HC Deb 05 July 1965 vol 715 cc1265-73

(1) It throughout a year of assessment all the issued units in a unit trust scheme as defined in section 26(1) of the Prevention of Fraud (Investment) Act 1958, or section 22 of the Prevention of Fraud (Investments) Act (Northern Ireland) 1940 are assets such that any gain accruing if they were disposed of by the unit holder would be wholly exempt from capital gains tax or corporation tax (otherwise than by reason of residence) gains accruing to the unit trust scheme in that year of assessment shall not be chargeable gains.

(2) If throughout a year of assessment all the issued units in a unit trust scheme as so defined constitute investments to which section 33(1) of this Act applies, each being an investment such that any gain accruing if it were disposed of by the unit holder would either be wholly exempt from capital gains tax or corporation tax, or be so exempt as to not less than eighty-five per cent., then of all the gains accruing to the unit trust scheme in that year of assessment one-tenth (that is one-tenth of what would apart from this subsection be chargeable gains) shall be chargeable gains; and section 34 of this Act, with the provisions of section 63 applying for the purposes of the said section 34, shall apply in relation to chargeable gains accruing to the unit trust scheme in that year of assessment (as reduced under this subsection) where the unit trust scheme is not within section 63(1) of this Act, as well as where it is.

>—[Mr. MacDermot.]

Brought up, and read the First time.

Mr. MacDermot

I beg to move, That the Clause be read a Second time.

This is another Clause which has been put down in fulfilment of an undertaking given in Committee and its general effect is to provide that where unit trusts cater exclusively for investors who are themselves exempt from liability for tax, then the gains of that trust shall be exempt. It also extends this provision to provide for the case of certain local authorities who have a special problem in connection with investment funds and the solution which is contained in the new Clause has been worked out after some fairly lengthy and detailed discussion with the representatives of the local authorities.

Mr. G. A. Pargiter (Southall)

Before my hon. and learned Friend sits down, will he say whether this applies equally to long and short-term gains?

Mr. Diamond

rose—

Mr. Deputy-Speaker (Dr. Horace King)

The question was asked of the Financial Secretary.

Mr. MacDermot

The answer to my hon. Friend is that it does not apply to the short-term gains.

Mr. Pargiter

While this new Clause goes some way to meeting the case which was put in Committee and subsequently discussed at official level it does not really go as far as one might have hoped it would. As I see it now, in regard to the Local Authorities Mutual Investment Trust, which is the body with which we were particularly concerned in Committee, the position, prior to local authorities themselves being exempt from tax, was that L.A.M.I.T. would have been in the same position, but we having accepted the Clause which exempts local authorities from tax, which presumably includes both long and short Capital Gains Tax amongst other tax exemptions, the position now will be that L.A.M.I.T. will be subject to tax in respect of short-term capital gains.

I was rather hoping that my hon. and learned Friend would be able to tell us that this would cover short-term gains as well. It may be that in the intervening period this point may have been overlooked, but we rather thought that it was covered. It now appears that it was not. It is, perhaps, rather late in the day to get it covered, but, certainly, there is an inequity here which ought to be remedied, because we come back to the original argument, that what a local authority may do individually it remains logical for it to do collectively, and that was the general principle which previously we were discussing.

I can only express the hope that my hon. and learned Friend will say that he will watch this with a view to receiving sympathetically representations, with a view to amendments at some future time, which would at least place the Local Authorities Mutual Investment Trust in the same position as local authorities. I can hardly hope for more than that now, but I think that I can reasonably expect my hon. and right hon. Friends to give us an assurance that they will receive sympathetically representations on this point.

The other point I would ask my hon. and learned Friend to deal with is the question of this rather rough and ready rule of one-tenth of the amount as being subject to tax. This one-tenth is probably a larger amount than the non-approved part of superannuation funds and so on which would be liable to tax in the ordinary way. I understand that in discussions it has not been found possible to do what was thought originally, which was to take the average of non-approved funds for the purpose of striking the right balance. Therefore, this rather arbitrary figure of one-tenth has been included.

I wonder whether my hon. and learned Friend would consider that when there has been some experience of the actual amounts involved it will be possible to reconsider this question of the arbitrary figure of one-tenth and fix this at what is an equitable and proper figure, being the actual amount on which tax is paid rather than the arbitrary amount of one-tenth.

I appreciate the difficulties in settling this at this time because of the absence of factual information, though it would have been possible to have got it if the authorities had been asked for it.

With that in mind I would thank my hon. and learned Friend for going this far, and I can only express the hope, like Oliver Twist, that we can ask for a little more in the not far distant future.

Mr. John Harvey

The Financial Secretary did not really go to any great distance in explaining the new Clause. Indeed he did not seem entirely happy about the intervention of the hon. Member for Southall (Mr. Pargiter). The second subsection is particularly complicated, and I think that it would be helpful if the Chief Secretary, in the absence of the Financial Secretary, could explain it in greater detail than his hon. and learned Friend did.

Mr. Diamond

I readily respond to that, and perhaps the House will permit me to say that it was a matter of courtesy which led my hon. and learned Friend to move the new Clause. I should have been in my place to do so, but was not, and I apologise for my absence.

Perhaps I might, first, answer the two questions put to me by my hon. Friend the Member for Southall (Mr. Pargiter) with regard to short-term Capital Gains Tax, and 10 per cent. As regards the former, L.A.M.I.T. has been paying it since 1962, when it was introduced, and it is therefore continuing an existing practice.

My hon. Friend is right when he says that the 10 per cent. is an arbitrary figure. It is arbitrary in the sense that it is a fixed figure. It has many advantages. People know where they are. It is a simple calculation, and it is estimated to be just about right. My hon. Friend will have noticed that the exemption is for funds approved to the extent of at least 85 per cent., and he is right in saying that many funds are approved to a greater extent, and that 90 per cent. might be the average.

I think that 10 per cent. might turn out to be approximately right at the end of the year, but my hon. Friend need have no fears about this. There is nothing to prevent us looking at the matter again at the end of the year, and if there is a wide divergence, which I do not expect, this could be looked into then. However, in my view it will prove to be the right figure, within a very small margin indeed, and the simplicity involved will outweigh any slight variation that might otherwise have taken place.

Mr. Raymond Gower (Barry)

Will the concession of the benefits provided by the new Clause inure for any kind of unit trust or investment trust which may be set up in future by any association of local authorities? For example, if the local authorities in Cumberland or Wales decide to set up their own trust, will they enjoy the benefits of the new Clause?

Mr. Pargiter

They have already done that.

Mr. Diamond

Is the hon. Gentleman asking about setting up a new fund?

Mr. Gower

Yes.

Mr. Diamond

If it satisfies these conditions, it will gain the advantages described in the new Clause. Perhaps it might be convenient shortly to repeat the advantages. There will be a 100 per cent. exemption from Capital Gains Tax if those bodies which will be wholly exempt themselves get together and form their own unit trust, provided that it is a unit trust of a kind which is serving them exclusively. A unit trust which exclusively serves exempt bodies will, under these provisions, itself be exempt, and there will not, therefore, be any problem at all. This corresponds to the precedent of the Charifund, to which my hon. Friend referred earlier, and which I promised to look at to see whether we could introduce something of that kind. That deals with the first subsection.

Subsection (2) deals not with 100 per cent. exemption, but with 90 per cent. exemption where the bodies who are investors, the unit holders, will be investing their superannuation funds, and those funds will be of a kind which are approved for Income Tax purposes as to no less than 85 per cent. If they are less than 85 per cent. approved, they should not come into this grouping at all, but if they are of at least 85 per cent. approved, and they come into this grouping for the purpose of investment as a group under unit trust methods, then 90 per cent. will be exempt for Capital Gains tax.

The credit system to which we referred earlier, in Committee, would still apply, so that there is no question of double taxation. This is a relief of a kind which my hon. Friend and others interested in this matter were anxious to have secured, and I am glad that as a result of the many and long negotiations which have taken place this exemption has been found possible.

Mr. Pargiter

Will my right hon. Friend say a few words on the question of the short-term aspects of the matter? He referred to the fact that in 1962 L.A.M.I.T. had been paying it and that the position had not altered. But local authorities paid it from 1962, and the position has altered for them. Logically, therefore, it should also alter for the Local Authorities' Mutual Investment Trust. Will my right hon. Friend say a word on that point? Will he agree to look at it again?

Mr. Diamond

My hon. Friend knows that everything can be looked at again, but that we are on Report now, and we look again at things that are perhaps less of immediate advantage than was the case at an earlier stage. This has been the position: short-term capital gains are in quite a different position from long-term ones, and have been accepted as such for a long time. I will look at the situation again, but my looking at it again could not possibly have any effect on this Bill. My hon. Friend is not asking that. He wants me to be aware of the fact that the situation has changed because of the relief given to local authorities.

I will bear that point in mind, but this position has held for a long time and there are good reasons why it should continue. I will, nevertheless, look at the position, as my hon. Friend has asked me to do.

10.30 p.m.

Mr. Peter Walker (Worcester)

I want to make it quite clear that we are extremely disappointed at the new Clause. I do not consider that it goes very far in meeting the indication given by the Chief Secretary in Committee. I would remind the House that when considering Clauses 32, 33 and 34 in Committee it was pointed out that the majority of superannuation funds and charities primarily invest in investment trusts, as opposed to unit trusts. The new Clause applies only to unit trusts.

I want to make it clear that the provision in subsection (1), that a unit trust scheme as defined in section 26(1) of the Prevention of Fraud (Investments) Act, 1958 means that the majority of investments by charities and superannuation funds currently held in investment trusts will obtain no benefit from the Clause. What is more, no benefit will be obtainable from the Clause even if an investment trust was set up solely for the purpose of local authorities or charities, or for superannuation funds.

I consider it rather surprising that neither the Financial Secretary—who, in the circumstances, dealt with the matter quite well in proposing the Clause so quickly—nor the Chief Secretary gave any explanation why he had decided to exclude the principle of investment trusts from the provisions of the Clause. Investment trusts are much more appropriate media for investment for charities and superannuation funds than are unit trusts. I checked today on four companies' superannuation funds and found none had any investments in any form of unit trust, although they have considerable investments in investment trusts.

Those trusts will be taxed by the Government at the rate of 35 per cent. In spite of all the representations made to them, the Government have decided to do nothing to assist charities, superannuation funds and local authorities in respect of their investment trust investments. The House needs to be told why the Government have decided to allow the principle of unit trusts, but completely to disallow that of investment trusts.

There are many reasons why the investment trust is more appropriate. First, a "gearing-up" of capital is possible within an investment trust which cannot go on within a unit trust. Secondly, this Clause gives complete and utter freedom to the Board of Trade. Section 26 of the Protection of Fraud (Investments) Act more or less says that a unit trust is a unit trust which is approved by the Board of Trade.

There are no stipulated regulations. There are certain things which one must do to become a unit trust, but if one complies with those conditions, the Board of Trade could still say "No" to a unit trust. It is completely in their hands and under their control. I do not understand why the Government have decided that, if a group of local authorities or a group of charities or a group of superannuation funds form an investment trust between them, they will be allowed no benefit at all, but will be subject to Capital Gains Tax at 35 per cent. within those trusts, but that if they form unit trusts, they will obtain exemption. We have had no explanation of this difference.

I would ask the Chief Secretary to comment further on the provision for superannuation funds. This affects 10 million people. I do not think that his explanation of the 90 per cent. provision was good enough, as he must know that many superannuation funds obtain virtually 100 per cent. exemption and there is a large number of such funds which come into the category of less than 85 per cent. Those in the latter category—for example, a superannuation fund enjoying a 70 or 80 per cent. exemption—will obtain no benefit from this Clause. They do not come into the Clause. They do not get 80 or 75 per cent. exemption; they get nothing at all. We have the rather absurd position, therefore, that if a superannuation fund enjoys 84 per cent. exemption, it will obtain no advantage or benefit, but if it receives 86 per cent. exemption, it will obtain a 90 per cent. exemption and a 90 per cent. discount.

I cannot see how any Government can defend a situation where a difference of 2 per cent. can make the difference between no exemption and 90 per cent. exemption. That is what the Clause does as at present drafted—[Interruption.] When I want advice on speaking, I will certainly go to the hon. Gentleman the Member for West Ham, North (Mr. Arthur Lewis), who is very learned in most languages.

This Clause is designed basically to give benefit to charities and superannuation funds. It will benefit but a small fraction of the existing charitable and superannuation funds. We shall be moving Amendments at a later stage which would give the full benefit of the elimination of the Capital Gains Tax, which will continue as a result of this Clause on charities and superannuation funds.

Mr. Diamond

With your permission and that of the House, Mr. Deputy-Speaker, I should like to deal with the second point of the hon. Member for Worcester (Mr. Peter Walker) first. Wherever one draws the line, of course, there is always a difference between being on one side of the line and being on the other. What the hon. Gentleman does not fully appreciate is that the credit scheme is in operation. The reason that it was necessary to do more than the plain credit scheme was that the funds of a number of organisations of this kind were almost wholly exempt. There would have been no real advantage to them in giving them a credit certificate, because there was very little against which to place that certificate and so recover the Capital Gains Tax which they had suffered, according to the certificate.

Therefore, where the funds are not of that kind and to the greater extent that they are not of that kind, the more will there be other Capital Gains Tax funds against which the credit can be set. Therefore, the benefit would be obtained in that way. I do not think. Therefore, that there is any doubt but that this division, slightly arbitrary as it is, will meet the case by and large.

As to investment trusts, the hon. Member is raising an entirely different point. Investment trusts are different bodies from unit trusts and carry out a different activity. They buy and sell their shares in the open market; they seek to make capital gains. They are a different kind of organisation and they would not normally serve this purpose. If local authorities desire to obtain the complete exemption which the Clause provides, they can so organise it through a unit trust and get everything they require in that way.

Mr. Peter Walker

If that is the case, why did the right hon. Gentleman say in Committee, when dealing with this point: What I am considering, and what we want to see, is whether it is possible in some respects to meet the spirit of this Amendment; whether if charities did combine together to form an investment trust, which was not itself a charity but the whole of whose members were charities, and whose membership was exclusively open to charities, we could provide special regulations …"?—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1235.] In Committee, therefore, the right hon. Gentleman considered that an investment