|Description of Government securities||Exempt price range (for £100 nominal of Stock)|
|5½% Exchequer Stock 1966||99½||100|
|5% Exchequer Stock 1967||96½||100|
|4% Exchequer Stock 1968||98||100|
|3½% Conversion Stock 1969||99||100|
|3% Funding Stock 1959/69||98||100|
|British Electricity 4½% Guaranteed Stock 1967/69||98½||100|
|5% Conversion Stock 1971||98½||100|
|British Gas 3½% Guaranteed Stock 1969/71||98||100|
|6% Conversion Stock 1972||97½||100|
|British Gas 4% Guaranteed Stock 1969/72||98||100|
|British Transport 3% Stock 1968/73||73⅛||100|
|5¼% Conversion Stock 1974||97½||100|
|4% Victory Bonds||85||100|
|British Electricity 3% Guaranteed Stock 1974/77||99½||100|
|British Transport 4% Stock 1972/77||95½||100|
|5% Exchequer Stock 1976/78||96||100|
§ Mr. Deputy-Speaker
The Chair has no objections, since both sides of the House concur, but it helps the Chair if it is informed in advance of these things. The Chair has to protect the rights of single Members who might be affected in some way.
§ Mr. Diamond
I am grateful to you, Mr. Deputy-Speaker, particularly since apparently you have not received notice that these Amendments were related to one another.
I beg to move, Amendment No. 13, in page 11, line 40, at the end to insert:(6) If the adjusted sale price and adjusted purchase price to be taken into account in computing the amount of a gain accruing from an acquisition and disposal of securities of one of the descriptions in Schedule (Capital gains: Government securities issued at a discount) to this Act are both within the exempt price range specified in that Schedule for those securities a gain accruing on that disposal shall be exempt from tax chargeable under Case VII (and a loss so accruing shall not be an allowable loss) and if the range between those prices overlaps that exempt price range a proportion of a gain so accruing shall be so exempt, which shall be the proportion which the part of the range between those prices which overlaps that exempt price range bears to the whole of the range between those prices (and correspondingly a part of a loss so accruing shall not be an allowable loss).1634In this and the next following subsection "adjusted sale price" means the amount of the consideration for the disposal and "adjusted purchase price" means the amount of the consideration for the acquisition (that is the acquisition by the person making the disposal), both adjusted, where the nominal amount of the securities being disposed of is not one hundred pounds, to represent a price for a nominal amount of one hundred pounds.(7) If in consequence of a conversion on their redemption date of securities of one of the descriptions in the said Schedule any securities of that description and a new holding of Government securities are, under paragraph 10(2) of Schedule 9 to the Finance Act 1962 as applied by paragraph 11 of that Schedule, to be treated as the same asset acquired as the converted securities were acquired, and the adjusted purchase price of the converted securities is less than one hundred pounds then, in computing the gain accruing on an acquisition and disposal of the new holding, or any part of the new holding, there shall be added to the amount of the expenditure which is allowable as a deduction the amount of the gain which would have been exempted by virtue of the last foregoing subsection if the converted securities, or as the case may be the corresponding part of them, had been disposed of at the time of their redemption for a consideration equal to their nominal value.The Amendment and the related ones, together with the new Schedule, give effect to the concession relating to gilt-edged stocks issued before Budget day which my right hon. Friend announced during the Committee stage debate on 26th May. The first Amendment relates to the short-term gains tax. Amendments Nos. 57 and 95 relate to the long-term Capital Gains Tax, and Amendment No. 118, which is the new Schedule, is common to both of them. When my right hon. Friend announced this concession he referred to the difference between the price of issue of a Government or Government-guaranteed stock and its redemption price and he said that that difference should not be subject to Capital Gains Tax.
My right hon. Friend's words were:The concession, therefore, that I propose to recommend to the Committee will apply to past issues made at a price below par of British Government or Government-guaranteed dated stocks. It would not extend to issues after Budget day.—[OFFICIAL REPORT, 26th May, 1965; Vol. 713, c. 761.]Essentially, therefore, the concession contained here is a simple one.
Where stocks were issued at a discount before Budget day—and the relevant stocks are set out in the new Schedule 1635 which we are now discussing—there will be what I could perhaps call a neutral zone, or what the Amendment describes as an exempt price range, within which gains will not be chargeable, and the corollary of that is that losses will not be allowable. The exempt price range is essentially the difference between the issue price of the stock and its redemption price. Gains between those two points will be outside the scope of Capital Gains Tax and of the short-term tax. For example, if a person bought a stock at issue at 95 and sold it on redemption at 100 he is not to be charged a Capital Gains Tax for the gain of five, because that five is wholly within the exempt price range.
Problems of overlapping are dealt with in the Amendments in the way described when the concession was referred to earlier. I could detail that to the House, but I think that the Amendment speaks for itself and there is a reference in the concluding paragraph of subsection (6) of Amendment No. 13 to the adjusted sale price and the adjusted purchase price. This is necessary because a Government security can be bought and sold in amounts of any size and purely as a matter of mechanics it is necessary to operate a concession to provide an adjustment to a £100 unit to which the figures in the Schedule would apply.
The only further point is the situation where the stock is not redeemed but is converted and where one has a conversion of this kind in the ordinary way the tax is deferred until the sale of the conversion stock which is issued to replace the original one. Where one has the sale of stock which is included in the Schedule the tax-free element is added on to the notional stock price of the second stock so that the profit, if any, on the second stock is reduced thereby. Therefore, full effect to the principles of both postponement and the tax-free element is given.
I think that I have dealt with the main purposes of the Amendment. The background is well-known to the House. The principle is well-known, and the Government have accepted what has been pleaded on many occasions in the House and outside that there was an implicit Government promise that where a stock was issued at a given figure with a redemption at a higher figure that was 1636 to be tax-free because the price had been calculated accordingly. My right hon. Friend felt that this was a claim which he did not fully accept but that the British Government ought to be fully, if I may say so, on the far side of honourable in their treatment of stockholders and those buying Government funds and, therefore, ought to meet the point even though it was not fully established and allow this part of any profit made by holders of Government gilt-edged to be tax-free.
I think that it would probably be more convenient to the House if I were to listen to arguments advanced on Amendment No. 282 before attempting to reply to them. I hope that I shall have the leave of the House to speak again should that be necessary.
§ Mr. Birch
The right hon. Gentleman the Chief Secretary has blushingly received almost as many bouquets as Mme. Callas on a bad night. Obviously, we cannot vote against any reduction in taxation—that would be a very wrong thing to do—but I can award the right hon. Gentleman no marks whatever. I award him minus 5 or omega minus.
The Government's argument is really the "housemaid's baby" argument in extremely elaborate form. I am sure that the right hon. Gentleman is familiar with that argument. The unfortunate housemaid who had had an illegitimate baby said, "After all, it is only a little one". It has never been held by the sterner moralists that her excuse was in any way convincing. What the Government have done is not at all what anyone wanted them to do. They say, "We admit we have acted dishonourably, but we shall endeavour to mitigate the dishonour by acting in this way. We shall exempt some gilt-edged securities wholly from Capital Gains Tax. Some of them we shall tax in full. Some of them will be spotted dogs, bits of them being taxed and bits not". I do not imagine that one would have any sympathy for a housemaid who put up that argument, and I have no sympathy whatever for the Government. They have acted dishonourably, and this makes it worse.
May I illustrate some of the nonsense which will occur? Take two stocks issued at the same price on exactly the same day, 1637 Transport 3 per cent. 1968–73 and Electricity 3 per cent. 1968–73. The Electricity Stock is subject in full to Capital Gains Tax, but the Transport Stock, owing to the accident that a small amount of it was subsequently issued at 73⅛, is not subject to Capital Gains Tax at all. For a great many years these two stocks have been dealt in completely interchangeably. The security was the same, the rate of interest was the same, the date was the same. They were regarded as being exactly the same. Who could conceivably have thought that something would suddenly alter this? It is really quite dishonest.
The Government's argument appears to be that the nominal issue price of a stock is the price which is relevant. But this is not so. Except in a few cases of very short-dated bonds, it is the rarest thing in the world for any Government stock to be subscribed on the day. In fact, the issue department of the Bank of England takes the stocks into its holding and peddles them out gradually, as the occasion arises. There are a few cases of stocks sold at over the issue price, but the vast majority, certainly at the present time, have been sold at well under the nominal issue price. For example, Funding 3½ per cent. 1999–2004 was sold by the Government at down to 17 points below the nominal issue price. Here, the Government were selling a stock 17 points below the nominal issue price, but they intend to mulct the whole 17 points from any person who bought at that price. He never would have bought at that price if he had had the slightest idea that this tax would be imposed. As I said before, this is retrospection in its most odious form.
Let us consider some of the other things which are happening to the market as a result of the tax. We were told that one of the objects of the Finance Bill was simplification. One of the reasons why people hold gilt-edged securities is simplicity. One can deal in them simply. One would know that one was about, one would know what the rate of interest was, when the stock would be redeemed, at what price, and so on. Now, a person wanting to buy or sell a gilt-edged security has to work out permutations and combinations of extraordinary complexity. 1638 He has to take account of the market price first, then the book value at which he originally acquired the stock; then he has to bear in mind the original issue price of the stock. He has to take account of the redemption price and of the price on Budget day.
It is very difficult to work out all these things. Even a man of the intellectual capacity of the Minister of Technology would have great difficulty working them out, and even if he got the right answer it still would not help very much. One may have to sell stock for business reasons at any time during its passage towards redemption date, and no one can really know where he is unless he knows whether the conversion stock which will be offered when the stock becomes redeemable is one which is suitable for him to hold or one issued at the right price. He knows that he can take cash but he will be mulcted of tax, but he does not know, if he takes conversion stock, whether the conversion stock will be worth the price at which it is offered to him. So, however clever he is, there is really no way of knowing where he stands.
It would be something if someone was happy about this, and one might have hoped that Mr. Kaldor would be happy about it. But he is not, because the whole point of his paper in the Minority Report of the Royal Commission was that there ought to be Capital Gains Tax on redeemable Government securities because otherwise Surtax payers might make some tax-free profit, a horrible possibility, in his view. But under this provision they can still make a tax-free capital profit. If they take Transport 3 per cent. stock they have a completely free run. I was told the other day that the Hugarian Ambassador told a friend of mine that there were some good economists in Hungary. I have been wondering whether some au pair arrangement could possibly be come to.
The damage done by what the Government are doing is considerable, and one can see it already. It was all predicted in our last debate. We have had two issues simultaneously of Government securities, both very short, both issued at 100 and both carrying interest at 6½ per cent., an unprecedently high rate. We predicted that if this were done 1639 one would have to have a very high coupon rate, one would have to issue at par, and one would have to give a conversion offer as well as a cash offer. All these things have duly had to be done, and it has been pretty damaging to the market. Though the Bank rate unexpectedly was suddenly reduced by a full 1 per cent., at the long end of the market it has made no difference at all. There has been absolutely no recovery of any sort.
The market, apart from being burdened by the provisions of the Capital Gains Tax, is also burdened by the effect of Corporation Tax, because it means that it is very difficult and expensive for companies to finance themselves other than by debenture issues. I predicted when we last debated this that though a flood of debenture issues had not yet started, it would start, and it has, in fact, now started. A large number are being made at high coupon rates—7¼, 7½ and so on—with good security. These are directly competitive with the gilt-edged market.
One of the reasons why in former times people were willing to take an appreciably lower rate of interest on Government securities than on debentures was the plus value they incurred through the ability to switch because of the very high marketability of the securities and the fact that in the long run they could probably improve their position slightly by switching from one security to another. So one had fluidity of the market, which was more attractive for the holding of these stocks.
The effect of Capital Gains Tax applied in this capricious way means that switching will be immensely cut down. In fact, no institution can afford to sell stock until it reaches its book price. Most of the stock is locked in. So the turnover at the long end of the gilt-edged market has gone down by 50 per cent., and it is likely to go down a good deal more.
All these things are important, because the Government have to raise a great deal of money. I think that £743 million is the correct figure of their real borrowing requirement, and there are £1,700 million of maturities, and since Budget day the potential deficit has been swollen not only by the very large wage increases 1640 in the public sector but by things which I think are absolutely ghastly, like subsidising London Transport and granting a £32 million above-the-line subsidy to the National Coal Board.
That money has to be printed. I suppose it is another victory by the First Secretary over the Chancellor of the Exchequer. But how anyone who took the preservation of the £ seriously could stand for that I do not know. At the moment the Government are managing the gilt-edged market for one reason only, that they are not having to raise any very large sums of money either by Treasury Bills or through the market because, as the Chief Secretary knows, we get the money by borrowing from the I.M.F., by the sale of our reserves and by printing notes, which we are doing on a very large scale. They were very prophetic words by Mr. Cecil Harmsworth King on joining the Court of the Bank of England. He said, "I think that my knowledge of printing should be of great value to the Court." It is.
But the Government have to sell sooner or later. Let us suppose that the £ does recover. We shall have to borrow on a very large scale if we are to contain inflation. I do not believe that the Government will ever get the market right if they put this Capital Gains Tax on it. They will never get the fluidity of the market. I ask the Chief Secretary to consider why anyone should buy gilt-edged securities at the moment. It is not as if they were having a good time. They are not having too good a time. The cost of living will rise. It is very likely that interest rates will rise further. In other countries, it is possible to have different treatment for taxation on Government and municipal securities from that meted out to other people. The Chief Secretary will know that many municipal bonds in America are free from Income Tax. I believe that the Government would be very wise indeed to accept our Amendment. I believe that honour demands it. I do not believe this business of the "spotted dog" arrangement, doing the right thing by one stock and the wrong thing by most of the stocks. I do not see how that can be held to redeem the honour of the Government. Their honour and their interest are involved.
If the gilt-edged market goes on like this, the whole of our financial system will 1641 become gradually unmanageable. Now we are left in the position where the only real operator in the market is the Government through the Government broker. That is a most dangerous position to be in. I hope that even now the Government will think again and appreciate that they have made a mistake and that they have not earned more than minus 5 marks.
§ Mr. Diamond
There is difficulty in replying to the right hon. Member for Flint, West (Mr. Birch), if I may do so by leave of the House, because he did not address himself at great length to the Amendment in the names of his right hon. Friends and himself as to freeing Government securities as a whole.
The right hon. Gentleman disliked the "spotted dog" arrangement, and went on to criticise a number of things connected with Government financial policy and I do not wish to reply to those remarks and widen the debate in that way. I can only say with regard to what the Government have done that it was precisely asked for by a number of persons in and outside the House. We have debated the matter—
§ Mr. Diamond
If the right hon. Gentleman will look at the debate that we had last time he will see the exact references that I quoted in HANSARD where it was asked for. My right hon. Friend felt that this was in response to a request which was reasonably made. If the right hon. Gentleman wants now to go into a debate exactly similar to the one that we had last time, I can only refer him to the remarks of my right hon. Friend in the OFFICIAL REPORT of 26th May, where he said:I will address my remarks to the general proposition that some of the gains in gilt-edged transactions should be exempt from tax. That proposition is open to the basic objection that to exempt one large class of gains would drive a coach and horses through the tax. I do not think that the exemption could stop … at the Government-issued and Government guaranteed stocks. The claims of Commonwealth and Colonial stocks would be pressed as well as those of local authorities. There are even advocates of exemption for gains realised on all fixed-interest securities."—[OFFICIAL REPORT, 26th May, 1965; Vol. 713, c. 759.]
§ Mr. Diamond
My right hon. Friend was saying in regard to the general exemption of stocks that it would not have been possible to hold it at any particular line, and it would have had to go all the way through to fixed-interest stocks. But there is no question of including fixed-interest stocks or, indeed, colonial stocks in the concession which my right hon. Friend granted, because there could not possibly be held to have been a promise between the Government as issuer of the stock and the purchaser of the stock on the prospectus which was issued at that time that the balance between the issued price and the redemption price would be one which was free of any new tax which might be raised.
In what the right hon. Gentleman has said he has directed his remarks not to Capital Gains Tax but purely to the taxation of gilt-edged stock. Every argument that he used would have been used with equal force when gilt-edged stock was first issued and was subjected to Income Tax. We have had all these arguments before. As the principle on which my right hon. Friend is relying has been adumbrated by no less a person than Mr. Gladstone, perhaps I could quote quite shortly the debate which took place on 25th April, 1884, in col. 686 of HANSARD. Mr. Gladstone said:Has the right hon. Gentleman considered the conditions under which this country contracted its loans? When it contracted those loans it gave the most solemn pledge to those who lent money that their money should not be made the subject of taxation.Mr. Hubbard intervened to say:Quite so. How have you taxed it?Mr. Gladstone replied:How has Mr. Pitt and how has Sir Robert Peel dealt with that? By this doctrine, that they laid the tax equally on every subject without reference to the sources from which the income was derived. It has been in that way and in that way alone that those great men believed they maintained the public faith.And we believe exactly the same thing.
§ Mr. Box
This Amendment implements the statement which the Chancellor of the Exchequer made at a rather late hour on 26th May, which, as we all know to our cost, was followed by the rather disastrous and certainly momentous events which resulted in the gilt-edged market being closed for several hours on the following day for the first time within living memory. There is no doubt that the repercussions of that closure would have been far greater if it had not by accident coincided with a holiday on the international bourses of the world.
My complaint is that the Chancellor's method of helping some sections of the gilt-edged market to be free of Capital Gains Tax is unnecessarily complicated. It seems to me that to have a neutral zone which is free of tax, and yet other prices which are outside that neutral zone are subject either to capital gains or capital losses, makes the position unnecessarily complicated. The right hon. Gentleman the Chancellor told us during his speech on 26th May:It would not be a sensible policy unduly to damage it"—he was referring to the gilt-edged market—or indeed to damage it at all. One should try to build it up."—[OFFICIAL REPORT, 26th May, 1965; Vol. 713, c. 758.]Quite honestly, this is a very poor way of trying to build up the gilt-edged market at present.
My right hon. Friend the Member for Flint, West (Mr. Birch) referred to two stocks which are affected, 3 per cent. Transport 1968–73, and 3 per cent. Electricity 1968–73. As he told us, the prices of those two stocks were almost identical before the announcement by the Chancellor. The following day, as a result of what the Chancellor said on 26th May, 3 per cent. Transport 1968–73 immediately appreciated to a figure of 81, a rise of 3⅛ per cent., whereas 3 per cent. Electricity 1968–73 rose very slightly to 78¼, and the prices of those two stocks, up to yesterday at any rate, were only very slightly higher than they were on 27th May, despite the fact that Bank Rate has been reduced by a full 1 per cent. So it is not apparent that the measures announced by the right hon. Gentleman have been very successful in helping the gilt-edged market to any material degree 1644 so far. Perhaps we might have expected a bigger gap between these two stocks as a result of the proposals of the Chancellor, but it seems by the narrow margin—it is something under three points—between the two at the present time that the vast majority of investors in the country were not over-impressed with the Chancellor's attempts to help the gilt-edged market.
We feel that this Amendment, put forward by the Government is a grudging concession, one which the Chancellor is putting forward because he felt he was obliged to because he and the Government were being accused of committing an act of bad faith against investors in gilt-edged securities.
Many investors, I think, would believe that it is not wise to purchase stock which is going to be free of tax under the Chancellor's proposals, because the redemption date is far enough ahead to offer considerable scope for a change to some sensible Government by that time. The one and only way to improve the market in gilt-edged stocks at present is to make them relatively more attractive than other stocks, like the debenture stocks to which my right hon. Friend referred. It therefore seems that the wise move by the Government would be to accept our Amendment, which we are discussing in conjunction with theirs, because if it were accepted then there would be no doubt that we would greatly increase the attraction of Government stocks in relation to other stocks in the market. This, I think, would make the funding, which we know is required, a very much easier matter for the Government.
I urge the Chief Secretary to give the closest possible consideration, even at this late stage, to changing his mind.
§ Mr. Geoffrey Lloyd (Sutton Coldfield)
I rise only to make a brief comment, not because I have any special expert knowledge of the gilt-edge market, for I have not, but because everybody in this House and in the country attaches the greatest importance to British Government credit. I do so also as somebody who has listened throughout all the debates on the Finance Bill, and I say that I have never heard the Chief Secretary less happy either in Committee, or so far on Report, than he has been this afternoon. My right 1645 hon. Friend the Member for Flint, West (Mr. Birch) clearly spoke with great knowledge and great authority, and we have had a quite pathetic reply from the Chief Secretary. He did not attempt to deal with the question of the damage which has actually been inflicted by the Government's proposals on the gilt-edged market. I say that it is an unhappy day for British credit.
§ Mr. Peter Walker (Worcester)
I would certainly support the view which has been expressed by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) as to the manner in which the Chief Secretary replied to this very important debate. One would have thought that the Chief Secretary would have had in mind the very serious problems the Government must be facing concerning the gilt-edged market, and one would have expected from him a careful, reasoned reply to the views expressed by my right hon. Friend the Member for Flint, West (Mr. Birch). Instead, the arguments propounded by my right hon. Friend were dismissed as not being arguments upon the Amendment; they were dismissed as being arguments on the general economic situation. In view of this, I intend to repeat, if I may, some of the questions raised by my right hon. Friend. I am quite certain that the House will give permission for the Chief Secretary, who, obviously, missed these points when they were last made, to get up and reply to them, because this is a matter of such seriousness and such importance to our economy that really the Chief Secretary cannot be allowed to reply to this debate in the manner in which he decided to do it.
First of all, my right hon. Friend raised quite clearly the point that the Government have discriminated in the manner of their concession, and they have not fully met the argument of meeting the Government's obligations. They have met them so far as some stocks are concerned and they have not met them so far as others are concerned, and it is really impossible, purely on the ground of the obligation of the Government to meet the understanding they had with those people who purchased stocks, to say that the Amendment fully meets this point.
The right hon. Gentleman did not deal with the question asked by my right hon. 1646 Friend, namely, are those stocks first retained by the Issue Department of the Bank of England, and thereafter issued through the Government Broker? The right hon. Gentleman did not comment on that.
Next, my right hon. Friend raised the point about the working of this market depending on it being a simple market in which people are able to invest. The Chief Secretary must be aware that his Amendment will complicate the market. He must be aware that many people who previously invested in this market will now hesitate to do so because of the complications introduced by the Amendment. This matter, too, was completely ignored by the right hon. Gentleman.
The general economics of the situation, which for some remarkable reason were dismissed by the Chief Secretary as being almost dissociated from this debate, are fundamental to it. The Government are in a position where they will have to borrow considerable sums of money. The gilt-edged market is very unhappy as a result of Government action. The Government are faced with the situation that the main investors in the long end of the market, the life offices and superannuation funds, will be handicapped by the Government refusing to allow any form of switching other than switching subject to Corporation Gains Tax. For all these reasons, the gilt-edged market is in a position in which it will find great difficulty in continuing with any firmness at all.
My right hon. Friend also made the point that the Government's policy will result in a considerable number of debenture stocks being issued in competition with the gilt-edged market, once more attracting money away from that market and further weakening it. The Chief Secretary had the audacity to dismiss the whole argument in five minutes without dealing with any of these vital points. He quoted as his one authority in defence of his action what Mr. Gladstone said in the 19th century. There was one other happening in the 19th century similar to what has happened under this Government, and that was the closing of the gilt-edged market. In that case it was due to the Battle of Waterloo.
Gladstone's authority is hardly appropriate to this argument. His policies did 1647 not require so much Government borrowing. The National Debt was of rather different proportions in his time, and although Mr. Gladstone introduced a lot of things of which I would not have approved, he did not introduce a Capital Gains Tax further to distort the market. I think that the House must demand of the Chief Secretary a much more detailed reply than we have so far received to the many points made by my right hon. Friend.
§ Mr. Diamond
With your leave, Mr. Speaker, and that of the House, I am ready to respond shortly and deal with the three points by demonstrating that they have already been answered.
The first point is that the Government have not met their full obligations. This was dealt with fully in the previous debate. A distinction is drawn between stocks issued under a prospectus, and stocks bought as it were off the shelf. I made the point that the Government could not accept that they were in any sense honour bound to those who had bought off the shelf. We cannot have regard to the terms of a bargain between a buyer and a seller in the way that we have regard to the prospectus of issue by a public company.
I underlined my argument by drawing attention to stock which had been sold by the middle man. That stock had not been sold on a prospectus, but was sold down to 17 points below the nominal prospectus price. I have no doubt that it was sold at various stages down to 17 points. I made it clear that this was not a transaction between the Government and the investor, the purchase of the stock. This was a transaction in which people were buying off the shelf at the market price at the time, and therefore the Government did not feel themselves in any sense honour bound at that point.
§ 6.15 p.m.
§ Mr. Birch
It is all very well talking about buying off the shelf, but who put the goods on the shelf? The answer is the Government. They never would have been sold at the price they were sold at if anyone had the faintest idea that a Capital Gains Tax would be imposed on them. The argument is the same as that for stock sold on a prospectus. There is no moral difference of any sort.
§ Mr. Diamond
The right hon. Gentleman says that the argument is the same, but I deny that. When a company goes to the market, a prospectus is issued, and on the precise terms of that prospectus people subscribe to the shares. There is a bargain between those who sign the prospectus, the directors and so on, and the purchasers of the shares. The shares are then quoted, and people buy them on the Stock Exchange. They are then not dealing with them according to the original bargain. The bargain is no longer between the issuing house, or those who issued the prospectus, and the purchasers, and it is the same in this case. As the right hon. Gentleman made it clear, here was a stock quoted at various prices going below the issue price. It went to 17 points below. This might be an argument for freeing all Government stocks from Capital Gains Tax, but that is a separate argument.
It was then said that there was an advantage in having simplicity in the market, and that Capital Gains Tax would introduce complications. It was never as simple as all that. It has always been argued that it was simple, but the fact is that the return had to take into account a basic unalterable standard rate of Income Tax, and, secondly, a standard rate of Surtax or Supertax in terms of the owner. Both these things had to be taken into account to find out the return to the owner, and they still have to be. It was not a simple straightforward argument before, and it is not now. These matters have to be taken into account, and the further matters which have to be taken into account are of negligible complexity by comparison with those which have always had to be considered, and this was dealt with in our previous debate.
§ Mr. Peter Walker
Would not the right hon. Gentleman agree that the biggest investors in the long end of the market are the life offices who pay a fixed rate of Income Tax, agreed to by the Government?
§ Mr. Diamond
That illustrates my point. They had a fixed rate because, if they did not, as tax went up their calculations would have been falsified. Therefore, one has to take into account the rate of tax. The life offices found 1649 themselves incapable of continuing when the tax exceeded a certain figure, and the Government of the day therefore agreed a maximum figure. That is how one gets this relationship between the Government and life insurance offices.
I was then asked why I did not deal with all the points raised by the right hon. Gentleman in relation to the operation of the gilt-edged market generally. This was fully dealt with in our previous debate. The answer is that we want to help the gilt-edged market. We want to help it a little more helpfully than the speech of the right hon. Gentleman. I should have thought that his was not a classic of speeches in aid of the gilt-edged market. The difficulty is that when anybody stands at this Box and answers a debate, as happened after the last debate, the right hon. Gentleman says, "How dare you say nasty things like that?". We are trying to get a Finance Bill through the House of Commons. We are expected to take everything that comes at us, and give nothing in return.
To those who are not satisfied with the fullness of my reply I say, "Read the debate that we had on this identical topic, and you will find the full reply there". Shortly, the position is that we are anxious to help the gilt-edged market, but it does not follow that the only way to help it is to pick a particular new tax and say that it shall apply to everybody, but shall not apply to owners of gilt-edged stock.
That is not the way to help the gilt-edged market. It is the way to break faith with the public and, in identical circumstances, Mr. Pitt, Sir Robert Peel and Mr. Gladstone all relied upon the same principle as that which I am relying upon, and which I thought would have had some weight in this House. It is in that way alone that those great men believed that they maintained the public faith, and we are continuing to do that.
§ Amendment agreed to.
§ Mr. MacDermot
I beg to move Amendment No. 147, in page 12, line 18, at the end to insert:in Section 12(5) of that Act (persons acting as nominees, etc.) for the words '(or for two or more persons jointly so entitled)' there shall be substituted the words 'or for another person who would be so entitled but for being an infant or other person under disability (or for two or more persons who are or would be 1650 jointly so entitled)' and in the proviso to Section 12(6) of that Act (residence of trustees) for the words 'body corporate' there shall be substituted the word 'person'".
§ Mr. Speaker
It might be convenient if, with this Amendment, the House discussed Amendments Nos. 148 and 149. I do not know whether that would be acceptable.
§ Mr. MacDermot
We shall be very content with that, Mr. Speaker. I am obliged to the right hon. Member for Bexley (Mr. Heath).
The Amendment raises a somewhat technical point. It deals with the short-term effect of the Capital Gains Tax on this point, while the other two Amendments deal with the long-term effect. Section 12(5) of the Finance Act, 1962, provides that an infant or other person under a disability who would be absolutely entitled to property as against trustees but for this legal disability should be treated as if he were absolutely entitled for the purposes of the tax. The House will remember that in the case of trust property generally the liability for Capital Gains Tax rests on the trustees, and that there is no looking beyond them to the beneficiaries. That rule does not apply where trustees hold property for persons absolutely entitled to it as against the trustees. The reality of the situation is that the trustee is little more than a nominee, holding on behalf of the beneficiaries.
In representations that we have received, especially from the Landowners' Association—and I was surprised to find it raising such a technical point; it is a very good one—we have had our attention drawn to the fact that in the case of a trust for a widowed mother, with the remainder going to her son absolutely, if the mother dies while the son is under 21 the infant would not be absolutely entitled, as against the trustees. In that situation it clearly would be unfair if, as a result of that somewhat artificial legal position, there were to be one charge to capital gains when the widow died and the life interest came to an end, and another charge when the son attained the age of 21 and thereby became beneficially entitled, as against the trustees.
1651 The proper course is to make it clear beyond all doubt that the mere fact of infancy does not prevent a person being regarded as absolutely entitled if the trusts of a settlement are at an end. The same arguments can be applied to persons of unsound mind who succeed to property on the termination of a prior interest. The Amendment is, therefore, couched in general terms, to cover all forms of legal disability. The real importance arises in relation to the long-term tax, but it is clearly appropriate to make some Amendment in respect of the short-term tax.
§ Mr. Scott-Hopkins
I am grateful to the Financial Secretary for bringing the Amendment forward. This is the case of a trustee of an estate, where, under the existing Capital Gains Tax legislation, a considerable degree of hardship could be incurred by a minor. As I understand from what the Financial Secretary has said, this liability will now be removed. I was a little foxed by the word "infant". I was not certain of its meaning, and whether it included a minor under the age of 21.
§ Mr. MacDermot indicated assent.
§ Mr. Scott-Hopkins
That takes another worry from my mind. As I understand it, there could be an assessment after each 10 years in respect of the trustees, where the minor is entitled absolutely later on. I should like to know whether these provisions exclude that necessarily having to be done. Further, when the minor inherits absolutely at the end of the trust period, will there have to be an assessment at that time? I understand that these Amendments would obviate that.
§ Mr. MacDermot indicated assent.
§ Mr. MacDermot
I did not quite follow the hon. Member's point about the 10-year period. In future it will be a 15-year period which is the minimum period which must elapse before there can be a second charge to tax upon the trustees. That situation is not affected by the Amendment.
On the other points—in law an infant is a person up to the age of 21, and the 1652 effect of the Amendment is that once the infant is the sole person entitled, and the settlement is therefore at an end, there will not be a second charge when he comes of age and is entitled to have the moneys paid over to him.
§ Mr. Scott-Hopkins
I am grateful to the Financial Secretary for intervening. He has answered the points that were raised in Committee, which caused a great deal of anxiety, especially as to the position of trustees and minors.
§ Amendment agreed to.
§ Mr. MacDermot
I beg to move Amendment No. 312, in page 12, line 42, at the end to insert:(f) at the beginning of paragraph 20(4) (definition of connected persons) there shall be inserted the words "Except in relation to acquisitions or disposals of partnership assets pursuant to bona fide commercial arrangements".
§ Mr. Speaker
I wonder if it will be for the convenience of the House to consider at the same time Amendment No. 276.
§ Mr. MacDermot
Yes, Mr. Speaker. They both raise exactly the same point. The Amendment has been put down as a result of our making a take-over bid for Amendment No. 276. This point was raised by the hon. Member for Crosby (Mr. Graham Page) and we think that the Amendment is worth making. Under the 1962 Finance Act connected persons are so defined as to include partners, a husband or wife, or relatives of a partner. That definition has been imported into the Bill through the provisions of the Seventh Schedule.
For the purpose of Capital Gains Tax transactions between connected persons are treated as transactions which take place otherwise than by a bargain at arm's length. In consequence, when an asset is disposed of between such persons it is deemed to be transferred at market value. This is a necessary anti-avoidance provision, but its application has given rise to considerable worry among certain professional bodies, in which it is now a practice that when a firm takes in a new partner it does not require him to pay for the full value of his share of the partnership, and particularly of the goodwill in the partnership.
1653 6.30 p.m.
In these circumstances, it was pointed out, it would be harsh to charge Capital Gains Tax on a notional sum which was not related to something which was a genuine commercial transaction. I would make it clear that it has always been the intention of the Revenue to interpret these provisions in such a way as to give effect to and to follow actual commercial arrangements between the members of the partnership. This is an anti-avoidance provision and would not be intended to interfere with proper commercial operations. The hon. Member for Crosby put down an Amendment to the Seventh Schedule which would write into the Bill this rule, in reference to which the Revenue would, in practice, have governed itself, beginning with this kind of case. We find the Amendment perfectly acceptable. It will help to reassure the bodies concerned. In consequence, we have also put down the Amendment to Clause 16.
§ Mr. Peter Walker
I am grateful to the Financial Secretary for this Amendment. I am pleased that my hon. Friend the Member for Crosby (Mr. Graham Page) originally raised it. People will always prefer to see matters like this as part of the Bill instead of left to the discretion of the Revenue. As a result of that, people sometimes receive advice which, although in practice it turns out to be wrong, in theory is correct. I think that it was right to make this part of the Bill.
§ Amendment agreed to.
§ Mr. MacDermot
I beg to move Amendment No. 15, in page 13, line 3, at the beginning to insert "The foregoing provisions of".
§ Mr. Speaker
Perhaps it would be for the convenience of the House to discuss with this Amendment the next one, No. 16.
§ Mr. MacDermot
I think that that would be convenient, Mr. Speaker.
These two Amendments have been put down in response to a request that I should look further into the question of the disposals of land acquired before Budget day and disposed of more than 12 months and less than three years after 1654 the acquisition. This question was raised by the hon. Member for Barkston Ash (Mr. Alison) in Committee. It arises, of course—with the alteration which we have made of the Bill—as a result of the period affecting land for which land may be held in order to escape liability to the short-term tax. Previously it was three years in future it will be 12 months.
The question which arose was what should be done in the case of people who have bought land before Budget day and, at the time they bought it, knew that they would have to hold it for three years if they were to dispose of it without incurring a liability to the short-term gains tax. Should they continue to be governed by the old Act, or should they enjoy the benefit of the new provisions? Clearly, there are here three classes of land which was bought before Budget day. First would be land bought before Budget day and sold within 12 months. Clearly, that remains still liable to both Income Tax and, if applicable, Surtax, as a short-term gain. At the other end, there is the case where the land bought before Budget day is not sold until after three years. That escapes the short-term tax and the liability there, under the new provisions, is to the long-term Capital Gains Tax on the gain since Budget day.
The problem arises with the intermediate class, that is to say, land sold between one and three years after the acquisition. As I have pointed out, as the old law stood, at the time of acquisition the purchaser knew that he would be liable to a short-term tax. It was for that reason that we proposed in the Bill that he should remain liable in the same way as in all cases of property other than land, where he could dispose of it after six months, and escape liability to the short-term tax. We have allowed that position to stand and did not seek to apply to him the longer period of 12 months. It was argued that the provisions affecting land would be unfair compared with post-Budget day acquisitions, which would pay only at the long-term rate if disposed of after 12 months. It was also argued that it would artificially lead to such land being held back from the market. I find that argument not very persuasive, because it was the 1962 Act which achieved this result, and not anything in the Bill.
1655 However, on reflection, we agreed that it would be fair to grant some concession here. We did not think that it should be done by exempting all pre-Budget day gains on which the owner fully expected to pay tax at the short-term rate if he disposed of it within three years. We propose in these Amendments that he should be liable by making the whole of the gain taxable, but taxable at the long-term rate of 30 per cent. or, if he can take advantage of it, on the alternative basis of charge. In this way, he benefits and is put in the same position in relation to his holding as someone would be who was to acquire land now and sell it between one and three years after acquisition.
§ Mr. Michael Alison (Barkston Ash)
I am very grateful to the Financial Secretary for going over the arguments which were used at that time for making this concession, which will be greatly welcomed by a number of people who have been caught, quite fortuitously, by the new provisions introduced in the Bill. As he said, the substance has now been granted in this respect, in that categories of persons who acquired land before the Budget and after it are now treated in a uniform way. We are very grateful to him for that.
§ Mr. Peter Walker
I should like to add my thanks to the Financial Secretary for acceding to this. This is another case of this side of the House having improved the Bill. I should like particularly to congratulate my hon. Friend the Member for Barkston Ash (Mr. Alison). On reference to the earlier debate, I find that the Financial Secretary paid tribute to the logical and cogent way in which this was argued. One saw that respect for the arguments of my hon. Friend when, during the debate in Committee, he used such phrases as, "Therefore, although this is a reasonable point … although … perhaps … just on balance …" and other similar arguments. When one sees a Treasury Minister happily wobbling in this way, one always has hopes that, by the time Report is reached, the Government will have been converted to sensible arguments like those propounded by my hon. Friend. Certainly, in this case these arguments have 1656 been respected and the Bill has been improved in this way.
§ Amendment agreed to.
Further Amendment made: In page 13, line 9, at end insert:
(12) Income tax shall not be charged by virtue of section 10 of the Finance Act 1962 in respect of an acquisition and disposal of land where—
This subsection shall apply to an option or other right to acquire or dispose of land as it applies to land—[Mr. MacDermot.]