§ The Chancellor of the Exchequer (Mr. James Callaghan)As for assets which are held for periods exceeding 12 months, I think that it would not be reasonable to subject a gain which may have accrued over a long period to the full rates of Income Tax and Surtax applicable to ordinary income for the year in which the gain is realised. I propose, therefore, that these long-term gains shall be taxed at a flat rate. Given a flat rate, I do not consider that there is any need to taper the rate according to the length of time for which the asset has been held, and the flat rate will, therefore, apply irrespective of the period of ownership.
The flat rate which I propose for the year 1965–66 is 30 per cent. as far as individuals are concerned.
I propose to make a concession which will be of value to people who, while by no means poor, nevertheless do not enjoy great wealth and make an occasional capital gain. I propose that, as an alternative to the flat rate on the whole gain, two-thirds of the gain may be charged to Income Tax—and to Surtax, where applicable—as ordinary income of the taxpayer, and the remaining third exempted, if that is more favourable to him. For example, we can take an elderly married couple over 65, whose income is one-third investment income and two-thirds pension. The alternative basis that I propose will be more favourable if their ordinary income plus two-thirds of the gains is less than about £2,500.
I propose that capital gains realised by companies—and this applies to both short-term and long-term gains—shall be subject to corporation tax at the corporation tax rate. A company is a continuing 251 association which has as its main purpose making profits; whether those profits arise as trading income or as capital gains is immaterial, and I think that it is right that they should be taxed at the same rate. I must, however, provide for companies whose profits made in 1965–66 will be assessed to Income Tax on the current year basis and not to corporation tax—for example, companies commencing and ceasing business. I propose that in such cases the rate of tax on long-term capital gains for 1965–66 shall be 35 per cent.
The Finance Bill will contain detailed provisions and rules for computing chargeable gains and for combating avoidance. I am aiming to ensure, so far as possible, that these rules follow those in the Ninth Schedule to the Finance Act, 1962, with which taxpayers and their advisers are already familiar. But, of course, a longterm tax needs fuller provisions; and other matters with which the 1962 Act did not concern itself will also be dealt with.
I estimate that the yield of the capital gains tax will eventually build up to a figure of about £125 million a year: in 1966–67 the long-term and short-term taxes together are expected to yield about £12 million, and in 1967–68 about £30 million.