clear about what my right hon. and learned Friend the Attorney-General means.
373 There can be many different forms of lease in the taking of a large premium at a small rent or a large rent at a small premium. It may be 21 years, 50 years, 99 years, or more. He says that the only item to be taken into account on the disposal is the premium, but against what is that compared? If, for example, a man buys a freehold property and buys it for £50,000 and he then decides to dispose of a 21-year lease, he takes a premium of £20,000 and lets at a small rent. On the £20,000 compared with the £50,000 which he paid for the freehold there Gs no gain. How, then, does one value the property which is left to him and take that into account if it is the value of his reversion, and add that to the premium which he took, and leave out the capitalised value of the rent?
I cannot see how this will work in order to judge between the acquisition price and the disposal price, because there are two different aspects being dealt with. He has acquired freehold and he disposes of the leasehold. How does one compare one with the other, if one takes into account the value of what he paid for the freehold and against that any premium—and it is entirely for him to decide what premium he takes—he takes on letting? It would not seem to be chargeable against this. I do not know whether it is intended or not.
§ The Attorney-GeneralMy hon. Friend has raised a different point from that raised by my hon. Friend the Member for Walsall, South. There is, as I am sure my hon. Friend will be aware, on reflection, a generally accepted procedure which has been recognised by the courts for arriving at the trader's profit in the case which he put. The cost of the land, that is, the price paid for it, plus allowable expenditure on it, is apportioned to the premium and the freehold reversion according to a formula. For Case VII the cost of the land will similarly be apportioned, and the taxpayer's chargeable gain or loss will be the difference between the premium and the cost apportioned thereto. That is, the cost of the land multiplied by the premium for the lease divided by the market value of the freehold reversion, plus premium for lease.
374 I hope that is now clear to my hon. Friend. It is a generally accepted procedure laid down by the courts.
§ Mr. Graham PageThat was crystal clear, but the point my right hon. and learned Friend has not dealt with is this. In the case of the trader who is charged, this charge of tax goes on for ever while the man is trading and therefore he is taxed on the rent which he is collecting in the ordinary way on his income, but in this case where it is a kind of tax which is being introduced we are considering only the gains during the three-year period, as I understand it. Therefore, it is obviously going to be a wise and very good way of escaping it to let at a high rent and never take a premium, because where is the gain out of it?
§ The Attorney-GeneralMy hon. Friend now raises another point. I was dealing with the question on how to find the profit where the lease is let at a premium. I said that it is by application of the multiple formula which he so readily understood. It is true that we are not dealing here with rents. Rents will not come into Case VII for the reasons I have given. Rental may or may not bear tax. What will come into the Case in the kind of instance my hon. Friend quoted will be premium for the lease and premium for the lease only.
§ Mr. MitchisonI trust that after the Attorney-General's exposition, no one on the other side of the Committee will say that any Schedules at the end of the Bill are in any way obscure. Secondly, we all know the Irishman's definition of a net: a number of holes with string round them. I seem to see some holes about.
§ Sir H. d'Avigdor-GoldsmidI do not think that it is any coincidence that the Government have chosen my right hon. and learned Friend the Attorney-General to reply on the Clause and that he has the support of his hon. and learned Friend the Solicitor-General. Clearly, this is a matter of considerable complication. Despite the considerable help which I have had from my hon. Friend the Member for Crosby (Mr. Graham Page), if my right hon. and learned Friend had said categorically that the Clause catches only the premium, I 375 would have felt satisfied with his reply. He qualified that, however.
That being so, I can give only a qualified answer by saying that in so far as the Clause catches the premium, I am perfectly satisfied for the Amendment to be withdrawn. In so far as I am not qualified to evaluate the further considerations explained by my right hon. and learned Friend, in seeking leave to withdraw the Amendment I must say that I shall have to take professional advice and see whether, on Report, we must come back to the second part of what my right hon. and learned Friend has said. Subject to that, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Clause ordered to stand part of the Bill.