§ Mr. CallaghanI intend to make a start next spring with two major tax reforms. The first will be a capital gains tax. The dividing 1040 line between capital and income has become blurred. The Income Tax system has been misused by some to avoid paying Income Tax by entering into arrangements which dress up income, which is taxable, to look like capital, which is mainly untaxed. The right hon. and learned Gentleman the Member for Wirrall caught a fleeting glimpse of this when he made short-term capital gains chargeable to tax under case VII of Schedule D, but, of course, he hardly even touched the fringe of the problem. I do not know what he intended to do, but he certainly did not succeed in doing what ought to be done and he did not raise any revenue.
The short-term tax has been ineffective in operation and has yielded in the first year about £1 million revenue. At first sight, it might seem that the solution would be to extend the time limits set by the right hon. and learned Gentleman the Member for Wirral, but the major anomaly would remain that, by holding on to one's gain for an extra day, one can always ensure that the capital goes scot-free.
Therefore, in my spring Budget I shall introduce proposals for the taxation of capital gains which will apply to gains arising from assets whenever acquired. The gains to be charged will not exceed the difference between the value of the particular asset on the 1965 Budget day and the amount realised when it is disposed of subsequently. That is to say, there will be no restrospection. There will be appropriate relief for realised capital losses.
This measure will bring to an end the state of affairs in which hard work and great energy are fully taxed while the fruits of speculation and passive ownership escape untaxed. I hope, therefore, that it will have a substantial effect in helping wage and salary earners in this country to accept the need for an incomes and prices policy. This is part of fair play as between groups of taxpayers. They have recognised long since that when they forgo a wage or salary increase it is lost for ever, but that a dividend unpaid frequently reappears later as an untaxed capital gain. It is time that this was brought to an end.
§ Mr. F. J. Bellenger (Bassetlaw)Will this new system replace the existing system?
§ Mr. CallaghanThe purpose of the new system is to replace the existing system, but I should not care to go too far into detail till I have considered the matter further. It is to bring to an end the anomaly of the time limit. That is the purpose of it, but it has to be worked out in further detail. I hope that my right hon. Friend will possess his soul in a little patience. A lot of detailed work is being done on this at the present time.