§ The Chancellor of the Exchequer (Mr. James Callaghan)It has been suggested that gains realised on Government and other fixed-interest securities should be exempt. I would like to make clear again that there 247 Will be no tax payable where the eventual selling price is lower than the original purchase price, even though the price at the time of sale is higher than the price today. But I can see no justification for exempting gains from such investments, whether or not they were issued at a discount. The gain on the redemption of such securities is just as much a capital gain as any other. Indeed, the rise in price with the approach of the redemption date is something that is clearly foreseen and expected, and has all the characteristics of ordinary income. It must, therefore, be brought within the scope of taxation if equality of treatment is to be secured between taxpayers. Moreover, a look at the deals in the gilt-edged market shows that to excluded them would leave a wide open door for avoidance.
This does not affect financial institutions, such as the banks and the discount houses, which are already subject to tax on any gains they make from the disposal of securities. Nor does it affect those who are exempt from tax at present and will continue to be exempt from the new tax, such as charities and approved superannuation funds and overseas institutions generally. These two classes of institution, one paying full tax and the other wholly exempt, are responsible for a high proportion of the transactions in the gilt-edged market.
The life assurance companies occupy an intermediate position between these two classes. The investment income of their life funds is subject to income tax, but their gains from the realisation of securities, in effect, largely go tax-free. I do not think it right that this situation should continue in the context of a Capital Gains Tax which is to apply quite generally; and I therefore propose that the gains of life assurance companies, both short-term and long-term, should be brought within its scope. This will not apply to the pension annuity funds of life offices which enjoy exemption from Income Tax. There will, of course, be no question of double taxation of the policy holders" receipts, as I have already announced that sums received on the maturity or surrender of normal life assurance policies will be outside the scope of the tax.
248 Neither the introduction of the Capital Gains Tax generally nor this particular proposal on life assurance companies will, in my judgment—and I have looked carefully into this matter—significantly affect the fluidity of the gilt-edged market.