§ 3.32 p.m.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)I beg to move, in page 21, line 18, at the end to add:
(6) There shall be exempt from tax chargeable under Case VII any gain accruing to an Investment Trust Company, other than one which is under the control of five persons or less, the shares of which are publicly quoted on a recognised Stock Exchange in the United Kingdom, and which by its Articles of Association provides that surpluses arising from the realisation of investments shall not be available for the payment of dividends.
§ The ChairmanI think that with this Amendment we can take that in page 21, line 18, at the end to add:
(6) There shall be exempt from tax chargeable under Case VII any gain accruing to an authorised Unit Trust as defined by section sixty-nine of the Finance Act. 1960.and that in page 38, line 1, to leave out from beginning to end of line 17 and to insert:and in section fifteen of the Stamp Act, 1891, the words 'Settlement … The settlor' in the table set out at the end of subsection (2), and in the said First Schedule the word 'Settlement' in the heading beginning 'Declaration', shall be deleted.
§ Mr. StevensYes, Sir William.
Clause 14 is the Clause which exempts from a charge to tax under Case VII:
Charities, superannuation funds, and other special cases.My Amendment deals with certain investment trust companies which, I submit, come within the category of special cases. My right hon. and learned Friend the Chancellor has on several occasions since April of last year made perfectly plain the principle underlying these Case VII assessments, and I shall quote from two of his speeches. I quote, first, from his Budget speech of 17th April, 1961, when he said:Of course, individuals or firms, who make a business of seeking capital gains on the Stock Exchange or in property or other deals, are, in fact, trading and are liable to the full 439 rates of Income Tax, Surtax or Profits Tax on the profits from such activities. People who are genuinely investing come into a different category."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 821.]My submission is that people who subscribe to the share capital of investment trust companies of the type covered by this Amendment are genuinely investing.Again, on 23rd October, 1961, my right hon. and learned Friend said:
I have also undertaken that certain transactions such as short-term deals on the Stock Exchange and in property which are intended to bring in spending money and incomes will be taxed as such."—[OFFICIAL REPORT, 23rd October, 1961; Vol. 646, c. 628.]I submit that the short-term gains of the investment trust companies I have in mind do not bring in spending money or incomes.I have referred to certain types of investment trust companies, and there are three very important provisos in my Amendment. First, these investment trust companies must be under the control of more than five persons. Secondly, their shares must be publicly quoted in a recognised United Kingdom Stock Exchange. Thirdly, their articles of association must prohibit surpluses from the realisation of investments being used in payment of dividends. When some of my hon. Friends saw the Amendment on the Notice Paper, they said, "You are just opening the door wide. Rich men will form themselves into investment trust companies, and drive a coach and horses through the Bill." I think that those three provisos are the answer to that suggestion.
It is not without interest that the first two of the provisos—that control must be in the hands of more than five persons, and that there shall be a public quotation—are hallowed by tradition and precedent. They are two of the major considerations in Section 256 of the Income Tax Act, 1952—one of the Sections dealing with the circumstances in which the profits of a limited company can be subject to Surtax assessment. Those two provisos have stood the test of time, and are fair and reasonable.
440 It is the fact that investment trust companies of the type I have in mind—which account for a very large proportion of the total amount invested in investment trust companies—rarely, if ever, sell securities for the capital gain. Their prime object is income yield, not capital gain. It may well be asked, in the case of such investment trust company, "Why sell within the six months limit? Why not hold for six months and one day and then no question of a charge under Case VII will arise?" There are circumstances, however, and not unusual ones, in which investment trust companies of this kind may find it exceedingly desirable to sell within the six-month period and, very often, find it essential to sell within that period if they are to keep within the law.
In the first place, they may, and commonly do, apply for a substantial block of shares of a new issue. If that new issue is a success and heavily oversubscribed, it is common farm for the larger application to be severely scaled down. In that case, an investment trust company may well find itself with a very small allocation of the new issue, and it is quite uneconomic and inefficient for such a company to hold a small amount of any one particular investment. In such circumstances, it is obviously in the interests of efficient administration and management that it should be able to sell that small holding as quickly as possible.
Again, that company may find itself required to sell in order to keep within the law. It is very common form for the articles of association of such companies to provide that not more than 5 per cent. or 10 per cent. of their total capital shall be held in one particular security. If there is a rights issue in respect of one of the investments in the company's portfolio, it may well take the investment beyond that 5 per cent. or 10 per cent. An investment trust company in that position, may, therefore, be required to sell. Or it may be that one of the companies represented in its portfolio amalgamates with one or more different companies, with the result, again, that the proportion goes 441 above that provided by the articles of association and, again, it is forced to sell. There are two instances whereby they may be forced to sell within the six months' limit.
Another point that has been made to me is that the Amendment states, in effect, that they must not distribute these capital gains as dividends but that there is an answer to that, for all one need do is to liquidate the company and make a capital distribution. I do not think that serious consideration need be given to that point. It is not a practical proposition and a company might do it once, but it would certainly not do it again for obvious reasons. If a company intended to try to do that year after year the company to be liquidated would have to reform and there are three objections to it being done more than once.
First, if any company tried to do that the chances on the second occasion of its getting a public quotation on the Stock Exchange are remote. Secondly, obviously any company which behaved in that way would soon lose the confidence of the investing public. Thirdly, and above all, any dodge or jiggery pokery of that sort would be expensive because there would be the cost of reforming the new company out of the ashes of the old, stamp duties, and so on, and the charges generally would almost certainly extinguish any possible tax advantage that might be gained. I do not think that the three safeguards I have mentioned would leave any possibility of yet another loophole being provided for people to dodge the tax that they should pay.
The trade body concerned in this matter is the Association of Investment Trust Companies and no company is eligible for membership unless it complies with the three provisos I mentioned. As I say, these companies are not organisations for speculators, but for genuine investors, including the small savers, and to leave their short-term gains charged to tax under Case VII would he entirely out of keeping with what the Chancellor of the Exchequer has said on more than one occasion. It would be completely out of keeping with the principle involved and I hope, therefore, that the Government will accept 442 the Amendment with the ready spirit with which they accepted two other Amendments of mine yesterday.
§ Mr. G. R. Mitchison (Kettering)There appears to be an ambiguity here. If one takes the words in the Amendment,
… other than one which is under the control of five persons or less …",and puts them in brackets, then the words,… the shares of which are publicly quoted …",and the reference to the articles of association, apply to the investment trust company, not to the excepted company. That is one way of reading it. The other way is that it might read "other than one" and all the rest of it refers to the excepted company. Have I made myself clear?
§ Mr. StevensI think that I am seized of the hon. and learned Gentleman's point. I tried to make it clear in my remark that the investment trust company which I have in mind must comply with all of the three provisos and not with just one or two of them. It seems incredible, but it may be possible that my drafting on this occasion may not be up to my former standard.
§ 3.45 p.m.
§ Mr. Edward du Cann (Taunton)I wish to underline the remarks of my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) and to say how strongly I agree with the logical and persuasive case that he advanced. There is another Amendment on the Notice Paper, in the names of myself and some of my hon. Friends, which deals with a somewhat similar though separate case, that of unit trusts.
I should, at this stage, declare my interest in this matter. I was responsible for forming the first unit trust management company to be launched in the United Kingdom since the last war and I am still responsible for managing that company, which has now built itself up in the short period of four-and-a-half years to a position where it serves about 160,000 shareholders with total assets of £21 million. I hope that it will be appreciated, therefore, that if there is one thing I can fairly claim it is that 443 I am speaking on behalf of a substantial body of small investors and that there is no sort of speculative sense involved here.
As I understand, the proposals in Clause 9 and the subsequent Clauses are designed to catch speculators. If it is true to say that an investment company can in no way be considered a speculative enterprise, then still less can a unit trust be considered as such. The total assets of unit trusts in the United Kingdom are now approaching £250 million and the total number of investors is nearly 750,000. I hope that my hon. Friends, and especially hon. Gentlemen opposite, will think it appropriate that there should be some of us in the United Kingdom who are endeavouring to do something definite about the propagation of a property-owning democracy rather than merely to talk about it.
When I declare my interest in this matter I do so with no sense of apology but, indeed, with a sense of pride. These are genuine investors. My hon. Friend the Member for Langstone detailed a number of cases where managers of investment trusts—and the same applies to unit trusts—may be obliged, for sound, sensible investment reasons, to dispose of securities within a short period of time. No one is suggesting that they are speculating by doing that, for they are merely doing their duty to manage competently the funds with which they have been entrusted. The end result of any individual transaction of this sort may be that the individual shareholder in the case of a unit trust may gain about one-tenth of ld. and these are the people who will, if this legislation becomes an Act in its present form, be caught for tax under the present drafting.
I hope that my right hon. and learned Friend may consider that this is not right and that there is a genuine case for considering afresh the position of these people. There is, also, the possibility that a small investor may be obliged to pay tax twice. To illustrate this, suppose the managers have made a fairly rapid transaction in the underlying securities of a unit trust for good investment reasons. The trust then pays tax on 444 that. Take the case of a person who is a subscriber to a unit trust savings scheme—I do not think that there can be any more genuine a long-term investor than he—who has subscribed, say, 10s. a week, or £1, or £2 a month, and whose money is used over a period of years to buy shares. He must, naturally, be a most genuine sort of investor.
Suppose that he subscribes 10s. a week to a savings scheme, and, at the end of a period, has £75 subscribed. In the meantime, his income will have been reinvested and at the end of the period he may have realised his objective and may wish to sell the shares. His first two and a half years' subscriptions are exempt from the provisions of the Bill, but his last six months are caught and should his realisable price be above the prices at which he acquired the shares he will be obliged to nay tax on that gain. He is in the position of being a genuine saver and is obliged to pay tax—that by itself, I believe, is quite wrong—and it may be also that he is having to pay tax twice on the same transaction. I hope that these points will merit the serious attention of my right hon. and learned Friend, because they disturb me substantially.
§ Mr. Douglas Jay (Battersea, North)Would the Amendment exempt altogether from the tax all investment trust companies and unit trusts whose shares or units are publicly quoted?
§ Mr. du CannI am glad to have an opportunity to explain any of these matters. In the United Kingdom there are 52 unit trusts. Very few unit trusts have a Stock Exchange quotation. There is an academic argument whether this has advantages or disadvantages to the subscribers to the schemes. The suggestion in the Amendment in my name and the names of my hon. Friends is that all authorised unit trusts should be exempted from the provision of this Clause and from the capital gains tax altogether.
My hon. Friend the Member for Lang-stone raised the point whether persons might form themselves into investment companies to avoid tax. It will be appreciated that an authorised unit trust has received Board of Trade approval. It has, therefore, complied with a number of extremely stringent regulations. 445 In particular, it will have a trustee of undoubted standing, for example, one of the joint stock banks. These matters apply whether the units of the unit trust are quoted on the Stock Exchange or not.
Any authorised unit trust will be a public venture and is, therefore, likely to have a total number of shareholders which will vary between 5,000, at the lowest, or, in the case of one trust to which I am responsible, no fewer than 65,000. This is not a case in which it might be thought that it would be possible for private persons to avoid the incidence of tax by bringing themselves within the ambit of authorised unit trusts.
I was talking about the double incidence of tax which I believe to be an important point. It is very fashionable, on this side of the Committee, to quip hon. Members opposite with the suggestion that the Opposition in general do not realise that we live in changing times. In particular, I remember a speech which the Prime Minister made when he referred to the Opposition as believing that they lived in a period when the people who drove motor cars were Edwardian ladies, wearing veils, and men with cloth caps which were turned the other way round.
I sometimes feel—and it is appropriate that I should say these things in the presence of my right hon. Friend the Chancellor—that we on this side of the Committee live in that kind of situation, too. I have always believed, and surely it must be right, that the worker who, by hand or by brain, contributes to the prosperity of British industry should be able to share in the profits, too. I believe that every scheme designed to that end must be a scheme which deserves to command the unqualified support of the whole Committee and, indeed, of the populace outside. During the last several years, one of the most significant factors in our economy has been the tremendous increase in personal savings, now running at over £2,000 million a year, and the even greater company savings.
The question which I should like to ask my right hon. and learned Friend is simply this: is it right for the Committee to say to the people, "We believe in savings, we will support what you are 446 doing and we will give every assistance"? Or is it right for the Committee to agree to put obstacles in the way of further advance? They may perhaps be tiny obstacles which do not add up to a great deal, but I hope that I carry the majority of the Committee, on both sides, with me when I say that they should not be placed there at all.
I should infinitely prefer my right hon. and learned Friend to go to the country and say, "Not only do we talk about savings in the House"—in the way in which the Chief Financial Secretary did yesterday—"and not only are we in favour of them, but more: we will not put obstacles in their way and we will do all that we can to encourage them."
§ Mr. Raymond Gower (Barry)My hon. Friends the Members for Portsmouth, Langstone (Mr. Stevens) and Taunton (Mr. du Cann) have put the case very forcibly and it is not necessary to elaborate on it, but there are one or two points which I want to emphasise.
From time to time all Treasury Ministers have said that they are very much in favour of a wider dispersion of property ownership. That is a profession with which almost everyone on these benches and many in other parts of the Committee will agree. We have also continually heard it repeated that it is most desirable that there should be the utmost encouragement for the small and medium investor.
Both these questions arise when we consider the Amendment. If my right hon. and learned Friend does not accept the case for this exemption, and if he insists that the Finance Bill shall go forward in this respect in its present form, then I respectfully submit to him that he will do definite disservice and harm to the investment trust movement, and particularly to the unit trust movement.
My hon. Friend the Member for Taunton has given figures showing the large number of people who are investing in this way, but the figures are still much smaller than many of us would like them to be. It can justly be said that this kind of investing by the small investor in the industrial future of this country is in its very early stages, and the Committee would perform an ill-service if, by its attitude to this question 447 today, it gave any impression that we are not wholeheartedly behind beneficial movements of this kind.
We want to see a much wider dispersion of property ownership in this country. We want to see a far larger number of people of modest means investing in this way. Surely the best way to achieve these desirable ends is to show by our legislative actions that we are prepared to support the ideas which we sometimes put in our speeches. This is a matter of far greater importance than might appear from a superficial examination, for it goes to the very root of this new age to which my hon. Friend the Member for Taunton referred. I sincerely hope that my right hon. and learned Friend will admit the importance of it and the beneficial effects of the extension of this kind of investment and will not by his actions today and his decision on the Amendment suggest to the Committee and the country that he is not wholeheartedly behind such investments.
§ Mr. Douglas Houghton (Sowerby)I rise to express some doubt on the Amendment. This tax is not in terms a tax on speculative gains; it is a tax on gains from the acquisition and disposal of assets. The Chancellor decided that for the purpose of this tax it will be levied on activities which, in general, are of a speculative nature, but he has not shaped the tax with a view to inquiring into the motives of people who make investments at any time. He has let the test of time decide whether it shall come within the scope of this tax, not the motive. The period which elapses between the date of acquisition and the date of disposal is the test.
Many genuine investors will be caught by this tax. They will make an investment with the full intention of keeping their money there as part of their savings, but circumstances will arise, probably very shortly after they have made the investment, which compels them to realise the investment. If they make a capital gain on so doing within the six months' period, they will be liable to tax on their capital gain, irrespective of their motives which prompted them to invest or which prompted them to sell. We have to look at the tax in 448 this context of the general principle of the time which elapsed between acquisition and disposal.
4.0 p.m.
I know that the Chancellor of the Exchequer could very well argue that I am really out to catch speculative activities, and that is my main purpose. I may catch many people who make gains quite innocently, but it will be incidental to the conduct of their private affairs. The Chancellor may regard that as unfortunate, but the main purpose is to catch speculative activity where people add to their income in the course of activity of this kind.
The Chancellor may say that in looking at corporate bodies and institutions he does not want to penalise unnecessarily bodies which are encouraging general investment and are not themselves in the normal way in these speculative markets. Yet in this connection it seems to me that it is not a question of what a subscriber does or intends to do. The test here is what the unit trust does.
Here again, there is the time limit. If the investment trust, in the course of the acquisition and disposal of its investments, makes a capital gain on the disposal of particular assets within the specified period, is there any strong case for exempting it from tax? The hon. Member for Taunton (Mr. du Cann) argues that this is a democratic thing and that the people who will ultimately benefit, the people who subscribe to investment trusts, are, on the whole, not rich.
The hon. Member argues that this is part of an extension of the concept of a property-owning democracy, but I am sure that he will admit that even if the capital gains are not distributed as dividends there will be a permanent expansion of capital which cumulatively will reflect itself in the higher value of the unit invested in the trust. Therefore, a capital benefit will accrue to subscribers in due course. In advertisements for investment trusts, have we not read of the rise in the value of the unit over a period of years, which surely is a revaluation of the capital value of the assets of the trust?
§ Mr. du CannPerhaps I could ask the hon. Member two questions. Has he not also read in unit trust advertisements the point which many of us are extremely concerned to bring out, namely, that share prices can fall as well as rise? Although there may be a small appreciation, in many cases perhaps of one-tenth of ld. per share, it is quite possible for this to be lost as well. I agree that this is a hard case, but does the hon. Member not agree with me that hard eases make bad law?
§ Mr. HoughtonI have never understood that saying. I have heard it so many times, but I have never seen it applied to anything that convinced me.
This is the final question. Are the activities of the investment trust of such a nature that the Chancellor will be justified in leaving them outside the scope of this tax? Are they in the corporate form so distinguishable from comparable activities that may be undertaken by individuals that they should be left out of the tax altogether? I am doubtful about that. In administering tax and in introducing new taxes we are constantly looking for good cases to leave out of the scope of the tax, whether because it might bear hardly on someone, or in relation to the purpose of the tax, or in relation to taxable capacity it would not be a good thing to leave those people out.
I am not convinced that this applies to investment trusts as, for example, in the case of charities. There are other equally worthy bodies. What about the trade unions which go in and out of the stock market? They will be caught unless the investments are assigned to benevolent or charitable activities. If they are part of the normal capital of the unions they will not be exempt from the terms of the new tax, any more than they are exempt from Income Tax at the standard rate at present. There is no more democratic property-owning body perhaps than a trade union, and once we begin on these exceptions there are other cases which may have an equally strong claim. In defining exemption we have to choose those things which are so clearly distinguishable in their purpose from other activities that we can justify on social and other grounds that they should be left out of the tax.
450 I am a genuine seeker after truth in this matter. We on this side of the Committee have come into the debate with open minds and I am bound to say that so far I have not been convinced by the arguments I have heard. I always get up with great trepidation to speak on an Amendment which has been moved by the hon. Member for Portsmouth, Langstone (Mr. Stevens), because I always think that he has been put up to something and that it has been drafted for him and has been tied up nicely with the Treasury. [Interruption.] I hope that the debate is quite open—
§ Mr. StevensOn a point of order. Is it in order for an hon. Member to call another hon. Member a "stooge"? A "stooge" by any other name may smell as sweet or as dirty.
§ The ChairmanI did not hear the word "stooge".
§ Mr. HoughtonI would not mind being put up to move any number of Amendments if I had any hope of having them accepted. I envy the hon. Member for Langstone. I do not despise his activities in the least. I wish that I were in the same position. I am sorry, but we on this side of the Committee are not favourably disposed to the Amendment.
§ The Financial Secretary to the Treasury (Sir Edward Boyle)We are now discussing two Amendments to Clause 14 and one Amendment to Clause 25. I think that I am right in saying that in the speeches made so far none of my hon. Friends has actually dealt with the third Amendment and, therefore, I hope that it will not seem discourteous to the Committee if I confine my argument in the main to the first two.
It is easy for there to grow up in the course of debates an impression of what appears to be an alliance between the two Front Benches against the rest of the Committee. Nothing is easier—and I hope that I do not include in it too much—than to express agreement between the two Front Benches in this way, but I think that the hon. Member for Sowerby (Mr. Houghton) has made an extremely careful speech to which I 451 hope the Committee will pay attention. I find myself in agreement with a good deal of what he said.
Clause 14 provides for certain exemptions from the Case VII charge. Broadly speaking, the bodies which will benefit from the Clause as drafted are those which already enjoy a wide measure of exemption from Income Tax. For example, subsection (1) exempts charities, and charities enjoy virtually general exemption from tax. Subsection (2) exempts superannuation funds approved by the Commissioners of Inland Revenue under Section 379 of the Income Tax, 1952.
The first Amendment, moved by my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens), proposes to extend Clause 14 in an important way by proposing that there should be exempted from the new charge the short-term gains of any investment trust if its shares are publicly quoted on a recognised stock exchange in the United Kingdom, it is not under the control of five or fewer persons, and its articles of association provide that any surplus arising from the realisation of investments shall not be available for the payment of dividends. I fully recognise that my hon. Friend has drawn this Amendment with care and that several conditions have to be fulfilled. Nevertheless, for reasons I shall explain, I cannot advise the Committee that we should make this very big addition to the number of exemptions envisaged in Clause 14.
Up to date, any gain from the realisation of investments has not been subject to tax unless the person making the gain was engaged in a trade of investment dealing. It is for this reason that institutions such as investment trusts and unit trusts have not had to pay tax on surpluses on the realisation of investments. But, of course, it was precisely to enable tax to be charged on certain profits from investments which have hitherto been tax-free, namely, profits realised in a relatively short time, that the present legislation was brought forward.
This Amendment, which, in the case of certain investment trust companies, would let out just the sort of gains which 452 it is desired to Charge, would, in my night hon. and learned Friend's view, definitely be something of a wrecking Amendment from the point of view of the whole scheme of his new Case VII. I think that to make a special exception for the gains of investment trust companies while maintaining the charge on the gains of other taxpayers would not tally with that sense of fair treatment between one taxpayer and another which has always marked our tax system and which, indeed, was one of my right hon. and learned Friend's main purposes in bringing forward this new Case VII tax.
My hon. Friend the Member for Langstone made the point that investment trusts may find themselves in a difficult position. Normally, they would not want to do a good deal of short-term changing in share acquisition, but, nevertheless, there might be special factors Which caused them to make certain short-term changes in order, perhaps, to protect the income yield, or when they applied for a new issue and obtained too small an allocation to be worth retention. I quite understand that these cases could arise.
I have not an interest to declare this afternoon, but I should have had an interest to declare in this matter some years ago because, before I became a member of the Government, I was myself a director of what was, in effect, a small investment trust company.
The fact that, for investment trusts, short-term gains may be the exception rather than the rule is not really a satisfactory reason for exempting from tax those gains which they do make any more than it would be a reason for treating in that way the short-term gains which a particular individual makes only rarely. Individual investors who do not normally speculate may, just as much as an investment trust, find special reasons why they have to make an occasional short-term change in an investment. This occurs to individuals whether or not they are connected with investment trust companies or have responsibility for managing investment trusts. There may be particular reasons why short-term changes have to be made.
§ Mr. StevensI entirely accept what my hon. Friend has said but, surely, in the case of the individual who is put in the position of making a short-term capital gain, the gain is available to him as spending money, as income, whereas, in the case of the investment trust corn-panics to which I have been referring, this is not so. How does my hon. Friend square what he has been saying with what my right hon. and learned Friend has said all the way through about this short-term capital gains tax, that what he is seeking to tax is spending money, income? What we have been discussing on these Amendments is exactly the opposite. It is saving.
§ Sir E. BoyleI was just coming to that point. The answer to my hon. Friend is that the tax which my right hon. and learned Friend is introducing is not, in fact, a tax on realised gains. The whole basis of the Case VII tax is that the appropriate test for distinguishing between short-term speculative gains, Case VII gains—call them what one likes—and long-term investment is a time test. Accordingly, periods have been fixed which are such that the reasonable inference can be drawn that, in general, transactions completed within those periods are of an income-seeking nature. My hon. Friend is going further and seeking to introduce by his Amendment a completely different kind of test, namely, that of what happens to the gains of a particular type of company. With respect to my hon. Friend, I do not think that it would be possible to accept the Amendment and stop there.
4.15 p.m.
I believe that the application of such a new test could not be confined to investment trusts and that the logical end of accepting my hon. Friend's Amendment would be to allow an exemption or, at least, a reduction in tax in respect of short-term transactions when the gains were reinvested. My right hon. and learned Friend's motive for introducing the tax was exactly as he has put it. Nevertheless, this is not a tax on realised gains and, as my right hon. and learned Friend has always made absolutely clear, he is not concerned in this context with the motive for the short-term gain. I put it to my 454 hon. Friend that the Amendment he has moved so very reasonably this afternoon would make a very big change in my right hon. and learned Friend's whole scheme, and it could not stop there.
I come now to the second Amendment, that spoken to by my hon. Friend the Member for Taunton (Mr. du Cann), namely, the Amendment which proposes that there should be a special exemption from Case VII tax for gains accruing to authorised investment trusts as defined by Section 69 of the Finance Act, 1960. My hon. Friend, whose work in this movement we all recognise and admire, suggested that there should be an exemption from the short-term gains tax for authorised unit trusts on the ground that these encourage savings, are not engaged in speculative activities, and, as he pointed out very clearly, encourage ordinary wage-earners to have a share in the wealth which is being produced.
Although I appreciate all that my hon. Friend the Member for Taunton has said, it seems to my right hon. and learned Friend the Chancellor that, if they derive gains within Case VII, there is no convincing reason to exempt them when other persons whose main activities are not speculative nevertheless have to pay tax on their short-term gains. Here again, there is no question of differentiating motives in my right hon. and learned Friend's mind.
There are one or two other points to be considered in this connection. In 1960, in deference to a request by the unit trust movement, the tax treatment of authorised unit trusts was brought into line with that of investment companies, with the result that unit trusts, like investment companies, became, perfectly properly, entitled to relief for their management expenses and, as a corollary, were brought into the Profits Tax charge. Investment companies will be subject to Case VII tax. Trusts in general will be subject to the new tax on short-term capital gains. In view of the way in which we have assimilated the treatment of unit trusts in the past to the treatment of other investment companies, I think that it would be difficult to make a special exemption in favour of authorised unit trusts.
The main point I make to my hon. Friend is this. I am as keen as he is on the success of the movement, and I 455 am delighted that there are now 160,000 people concerned with my hon. Friend's unit trust. This is a very important movement and, of course, we want to see people with lower incomes sharing in the productive wealth of the country by this means. Nevertheless, I do not think, with respect, that it follows from that that they ought to be given a differential advantage in the tax system. In a way, I think that I can almost turn my hon. Friend's arguments not against him, but the other way round, and say that, precisely as more and more people do become ordinary shareholders in the nation's wealth, we do not want to see them treated in a special category for tax purposes.
Just as we may well think that it is perfectly right, as we become richer as a community, that certain forms of universal social service should be discontinued—we have often discussed food subsidies, including the bread subsidy, and so forth—so, by the same token, I should myself say that it is right, as we become richer as a community, that those who are shareholders in the nation's wealth should be treated like everyone else, namely, that the rate of tax which they pay should depend upon their personal circumstances. Those who are not well off, those who do not pay tax at high rates, will not pay any great amount of extra tax as a result of the new Case VII which is being introduced.
May I repeat an argument which I have mentioned already but which bears repetition. Authorised unit trusts are treated for tax purposes generally in the same way as investment companies. Like investment companies, they do not rank for any special exemption and I believe it right that they should be subject to the Case VII tax. They receive money from individual savers and invest it to produce an income for the unit holders and, at the same time, provide them with a readily realisable investment in the form of their units.
This is a useful and very important activity, but it is difficult, I think, to say that it should qualify unit trusts for special exemption from Case VII tax It is always difficult, when bringing in a new scheme of taxation, to decide how wide the exemption should be. While considering things like charitable activities and superannuation funds, it is 456 fairest, in general, to base our tax system as far as we can on the principle which has prevailed up to now, namely, that throughout our direct tax system taxpayers should pay in accordance with their own particular circumstances.
Having listened carefully to what my hon. Friends have said, it is in accordance with that general principle that I cannot advise the Committee to accept the Amendment.
§ Mr. James Callaghan (Cardiff, East)I speak as one who believes that the growth of unit trusts is desirable and certainly should not be discouraged. The speeches of my hon. Friend the Member for Sowerby (Mr. Houghton) and the Financial Secretary were overwhelming, and I accept the philosophy put forward by the Financial Secretary.
However, I hope that the Financial Secretary will not endanger our future relations by speaking of the appearance even of an alliance between the Front Benches against the back benches. I think that that was a most incautious remark. In fact, the alliance is between the Opposition and the Government Front Bench against the Conservative back benches.
I know of no hon. Member on this side of the Committee who wants the Amendment to succeed. I am very glad that we have the Government with us on this matter. I always consider that the rôle of the Financial Secretary is that of a young woman who would like to do right, but is frequently tempted to do wrong. The temptation has come to him again this afternoon, and we are by his side assisting him to resist that temptation. He has stood up manfully—or should I say womanfully—against the temptation to do wrong. I agree with what he has said and hope that he will continue to resist the Amendment.
§ Mr. du CannWhoever is in alliance with whoever else, I should say two things. I know how much my colleagues, like myself, appreciate what my hon. Friend the Financial Secretary said about the work which the unit trust movement is doing. All that I wish is that a little more was done to help it along its way. However, we are not ungrateful for what has been done.
457 My first point arises directly out of something which the Financial Secretary said. He said that, as a result of a direct request by the unit trust management companies, unit trusts were assimilated with investment trusts for the purposes of taxation. He went on to argue by inference that the two, therefore, were virtually the same. That is not so, any more than a sheep is the same as an elephant because both have four legs and a tail. The reason why it was suggested that the two activities should be assimilated from the point of view of taxation was to remove the tax disability on unit trusts, and not to put them in a specially favoured position. I should like to make that very clear for the record.
Secondly, the Financial Secretary said that he thought that it would be quite wrong to put any savings movement in a class of special advantage. I do not disagree with that view. But the tragedy is that that is exactly the position in England today. We have the sacred cow of the National Savings movement, which is continuously given special advantages. We have life insurance premiums, which, to some extent, are tax free. There is tax exemption for the first £15 of interest on money deposited with the trustees savings banks and with the Post Office.
My argument has always been that it must be right to rationalise these advantages. It is absurd that a deposit with the Co-op bank does not contain a tax-free element, just as it is absurd that a regular savings scheme with a unit trust or building society, which is every bit as valuable to the economy as the payment of a life insurance premium, should not have an advantage similar to that which such premiums enjoy. That is my point.
I suggested in my speech that the effect of this speculative gains tax would be to put unit holders of a unit trust in a specially disadvantageous position. I suggested that tax would be payable by the trust fund in respect of dealings which everyone seems to agree must occur from time to time in the natural order of sound investment management. The tax will be payable by the fund, and the ordinary unit holder who subscribes to a savings scheme can be liable for a second amount of tax.
458 If my hon. Friend the Financial Secretary could comment on that matter, it would be valuable and helpful to the Committee.
§ Mr. StevensI always pay the greatest possible attention to the speeches of the hon. Member for Sowerby (Mr. Houghton), whether they are his own or speeches which he has been put up to make. It was clear this afternoon that he had no great sympathy with the two Amendments, nor any great hostility towards them.
Only one of the series of arguments deployed by my hon. Friend the Financial Secretary carries great weight with me. I should like to deal fairly thoroughly with some of his other arguments on another occasion. It is not easy to say that, if these Amendments were accepted, the principle of them could not be much more widely applied. I am not prepared to say that that could not be so this afternoon. I should like a little more time to do more research into that point. I confess that I am not wholly convinced, but, because I am not fully equipped at the moment to press it, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Question proposed, That the Clause stand part of the Bill.
§ Mr. Donald Wade (Huddersfield, West)Since we are dealing with special cases, I hope that it is in order for me to raise a small but not unimportant point in connection with building societies. For taxation purposes, building societies fall into a special category and, therefore, I think that they form an exceptional case. It is not clear to me how they will be affected by this taxation of short-term gains.
I think that it would save time if I were to read an extract from a letter from the secretary of the Building Societies Association to the Chancellor of the Exchequer, dated 15th May this year. It reads as follows:
The Council of the Association has requested me to express its concern that as the provisions of the above-mentioned tax at present stand a building society will he liable within the limits prescribed, to tax on any surplus arising from the sale of investments. It appears to have been overlooked that paragraph 3 (d) of the Income Tax Arrangements made between the Inland Revenue and building 459 societies expressly excludes from a society's computation for Income Tax any surplus or loss arising from the realisation of investments. The provisions of the Finance Bill thus conflict with the treatment of this item under the existing statutory Arrangements, which was accepted by building societies in good faith, and the Council therefore requests that the Bill may be amended to preserve the present position.The Council has noted that the special position of mutual life offices may lead to an amendment to the Bill. The Council has asked me to point out that building societies are similarly in a special position. The building society is by statute bound to invest only in trustee securities and must comply with the most stringent conditions as to short-term maturities in the case of gilt-edged stocks, and corporation loans in order to ensure a high degree of realisability to meet demands made upon it at any time, whether by way of withdrawals by its investors or advances to borrowers.4.30 p.m.On other occasions when we have discussed Finance Bills, I have raised the subject of building societies. I shall not enter at any length into the general subject or the problems concerning taxation. I simply make the point that in carrying out their proper duties it is necessary for building societies to change their investments from time to time. They do not make profits in the strict sense of the term and there are no equity shareholders to whom any such profits could be paid. It seems to me that they fall into a special category. It would be helpful to know how they would be affected and what is the answer to the letter sent by the Secretary of the Building Societies Association to the Chancellor.
§ Mr. William Clark (Nottingham, South)I regret that in the Clause my right hon. and learned Friend the Chancellor of the Exchequer has not thought fit to extend the exemptions to take cognisance of unit trusts and investment trusts. My hon. Friends the Members for Portsmouth, Langstone (Mr. Stevens) and for Taunton (Mr. du Cann) have clearly demonstrated that it must be a political decision whether we help small savers. I unashamedly say that we should take that political decision and help small savers up to the hilt.
In reply to the debate yesterday on an exemption limit for capital gains tax, my hon. Friend the Financial Secretary to the Treasury said—
§ Mr. MitchisonOn a point of order. Is not the hon. Member discussing the matter which has just been before the Committee and decided?
§ The Temporary Chairman (Sir Samuel Storey)The hon. Member is, I think, getting away from the Clause.
§ Mr. ClarkI am sorry if I have confused the Committee. I was trying to speak generally on exemptions and regretted that they were not wider than the Bill provides.
The very fact that yesterday, when the question of an exemption limit for capital gains was debated, my hon. Friend the Financial Secretary pointed out that all of us had it wrong concerning the £15 exemption for Post Office and trustee savings bank savers, obviously indicated that this exemption of the first £15 of interest is intended to attract people to lend money to the nation. That I accept.
Presumably, the reason why the exemptions in the Clause are not extended further is that the Government wish to continue this preference for investing with the State. The reason why they must give tax relief on the first £15 of interest is the attractive rates of interest given by other financial bodies, including unit trusts and investment trusts.
§ Mr. A. E. Hunter (Feltham)Would not the hon. Member agree that the rate of interest on Post Office savings is very small—only 2½ per cent.?
§ Mr. ClarkI agree, but the rate is also very low in the case of many unit trusts. If it is necessary to give a fiscal incentive to Post Office and trustee savings bank savers because of the more attractive avenues for investors in other financial institutions, unit trusts and investment trusts are now being penalized—
§ Mr. MitchisonOn the same point of order, Sir Samuel. Surely, the hon. Member is coming back every time to a point which has already been disposed of by the Committee. All that is contained in the Clause is summarised in the note at the side:
Charities, superannuation funds, and other special cases.The special cases are the United Kingdom Atomic Energy Authority and a point about bankruptcy.
§ The Temporary ChairmanI was about to call the hon. Member's attention to that when the hon. and learned Member for Kettering (Mr. Mitchison) rose.
§ Mr. ClarkAgain, I am sorry for the confusion. Perhaps I may come to the question which I should like my hon. Friend the Financial Secretary to answer. As the differential with the Post Office and trustee savings banks has been narrowed because of the imposition of a capital gains tax on unit trusts and financial investment trusts, is it envisaged that the £15 exemption given to Post Office savings bank savers is to be reduced?
§ The Temporary ChairmanThat does not arise on the Clause.
§ Sir E. BoyleThe hon. Member for Huddersfield, West (Mr. Wade) will have seen that there is no reference whatever in the Clause to building societies. I can, therefore, give an unambiguous reply to his question. If, in the course of disposing of their assets, building societies make gains within the time limit set under the proposals of my right hon. and learned Friend the Chancellor of the Exchequer, they will be liable under Case VII. I do not want there to be any misunderstanding about this. There was no specific Amendment on the subject, so it would not be proper for me to deploy the arguments at length. Building societies, however, are not included within the scope of the exemption in the Clause. Therefore, the position is perfectly clear.
In answer to my hon. Friend the Member for Nottingham, South (Mr. W. Clark) and my hon. Friend the Member for Taunton (Mr. du Cann), I should like to say this without, I hope, getting out of order. Whether it is in the Clause or not, my hon. Friend the Member for Nottingham, South must please not say that I have said anything to the Committee suggesting that it is better to lend to the State than to lend for the purposes of industry, because I have said no such thing. I was merely answering yesterday because I thought that the debate took a form which suggested that there was misunderstanding about the purposes of the concession in 1956.
The answer to my hon. Friend the Member for Taunton about specially favourable treatment for the National 462 Savings movement is that if he would look carefully at what I said in column 305 of HANSARD yesterday, it answers to some extent his point. I had better not enlarge upon anything I have said lest I, too, should get out of order.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.