New Clause.—(CAPITAL GAINS TAX EXEMPTION LIMIT.) (Hansard, 30 May 1963)

§ Mr. W. Clark
I beg to move, That the Clause be read a Second time.
We have had an interesting debate on school fees and now, no doubt, hon. Members opposite will get a little excited about this new Clause, too, and will say that it is a Tory reactionary movement by the capitalist system.
1653 My hon. Friends and I who put down the new Clause are grateful that this year, again, we have had the opportunity to discuss the capital gains tax, which was introduced last year. Its object was to catch the large manipulator of stocks and shares, the man or woman who was making a living out of buying and selling them. The object of the new Clause is that whale it is right to catch the large manipulator in that way, we should not penalise the small investor.
There is no question that the capital gains tax and Stamp Duty—although the Government should be congratulated on making a partial move towards the abolition of Stamp Duty—are deterrents to saving. I do not at this hour intend to recanvass the necessity for increased invesment, but anything that activates against investment or saving should be examined carefully. In referring to savings, I speak of the savings of small people. The object of the Clause is to exempt from the capital gains tax the first £100 of an increase in capital value.
It may happen that a small investor who is not manipulating the exchange and is not making a living from the buying and selling of shares may, for various circumstances, have to change his investment. Many of the people who have £300, £400 or £500 invested in equity shares may be advised by their bank manager or by a friend on whom they place reliance to change their investment. In the transaction, no money passes. The person concerned merely comes out of share A and goes into share B. If, however, there is a capital appreciation on the transfer, although it is not spent, it will be taxed.
In another case, the sale of an investment may become necessary on a person's death. Is it to be expected that if a small investor dies within six months of making the investment, the profit which has accrued meanwhile should be charged to Income Tax? I am sure that the Revenue cannot take this narrow view towards small investors.
8.45 p.m.
I do not suggest that an exemption of £100 is necessarily the right figure. would be prepared to accept £50, or £25, or even £15 as the limit. The mythical £15 in the trustee and Post Office savings banks could be the limit. The hon. Member for Sowerby (Mr. Houghton) knows more about this than any other 1654 person in this Committee, but I have no doubt that administratively the Inland Revenue cannot afford the manpower to chase these small investors. Indeed, during our discussions on the Finance Act, 1962, the then Financial Secretary admitted this in so many words. Thus, from the point of view of equity and for the sake of administrative convenience there is a great deal of sense in proposing an exemption limit.
No doubt my hon. Friend will reply that any appreciation from selling or buying shares, whether small or large, is in the same category as any other income. That was said last year. But this income is not comparable with the other sorts of income which come under Case VII. The Inland Revenue itself has accepted the fact that this is a particular type of income and is not liable for set-off. We always speak as though anyone who invests in shares necessarily makes money. We must remember that some people make losses. If a loss is made during the year, and if the Inland Revenue says that the income is the same as any other and will not give an exemption, it is then making Case VII available to set off other income.
I urge my hon. Friend to remember there is great feeling in the savings movement that this capital gains tax is a deterrent to the savings which we must have, and that the Government should not put any obstacle in the way of the small investor. I am not interested here in the large investor but I am interested in the small investor. I hope that my hon. Friend will look at this sympathetically.

§ Mr. F. M. Bennett (Torquay)
Last year, I was delighted to support my hon. Friend the Member for the best of the Nottingham seats, and I am equally delighted to do so on this occasion because none of the arguments which he and I produced a year ago, and which he has again produced tonight, has been proved otherwise than more effective than when we originally introduced them. My hon. Friend has mentioned a number of arguments. There is, in addition, the practical argument that, whatever the Government may say and the Committee decide tonight, the Inland Revenue, in its wisdom, will not pursue these very small amounts. To some extent, therefore, we are arguing about something which, for administrative 1655 reasons, is already regarded as uncollectable—if one can use such a term.
I was interested to hear my hon. Friend the Financial Secretary on the last Amendment, and I now invite him to comment in the light of this Amendment. My hon. Friend finished his remarks in a blaze of oratory, saying, "For in taxation matters there is no equity in that which is not reasonably capable of being put into practical operation".

§ Mr. Barber
I was quoting the Royal Commission Report. I do not approve of every phrase in that Report, but I felt that in this case the sense was right, although not necessarily the phrase.

§ Mr. Bennett
My hon. Friend should not be so bashful. I am commending his choice of rhetoric in this connection, and I hope that he will not claim that a phrase which he chose out of the Royal Commission's Report for the last new Clause is not equally applicable to arguments which he proposes to adduce on this new Clause. I hope that he will not mind if I say that my hon. Friends and I may be even more inclined than we are at the moment to press the matter to a Division if he produces one kind of argument for the last new Clause and another in connection with this new Clause. I was on the edge of sleep when we were discussing the last new Clause, and I was awakened by that sudden burst and thought that the argument which he then used would be remarkably effective in the present context.
Despite the fact that we were attacked by hon. Members opposite, who said that we were trying to protect the regular speculator and the regular gambler, last year my hon. Friend and I emphasised that what we were seeking to do was to protect from the full onus and very expensive operation of the law the investments of a comparatively small section of the community who were not regular speculative gamblers but were trying to invest quite small sums of money. As I said before, and as I repeat, my hon. Friend must deal with that point. I do not think that he will challenge me that in fact the Inland Revenue at the moment does not bother to collect these very small sums and that therefore we shall simply be acknowledging a state of affairs 1656 which exists at the moment rather than setting out any new law.
My hon. Friend the Member for Nottingham, South (Mr. W. Clark) has produced so many good arguments that I propose to add only one more. I fully supported, and still support, the speculative gains tax, which was introduced to deal with those who attempted to make income out of calculations and computations which brought them in income but which they claimed to be capital transactions. This does not apply to the sort of transactions with which we are dealing tonight.
There are many people in the country who are genuine savers in gilt-edged but who may buy within six months of redemption. If the securities are redeemed within six months, which is a matter not within their discretion but within the discretion of the Treasury, which picks the redemption date, they are caught by the full burden of the new tax. I do not think that that was in my hon. Friend's mind when the new tax was introduced.
I ask him tonight to look again at this matter, not only on grounds of administrative convenience, but on grounds of social justice. It is not worth while pursuing very small gains of this sort, more particularly when I suspect that if one pursued these very small gains one would have to take into account very small losses. I would have a heavy bet that, in that event, it would mean a net loss to the Revenue overall if we took into account all the transactions in this field. I ask my hon. Friend to be more susceptible than he was last year in replying to the suggestion which has been made tonight, even if the figure of £100 is not right and if the wording is not explicit.

§ Mr. Walker
I support the new Clause which has been moved by my hon. Friend the Member for Nottingham, South (Mr. W. Clark). I recognise that this proposal may well not appeal to hon. Members opposite, and perhaps as a compromise solution with them, instead of having a limit of £100, we should alter the wording of the Clause so that nobody could be taxed unless he had a total investment of £20,000, which comes within the general spirit of the taxation proposed by hon. Members opposite.
This is a tax which has been in operation for only four months and as yet, 1657 presumably, the Revenue has had little experience of the difficulties of collecting it. It may, therefore, be reasonable for my hon. Friend the Financial Secretary to say that because of the Revenue's lack of experience of the difficulty of collecting the tax it is not possible to advise upon any particular change. But I ask for a further assurance from my hon. Friend—my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) having stated last year that a careful watch would be kept on the operation of this tax to see its effects both upon normal market management and on savings—that this watch will be sustained during the coming twelve months, when this tax will have to be collected.
I cannot help but think that there are enormous expenses and complications in collecting from the small investor who may have had certain transactions in the past year. As somebody with an interest in unit trusts connected with small investors, I know that one of the important factors in dealing with small investors is to try to make things as simple as possible.
One of the things which deters the potential small investor from purchasing shares is that he recognises that there is a tax called the speculative gains tax, but he is not certain how it operates and he is not certain what records he ought to keep to be able to declare his tax at the end of the year. This may be a real deterrent to persons contemplating their first investment, possibly in the company in which they are employed.
It also has the effect of perverting the issue market, because whereas, fortunately, many small investors are now being allocated numbers of shares in new issues, the price of the new issue is perverted for six months while waiting for the tax position to come into operation. Therefore, although I would be delighted if the Financial Secretary accepted the new Clause tonight, if he finds himself unable to do so I hope that he will give us the assurance that he will keep a careful watch on the situation.

§ Mr. P. Browne
My hon. Friend the Member for Torquay (Mr. F. M. Bennett) will remember that about four years ago I made a speech in his constituency in which I suggested that we should have a capital gains tax. He did 1658 not seem to mind. I was surprised that in the newspapers of the following day it was said, "Tory M.P. wants capital gains tax". We had one two years later.
But when I was talking about a capital gains tax I was thinking particularly of the land speculators, whom we have not yet caught by this present tax. On the other hand, we have caught the small investor who is just the person we want to encourage and not to catch. I was sorry to hear my hon. Friend the Member for Nottingham, South (Mr. W. Clark) say that he did not mind whether the figure was £100 or £25. I think that it is important that the limit should be £100 and I hope that if the Financial Secretary does not accept the new Clause we shall vote on it, as we should, as a matter of principle.
I have one other reason for being particularly interested in the figure of £100. In 1960, I had an Adjournment debate on War Loan, one of the undated Government stocks, to which the reply was given by my hon. Friend the then Economic Secretary, now the Financial Secretary. We had the usual stonewalling answer. I believe that throughout the country there are many investors in undated Government stock, particularly War Loan, which was bought during the war for patriotic reasons, or as the result of getting advice from bank managers—which, everybody who is sensible knows, one should never do—who lost a considerable sum of money. In view of the unsatisfactory nature of the reply I had in 1960, I have formed an association of gilt-edged security holders in order to give a voice to these people and to try to persuade the Government and all candidates at the next election that they have to do something about it.
9.0 p.m.
One of the things that we are doing, annually, and we are doing it at the end of July this year, is to have a redemption draw which will enable any member of the association who has undated stock to redeem up to £200 of stock at par, for which the association will pay and take the stock from him.
This means that somebody who has recently bought some War Loan and takes part in the annual redemption draw will pay tax on £120 worth of capital gain on a stock which stands extremely low on the market at the moment. This 1659 is why I am particularly interested in the figure of £100. I should like it to have been higher. I accept that the majority of people whom the council and I are trying to help have had stock for some time and will not be caught by this tax, but others may well be, and I think that it behoves the Government to try to ensure that stock stands a little higher on the market than it does today and to try either to date it or do something to help those who hold small amounts. I am delighted to have got that off my chest, Sir Norman, because I did not think that you would consider it to be in order.
It is a tenet of Conservative faith that we should do all we can to encourage savings and small investors, and with this belief I think that there should be an exemption for the first £100 of capital gains within the given period of six months. For this reason I hope that the Financial Secretary will agree to accept this new Clause, and if he does not I trust that my hon. Friends and I will vote for it.

§ Mr. Barber
My hon. Friend the Member for Worcester (Mr. Walker) asked for an assurance. He pointed out that the collection of this tax under Case VII was not yet taking place, and he is right. As this is a new form of taxation, I can without hesitation give him the assurance that throughout this year we shall continue to look, as we have done over the past year, at the operation of the tax. I am sure that that is an assurance for which my hon. Friend will be grateful, and it is a very realistic one.
The purpose of the new Clause is to exclude for the purposes of that charge to tax under Case VII any profit not exceeding £100 in any year of assessment. My hon. Friend the Member for Torrington (Mr. P. Browne) thought that the figure of £100 was particularly important, whereas my hon. Friend the Member for Nottingham, South (Mr. W. Clark) said that he was prepared to have a lower figure such as £50 or even £25.
It is important for the Committee to bear in mind that if there were to be an exemption limit for even the smaller amount, say £25, the calculations would still have to be made to determine what the profit was. This is highly relevant to the point made by one or two of my 1660 hon. Friends, that this would cause a great deal of trouble and that it was not really worth collecting these small amounts. One would still have to do the computation to find out whether or not the particular taxpayer had made more than the permitted maximum.
I propose to address myself to the substance of the new Clause, but I should point out that as drafted the new Clause would not seem to achieve what my hon. Friend has in mind, or what I assume he has in mind from the way in which he moved it. I take it that what he wants to do is to exempt total gains not exceeding £100 in any one year. As drafted, I am advised that the new Clause would exempt gains not exceeding £100 on individual transactions, and, as my hon. Friend will appreciate, this is different from exempting gains not exceeding that sum.

§ Mr. W. Clark
I think that my hon. Friend knows the spirit of this, that there should be exemption for £100 net gains in any fiscal year. If my hon. Friend is going to be a bit more sympathetic, let us also exempt the first £100 loss from carry forward.

§ Mr. Barber
I said that I proposed to direct myself to the substance of the new Clause, but I should point out, lest it should be misunderstood by anyone outside the Committee, that if the intention were as drafted, it would lead to exempting substantial total gains, which is not the intention of my hon. Friend.
This Clause really challenges the basic principle which underlies the tax on short-term gains. I will explain why in a moment. First, may I say that I am well aware that some people quite sincerely prefer what I might call the conventional type of capital gains tax—a quite separate tax, perhaps with special rates graduated according to the period for which the asset is held. In that event, I suppose that it might be possible to provide for an exemption limit, but the fact is that, for reasons explained at considerable length on a number of occasions by my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) last year, the principle behind the tax on short-term gains is that the gains are taxed as income in the ordinary way.
1661 My hon. Friend the Member for Nottingham, South, as I understand it, while he accepted that this had been said last year, challenged it. But the fact is that this was the basis on which the tax was introduced and the basis on which it is operated.

§ Mr. W. Clark
Why not allow a set-oft if there is a loss?

§ Mr. Barber
My hon. Friend asks why not allow a set-off if there is a loss under Case VII against other income. There were special reasons for deciding that last year.

§ Mr. Clark
What are they?

§ Mr. Barber
There was a number of reasons which were set out at great length, and if my hon. Friend will look at HANSARD he will see them set out. I would say in answer to the point made by my hon. Friend, which was a very valid one, that there are, of course, as he knows, other incomes of particular kinds, losses on which can be set off against profits from the same sort of transaction. The transactions that I have in mind are cases of losses from transactions which if profitable would produce liability under Case VI, but if there is a loss that is allowed only against other Case VI liability and not against other income in general.
I make this point because the idea of set-off being allowed only against items in the same category was not something new in relation to Case VII incomes. Suffice it to say, it is in relation to the basis that income on short-term gains is to be treated as income in the ordinary way, that this new Clause has to be considered. I am not arguing at this stage whether that is right or wrong, but it is certainly the basis of the proposals of my right hon. and learned Friend the Member for Wirral. It must follow from what I have said that, as short-term gains are to be treated as income, the question of the rate of Income Tax must depend on the taxpayer's total income. This, of course, is the principle which is applied to any other item of income such as, for example, a dividend. Bearing in mind that these gains are to be treated as income, I cannot help feeling that if we were to do what is proposed in this new Clause, other taxpayers could argue with some cogency for an exemption on small amounts of, say, investment income.

§ Mr. John Diamond (Gloucester)
Hear, hear.

§ Mr. Barber
As the Committee knows. I am in favour of encouraging the small saver. But the fact that a person's short-term gains do not exceed £100 in a particular year is no reflection of the size of his wealth—

§ Mr. Diamond
Hear, hear.

§ Mr. Barber
It really all depends—I wish that hon. Gentlemen opposite would not cheer too much, because it makes my life very difficult—it all depends on how the taxpayer orders his affairs.

§ Mr. Douglas Jay (Battersea, North)
The Financial Secretary must realise that when he says something which is true, we simply cannot help cheering.

§ Mr. Barber
Then I expect the rest of my speech to be deafened by the Opposition cheers.
Such exemption would be of greater benefit to the man with a large income compared with the man with a small income. It would effectively pick up Income Tax, and Surtax as well. The real reason why a proposal on the lines of this Clause is not appropriate stems from the fact which I mentioned at the outset—it may be agreeable or disagreeable to my hon. Friends—that the short-term gains in question are to be treated as ordinary income.

§ Mr. F. M. Bennett
I think that my hon. Friend owes it to the Committee to tell us whether in practice and in fact the terms of the Amendment have been followed by the Inland Revenue authorities. Is the Inland Revenue, or is it not, pursuing the very small man with the sort of limit which we set?

§ Mr. Barber
I thought I made clear in answer to my hon. Friend the Member for Worcester that the Inland Revenue has not yet started to collect the tax. That follows from the normal timing of its introduction. I can assure my hon. Friend the Member for Torquay (Mr. F. M. Bennett) that if he made a £90, £80, £70, £60, £40, £30 or £20 capital gain the Inland Revenue would seek to collect on it.

§ Mr. Bennett
At 4s. 6d.?

§ Mr. Barber
They will treat the 4s. 6d. profit as capital gain in exactly the same way—

§ Mr. Bennett
How much would it cost to collect?

§ Mr. Barber
My hon. Friend keeps interrupting me.
The case is exactly the same as for 4s. 6d. in other income. This is being treated in the same way as other income. The occasional taxpayer may get away with it on one stock, and he may get away with this.

§ Mr. Houghton
Would the hon. Gentleman like to face his adversaries? If so, we will make room for him on this side of the Committee.

§ Mr. Barber
I think it time that I brought this speech to a close. It being the case that these short-term gains are to be treated as ordinary income, and whatever may be appropriate for a full-blooded capital gains tax, I hope that the Committee will take the same view as it did last year, namely, that proper means of providing relief must depend on the total income of the taxpayer.
I think it most useful that we should have had this debate. It was only last year that the change under Case VII was introduced and it is useful that we should have an opportunity to go over it again. Whatever views my hon. Friends may hold about the basis of the change under Case VII and about the principle behind this Clause. I am sure that they will bear in mind what has been said.

§ Mr. Diamond
I shall not be too long, but I feel that it would be right if occasionally an hon. Member on this side of the Committee took part in the discussion. [HON. MEMBERS: "Hear, hear."] Naturally, we limit ourselves very considerably, and we do not wish to prevent hon. Members opposite from attacking the Government regarding Clause after Clause, as they would wish to do. But it would be right, I think, for me to say a word or two on this matter.
I might perhaps start by extending an apology to the Financial Secretary for having interrupted his speech with sounds of acclamation. But we wanted to make clear to the hon. Gentleman 1664 that when the Division came, and all the hon. Members behind him went into the Lobby to vote against the Government Front Bench, we should summon all our troops to his support. I thought that the hon. Gentleman would be encouraged by those sounds.
I see that the hon. Member for Torrington (Mr. P. Browne) has returned to the Chamber. I was very interested—the hon. Gentleman will know this from happenings on other occasions—in his views about gilt-edged stocks and a long distance redemption date. I think it helpful to the Committee that we should switch from the discussion of the Clause under consideration to a full discussion on gilt-edged and the putting of a redemption date in undated stock.
9.15 p.m.
A number of hon. Members have made remarks which I think were perhaps not absolutely directed at proving the value of this Clause. First, the hon. Member for Nottingham, South (Mr. W. Clark) rested the whole of his case on the contention that this is something to do with small investors. He did not prove that contention. I was astonished. He is always so accurate, helpful and logical in his arguments. I waited carefully. I listened to every word he said. At no time did he explain to us why this would be a method of searching out and separating the small investor from the rest, and why, for example, there could not be a very large investor who bought and sold a number of stocks and had a number of transactions during the course of six months, the net result of which was a profit of £98 or £97. That could very well be the case. Over the last period, for example, it could very well have been the case that on hundreds of thousands of pounds invested there would be a margin of that kind.
At all events, although the hon. Member for Nottingham, South may have had in mind something to do with small investors, it is obvious to all of us that the Clause as drafted has nothing whatsoever to do with small investment. It merely has to do with what the hon. Gentleman would perhaps call a small amount of profit in terms of capital gain made in any particular year. It has no relation, as the Financial Secretary made 1665 quite clear, to the position of the taxpayer concerned.
The argument that it would result in administrative saving was a very obvious fallacious argument, and the Financial Secretary explained that. Again, I should have thought that the hon. Gentleman with his great knowledge in these matters—after all, he belongs to a very distinguished profession—would have understood full well that it takes just as much time to find out whether something amounts to over £100 or to less than £100. Obviously, all the work has to be done just the same by the taxpayer and by the Revenue to ascertain whether there is a charge lying.
I do not think that the Financial Secretary paid quite enough attention to the remarks of the hon. Member for Worcester (Mr. Walker). The hon. Member for Worcester moves in circles where this is everyday practice. He is well-informed, and he well understands these matters. He made the very valuable point indeed that the market is being completely upset by this short-term capital gains tax, particularly with new issues. This is true, but the Government did not answer the point. Why do not the Government extend the period of six months? At the moment the ridiculous situation exists, owing to the short-term capital gains tax, in which, as we forecast time and time again, everybody to avoid the tax hangs on for six months. They sell the stocks six months and one day after purchase, instead of within six months.
The hon. Member for Worcester pointed out that in terms of new issues there is no real free market until six months have elapsed. This is how everybody avoids the tax. Therefore, there is no tax and the market is disturbed. The hon. Member for Worcester was on a very solid point. The only way of satisfying his argument would be to remove the six months' limitation. Why do not the Government do that? Why do not they propose to remove the six months' limitation and make the tax lie whenever the transaction takes place—after three months, after three days, or after three years—in the way that most other civilised countries deal with their capital gains tax, and not have it in the form of an artificial short-term?
1666 I hope that the Financial Secretary will, as he often says he will, read HANSARD very carefully tomorrow, reread the remarks of his hon. Friend the Member for Worcester, and consider between now and Report whether we might have a thorough-going capital gains tax brought in which we could then fully consider. In the meantime, I must say that the Financial Secretary's arguments were solid and fair. We were quite convinced by them and we shall support him in the Lobby.

§ Mr. Stevens
When I first saw the new Clause on the Notice Paper I was very much attracted by it. I did not think that the short-term capital gains tax was meant to catch the small man—good luck to him. I am sorry to tell my hon. Friend the Member for Torrington (Mr. P. Browne) that I shall not be joining him in the Lobby this evening, because I have been very much impressed by the powerful arguments advanced by my hon. Fiend the Financial Secretary as to why the Clause cannot be supported. I particularly noted what he said about the nature of these capital gains. He said that they were exactly the same as any other income. He used that phrase several times, and I accept what he said as the main reason why he is unable to accept the new Clause.
To follow that to its logical conclusion, any losses must equally be the same as any other losses; in other words, they should be available for set-off against these capital profits. I hope that in the searching examination to which my hon. Friend referred, and which is to be made by the Inland Revenue this year—and I hope that my hon. Friend the Financial Secretary will join in it with his officials—this point will be borne in mind so that next year we may find a provision whereby these losses are the same as any other, and may be set off.

§ Mr. Barber
In view of what my hon. Friends have said there is only one course open to me, and that is to abstain.