HC Deb 07 July 1965 vol 715 cc1658-89

6.45 p.m.

Mr. Peter Walker

I beg to move Amendment No. 21, in page 15, line 10, at the end to insert: less three-tenths of one per cent. for each one per cent. that the Index of Retail Prices, prepared by the Ministry of Labour, has risen in the period between the date that the chargeable asset was acquired and the date at which the disposal of the chargeable asset took place; or, in the event of assets acquired prior to 5th April, 1965, less three-tenths of one per cent. for each one per cent. that the Index of Retail Prices has risen in the period between 5th April, 1965, and the date at which the disposal of the chargeable asset took place". The Amendment, which stands in the names of my right hon. Friends and myself, is perhaps one of the most important Amendments concerning the Capital Gains Tax provisions of the Bill. It is designed to protect persons from paying tax upon the enhancement of the value of their property resulting from inflation. The House will see that we have endeavoured to relate this to the Ministry of Labour retail price index. Although this is not the most perfect instrument for certain items, it is the only available instrument which could be used to ascertain month by month the degree of inflation which has taken place within the economy.

The Amendment is of particular importance during the present time when we are suffering from considerable inflation in the economy. To give an illustration, in the short time that the Government have been in power there has been a rise in the retail price index of 4 per cent. This means that had there been a Capital Gains Tax of the dimensions suggested in the Bill, and had some person purchased property on the day the Government came into power and disposed of it at the present time, then 4 per cent. of that value would have been subject to Capital Gains Tax, although in terms of purchasing power the realisation of those goods would not have been more satisfactory to the person concerned than had they been sold at the original price on the day of the General Election.

This is very important in many spheres. It is important in terms of the general provisions of the Bill in respect of chattels, for over the decades we have seen the value of many articles increase because of the general inflation. We suggest that if over a period of 20 or 30 years general inflation is to the extent, for example, of 100 per cent., then it is absurd that if a person disposes of property at the end of that period he should have a deduction of 30 per cent., or whatever is the appropriate rate, from what has been an enhancement only in paper terms and certainly not an enhancement in general purchasing power.

Various formulae are used throughout the world to protect persons, where a Capital Gains Tax has been applied, from the ravages of inflation. Hon. Members opposite frequently quote the economic position in Sweden and the various taxation methods which are used there. In Sweden, where Capital Gains Tax applies, the percentage of the Capital Gains Tax decreases over a period of time. It is true that in Sweden it is not directly related to any inflationary position, but it is generally assumed that over a period of years one can in any case expect an enhancement of value and that it is wrong to tax that enhancement.

I hope that hon. Members on both sides of the House will agree that the purpose of the Capital Gains Tax is to tax those persons who make a genuine profit out of a capital transaction and not, for example, to tax a person who perhaps owns two or three houses for the purpose of obtaining an income. We all know of the example of a widow relying on an income from the rent of two or three houses. We also know that over a period of years the value of those houses has increased. If for some reason, perhaps because of a decision to move to some other part of the country, the widow decided to sell those houses after 20 years, and to buy three identical houses providing a similar rent in another part of the country, it is almost a certainty that there would be a considerable difference in the capital value of her properties between the original date on which they were purchased and the date on which they were sold 30 years later. Yet, in undertaking what in this case is a transfer of assets, that person would have a Capital Gains Tax imposed of 30 per cent., or whatever is the appropriate rate for her, of that transaction.

I would emphasise that the Amendment is important only to the long-term investor. It is of no importance to the speculator, because the speculator who makes a capital profit over a short time is hardly affected by the provisions of the Amendment.

Surely no hon. Member can argue that a person who, over a period of 30 years, sees the enhancement of a piece of property from £1,000 to £1,500 should be treated in exactly the same way for taxation purposes as a person who receives an enhancement of property from £1,000 to £1,500 over 18 months. But under the Bill the position will be that if a person buys a property in 1965 for £1,000 and sells it 20 years later for £1,500, he will be taxed at exactly the same rate as a person who made a similar transaction 18 months prior to the selling of the property. It means that people who are investing to provide for their retirement—shopkeepers and others who are self-employed, many of whom invest to provide for their later years—would find themselves heavily penalised by the taxation which would be imposed not on any trading transaction which had taken place, but because of inflationary tendencies in the economy.

If the Government are claiming that they are endeavouring to stop inflation—if they now believe that as a result of recent happenings their incomes policy is succeeding—they should admit that the Amendment would not cost them a penny; that is, as long as they believe that their policies can check inflation. The only possible reason for the Government not accepting the Amendment is that they expect inflation to take place during their period in office. I agree that there is every sign that that expectation will be realised. Indeed, they are doing exceedingly well in the first few months of their term of office to see that it is realised. As I say, if they are genuine in their belief that inflation can be checked, the Amendment should appeal to them, particularly since acceptance of it would not cost any money.

The Amendment is drafted to have a direct relationship to inflationary trends and it is concerned particularly with small investors, people who invest in various types of security, such as life assurance. It is well known that one of the ways in which the life offices have appealed to the public over the years is that their with-profit policies provide a hedge against inflation. The success of their investment policies is such that they are able to pay out, at the end of a 20- or 30-year period, a far greater sum than the premiums paid. It is through these offices that the majority of families make provivision, by means of life assurance, for later years.

Under the Bill as drafted these life funds will be subject to the full blast of the Capital Gains Tax. It may well be that after the new Clause which was accepted last night the Government will decide to reduce the rate of tax on life funds to 30 per cent. That would, to some extent, help to lessen the ravages which the Government's taxation measures will have on life funds.

Many of the investments of life assurance companies are in dated gilt-edged stocks. If inflation took place in the 10 to 20 years prior to the date of redemption of those stocks, the gain would probably be tax-free as a result of the exemption provided by the Amendment, if it is accepted. Its acceptance would, therefore, go some way towards relieving the damage that will be done to the attractiveness of life policies as a result of the imposition of the Capital Gains Tax. I strongly commend the Amendment to the House. It would mean that the tax would apply only to genuine gains and not to artificial gains.

Mr. Terence L. Higgins (Worthing)

I strongly support the Amendment and the remarks of my hon. Friend the Member for Worcester (Mr. Peter Walker) because this is indeed one of the most important Amendments affecting the capital gains aspects of the Bill. I regret that the algebraic formula which was suggested in Committee to make allowance for the effect of inflation was not accepted by the Government. I hope, however, that they will accept the Amendment because it is perfectly clear, from an analytical point of view, that it should be accepted.

In considering this matter hon. Gentlemen opposite have allowed their political prejudicies to overcome their analysis of the problem. There is a genuine difference in analysis between the two sides and it is to this aspect that I will primarily address my remarks. In other words, I will try to persuade impartial hon. and right hon. Members, such as yourself, Mr. Speaker—for if the Opposition do rather worse than they did last night you may have a casting vote on this matter—of the importance of accepting the Amendment.

When we consider a Capital Gains Tax we must surely consider taxing gains in real terms. It is wrong to tax not only gains in real terms but gains which merely reflect a change in the value of money. I suggest that we must first consider the important fact that the yield which the Government will get from this form of taxation—if the Amendment is not accepted—will depend on the rate of inflation which they allow to happen. This is the crucial point. The Government will collect more in taxation from people who happen to own capital if inflation goes on unchecked than if the Government adopt a responsible attitude and restrict the rate of inflation or attempt to try to halt it.

This is a totally wrong position for any responsible Government to put themselves in. Suppose, as a result in inflation, an asset which was originally worth £100 goes up in money value to £200, then the Government will collect twice as much in taxation as if the rate of inflation had only been such as to increase the money value of the asset to £150. I suggest, therefore, that we must consider the matter in real not money terms. For if we do not amend the Bill in the way suggested by my hon. Friend the tax will be charged not on capital gains but on anyone who happens to own real assets. It is because they will not think in real terms that the analysis of hon. Gentlemen opposite has gone awry.

Secondly, as my hon. Friend the Member for Worcester explained in some detail, it may happen that someone makes a capital gain over a short period, when the value of money has scarcely changed at all—and, say, the value of his assets has gone up from £100 to £120. He will be charged precisely the same tax as someone whose assets have appreciated from £100 to £120 over a much longer period, during which time the value of money has changed considerably. It is surely evident that that is totally unfair because, on the one hand, we have someone who has made a large real increase in the value of his assets and, on the other hand, we have someone who has made a very small increase in the real value of his assets—and the rest simply reflects a change in the value of money. Are both to be charged the same amount in taxtion? On common-sense grounds it must be inequitable to do so. Indeed, I cannot understand why hon. Gentlemen opposite have adopted the view they have on this matter. Their point of view was clearly expressed in Committee when the Financial Secretary said: I am referring to spending power as between different sections of the community, judged, in terms of money. If people increase their money incomes, whether they do so in the form of wages or capital gains, they have an increase in spending power."—[OFFICIAL REPORT, 25th May, 1965; Vol. 713, c. 319.] This is simply not so. In terms of spending power expressed as one must express it—in terms of command over the goods one can get by spending—this is not true. Hon. Gentlemen opposite have extended the principle that one should tax people who happen to make real capital gains to the principle that people should be taxed on their capital whether or not they make real capital gains. That is absurd.

The Financial Secretary got himself tied up when in the Committee stage of the Bill, in column 322, he spoke about the redistributive effects of inflation on various kinds of income receivers. The argument he spelt out then is fairly complicated. He said that people who hold equity shares will gain at the expense of those who hold fixed-income securities, and he also suggests they will gain at the expense of wage earners. The important thing is the timing aspect of this, and I would commend to him certain works of Professor Phelps-Brown, of the London School of Economics. Frequently we may find that wage earners are gaining on those who hold different types of assets. But at other times we may not, and it would be quite wrong for him to pursue the kind of argument we find in column 322 of the OFFICIAL REPORT of 25th May, and suggest, therefore, that we must extend this tax to cover money gains as well as real gains.

7.0 p.m.

Finally, I want to turn to the underlying analysis of this whole question. I can see that hon. Gentlemen on the other side genuinely believe they are right about this, but I want if I may to persuade hon. Gentlemen that the basis of their argument is false.

It is most cogently expressed on page 366 of the Minority Report of the Royal Commission on Taxation of Profits and Income, one of the authors of which was Dr. Kaldor. The argument he sets out in paragraph 37 has a logical fallacy in it, which is fairly unusual in an analytical matter of this kind. His opening words are: We do not deny that the rise in capital values that occurs in the course of an inflation does not increase the taxable capacity of the recipients in the same way as a rise in capital values during the period of steady prices. But we cannot regard this as a justification for excluding capital gains from taxation within the general framework of a tax system which sets out to tax income and not consumption. The point I want to make is that the Report says that this is not a reason for not taxing capital gains, but it does not says it is not a reason for not making an allowance for inflation when computing capital gains. I would suggest that in reading this, the hon. Gentlemen opposite, looking at it from their own basic assumptions, have misunderstood what the author of that Minority Report was advocating.

He goes on to say: If the proceeds of the gain are spent the recipient derives the same benefit as he does in spending taxed income. That is the crux of the matter. If the value of money changes, as I have already said, the owners of the asset gains nothing in real terms. The gain which he has made is purely a monetary gain and not a real gain. Therefore, I, would suggest it would be wrong to tax him on an increase in money terms. It is not right to say that he should be taxed because all other income receivers are also only gaining in money terms. The person who has the asset in the first place has already paid tax when he acquired that asset, because he has bought it out of taxed income. I see some hesitation on the faces of the hon. Gentlemen opposite. If one has already paid tax before one buys an asset and then it appreciates purely in money terms and not in real terms, it would be wrong for the owner to pay tax again when he uses some part of the value of that asset. Unless the Amendment is accepted, there will be a double taxation. The equitable thing to do would therefore be to make an allowance in computing the capital gain for the effect of inflation.

The argument which has been put forward in paragraph 37 of the Minority Report, which underlies the whole case that has come from the other side, is fallacious, because what the person who liquidates a paper gain on a capital asset is doing is using up part of his asset. It would be much the same to say that if I were to have £100 and I spent £10 out of that, I ought to be taxed on the £10 because I derive the same benefit as someone who spends £10 out of taxed income. That is quite absurd. If we do not accept the Amendment, on this kind of capital gain we shall have both Income Tax on the money used to acquire the asset and an expenditure tax if part of the capital is used to buy something.

I do not think there is a hole in this argument. I believe that the case put forward on behalf of the Government is wrong, and unless we accept the Amendment we shall have, on people who happen to have acquired real assets in an inflationary situation, both a tax when they have acquired money to buy the asset and a tax when they have used part of the asset to buy something else.

Mr. Robert Sheldon (Ashton-under-Lyne)

Would not the hon. Gentleman accept that when purchasing his asset, the money with which the asset is purchased is also taxed?

Mr. Higgins

Yes. That is precisely my argument; but he is taxed a second time when he spends it or liquidates what is purely a paper gain.

I am convinced that there should be an allowance made for the effect of inflation in computing capital gains. Unless we do that, what the hon. Gentlemen opposite are saying—and they ought to come out in the open and say it—is that anyone who happens to have an asset and who happens to live in an inflationary society must have part of it taxed away. This has nothing to do with a capital gain at all. This is a wealth tax.

Mr. Joel Barnett (Heywood and Royton)

The hon. Gentleman the Member for Worthing (Mr. Higgins) showed his customary logical approach to the subject, but he did not allow himself to go far enough. I cannot allot five marks out of ten to the hon. Gentlemen, unlike the hon. Member for Shipley (Mr. Hirst) when he allotted five out of ten to my right hon. Friend the Chief Secretary because they have presented a very poor case for their own Amendment. Whether we like it or not, inflation is an economic fact of life, and, of course, one can make political capital out of whichever party happens to be in power at a particular time. But one has to recognise in effecting a reasonable and equitable tax system that the inflationary situation that we have is not made any better by the sneers one hears from hon. Gentlemen opposite at attempts to do something about an incomes and prices policy. Neither is it made any better by the genuine disbelievers who have nothing else to offer than reverting back to the system we have had over the previous thirteen years.

Sir D. Glover

I think that there are very few Members on this side who are members of the Transport and General Workers Union.

Mr. Barnett

The hon. and gallant Gentleman is doing his best, in his usual way, and adds strength to the point I was making. One can make political capital out of one particular Government having during its course of life a certain degree of inflation, but I would have thought that all hon. and right hon. Gentlemen would have a vested interest in seeing that we had an incomes and prices policy that was effective to some degree. However, it may be that I am wrong about that.

I would say to the hon. and right hon. Gentlemen who support this Amendment, why have they never put down an Amendment for the reduction of Income Tax on allow for inflation? The right hon. Gentleman the Member for Bexley (Mr. Heath) shakes his head, but it is equally logical. There is precisely the same logic in that as in the Amendment, and I am afraid the hon. Gentleman the Member for Worthing did not make his case at all. The fact that we tax inflationary increases in income means that it falls much harder on a person with no capital at all. There is no real increase in a wage when that increase is only equal to the amount of inflation, yet we still tax it at the same standard rate or, perhaps, reduced rates of tax.

Mr. Fletcher-Cooke

The hon. Gentleman has said that nothing was done about the Income Tax as it affected an increase in wages that might have been due to inflation. That is not true. Year after year the personal and other allowances were raised precisely to make sure that the amount of tax extracted was not increased by the factor of inflation. That was done over the last 13 years.

Mr. Barnett

One can give all sorts of reasons now why a particular personal allowance is given. [Interruption.] If hon. Members opposite want to make speeches, let them do so in their own time. I intend to make my own speech now.

To be logical, if one wants to give some assistance to taxpayers who suffer by inflation one should put forward suggestions that will equally affect those who are subject to Income Tax, because their only source of revenue is their income, and the increase in their income. The crux of the matter is that right hon. and hon. Members opposite do not accept our contention that increases in capital should be taxed in precisely the same way as increases in income. If they do not accept that premise, they will find all sorts of methods of trying to alleviate the effects of the Capital Gains Tax—

Mr. Higgins

I thank the hon. Gentleman for giving way, because I know that we are all trying to find the right answer. Would he not agree that if his argument is carried to its logical conclusion we ought to have a Capital Gains Tax on capital and make some allowances on income, but there are people with capital who are also subject to progressive Income Tax on the dividends that are paid? The purpose of the tax is not to adjust inequities due to inflation; that is something the Government should do, for example, with old-age non-pensioners.

Mr. Barnett

I am sure that the hon. Gentleman would want to see as equitable a tax system as possible. Once we accept the basic point that one taxes increases in capital similarly to increases in income, I say that we should have a tax affecting both in a like way. If, as is suggested in the Amendment, we have relief in advance because there might be inflation in the future, then, in equity, we must allow it all round. Hon. Members opposite know that if we were to give relief in this way a given Chancellor in a given year, knowing that he had certain revenue from Capital Gains Tax or Income Tax, Surtax, or Corporation Tax, and knowing that it was in some way reduced because of the inflationary spiral, all that would happen, assuming one had the same level of Government expenditure, would be that he would slightly increase the standard rate, as it were, to allow for the small amount given as a concession, or he would reduce public expenditure. That cannot be disputed.

I believe that the supporters of the Amendment have put forward a foolish point and a purely political one. The Amendment could be harmful by giving to taxpayers the completely false impression that it would help them. It would do nothing of the sort.

7.15 p.m.

Mr. Hirst

The Government really must be in a jam over this Amendment when we find the hon. Member for Heywood and Royton (Mr. Barnett), who usually argues so closely, setting up so many hares that he does not know what course he is on. When we discussed this point in Committee, I remember being rather cross with the Financial Secretary for giving an idea of the Government's intentions before we had deployed our arguments on the appropriate part of the Bill. I hope that the delay we have so far had will have given him some opportunity to think again, because there is considerable feeling over this question.

I agree that we have had inflation for a long time. In Committee, I went back in that respect to Queen Anne, though I do not propose to do so now. What makes us on this side more careful is that we cannot forget that inflation went on at about 6 per cent. per annum when the Labour Party was in power, fell very considerably when the Conservative Party was in power and is now running at the rate of 8 per cent. a year. If, as every sign indicates, inflation continues at the same rate in the second half of this Government's year as in the first, the result will be a great inroad into the value of assets in money terms.

If, in a few years, an asset worth £1,000 is reduced to an effective £400, it means that the Government are not only embarking on a policy of capital gains but are, on top, pursuing a policy of capital levy. There is talk of an expenditure tax. I do not mind what the label is, but with the fall in the value of money the Government are not only taxing personal capital gains but gradually eroding the country's capital. This does not just apply to a few rich people. It applies to lots of people who have their little parcels of savings. It applies to trade unions, who have great sums in equities.

It is important in these discussions to try to get behind the Government's mind. I do not know whether the Financial Secretary represented the Government's mind on the subject when he said in Committee on 25th May: We have heard a lot about the position of the investor who makes a gain in money terms which does not reflect the real gain in terms of purchasing power. To put it the other way round, there is not a real gain in purchasing power because it is posited"— What dreadful terms one picks up from the Treasury!: that the monetary gain is only sufficient to maintain the value in terms of purchasing power of the original investment. This is meant to be a clarification!: But in that situation, which is one of inflation, one must also look at the position of investors who do not make gains, investors who have invested in other forms of investment where they do not make gains."—[OFFICIAL REPORT, 25th May, 1963; Vol. 713, c. 370.] What does that mean—apart from the hon. and learned Gentleman's longwinded terms?

What the Financial Secretary meant was that there was something wrong, something immoral, in a person endeavouring to maintain capital for his business or family. He meant that there was something positively wrong there, and that it had to bear not only a Capital Gains Tax but a capital levy; that some people were so foolish, so unwise, so unbusinesslike that they did not know how to go about things, so they should not be allowed to protect the value of their money in real terms. If that is still the policy of the Government—and I have spoken to expose this because it ought to be exposed—let us have it made clear. Then the country can learn what it is. If it is not the policy of the Government, then without a shadow of doubt the Amendment moved by my hon. Friend ought to be accepted forthwith.

Mr. Harold Lever (Manchester, Cheetham)

We are all grateful to the hon. Member who raised this point and to the Opposition in relation to this matter. I hope that my hon. and learned Friend the Financial Secretary will not mind my saying that the Opposition are doing their best to enlighten the House and to help to improve the Bill. Look at what they did yesterday to effect what, after all, was a minor improvement, unless it was something to atone for the unjust action taken in relation to the Chancellor of the Exchequer earlier.

I acquit the Opposition of any fractious, foolish action in raising this point. In raising the point about Capital Gains Tax they have not debased the currency by talking of double tax. Double tax, so far as it has a useful meaning, is when there is applied to the same corpus of profit the same tax more than once. It is not at all the same to say that indirectly or directly money bears tax more than once. This has been happening for centuries inevitably and inescapably and without injustice. If I buy a motor car I buy it from my taxed income. If that income bears Surtax it is too bad, but I am using my taxed money to buy a taxed article just the same as when I buy petrol in order to run that car.

This talk about double tax is beside the point but under a cocoon of bad argument there is a real grievance. It is that tax is levied not on the real but on the paper profits. Here not only have the Opposition a case but they have an unanswerable case. The only trouble about the unanswerable case is that it is an utterly useless one to the House. It is unanswerable and it is unremediable at the same time. If we were to attempt to remedy the grievance, which is a grievance inevitable in our lives and since the Battle of Waterloo our currency has been depreciating, it is inevitable that there should be an exactly unremediable injustice arising from the currency.

A man may start a business with £10,000 as a leather merchant and at the end of the year he has £10,500. The £500 represents his profit and he is duly taxed. No one says that we should apply a logarithmic table to what he has earned and that there has been an addition of 5 per cent. to his net capital so that therefore, instead of 10s. in the £ of his paper profit being taken, he should be given a reduction on last year's tax. No one suggests that. The trouble about the case of the Opposition is that it is an excellent theoretical case, but it is unanswerable. My hon. Friends are unwise to attempt to answer an unanswerable case. The real difficulty is that we all wish we had a currency which did not alter, but, having one which alters in an unpredictable way at unpredictable rates, we have to do the best we can in our tax arrangements. The tax on the paper profit, that is, in terms of currency, is the only one which can be used by the tax gatherer in deciding our affairs.

Therefore, we pay the capital profit on precisely the same basis as the income profit. Many a man, for example, holds Government stock which produces an income profit, which has always been taxed even under the benign, intelligent, flexible Conservative government. None of these remedies was applied to the unfortunate chap who had Government stock in that period and then found the capital value declining or the buying power rate of the £ declining. That was not a case in which Conservative Chancellors were moved to rebate tax on income. We have to act in a sensible and fair manner. One of the things we have to do in deciding the rate of Income Tax and Capital Gains Tax is to take that factor into account.

It is not a silly argument which the Opposition make but one which cannot be exactly remedied in any sensible way. The sensible thing to do in fixing the rates of these taxes is to remember that we are dealing with a currency which changes in value. That is what the Chancellor has done. Whether he has succeeded to the satisfaction of every hon. Member is a matter for argument, but a different argument from that put forward by this Amendment, which cannot be acceptable to any Chancellor with any opinion about this tax or any other.

Mr. David Price (Eastleigh)

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) is not quite up to his best form tonight because if he had studied the method of raising Capital Gains Tax in other countries he would have found that the proposal made by the Chancellor is unique. Other countries have a descending rate of capital gains tax. That is one way of meeting this problem and the other way is that proposed by the Amendment.

In support of my hon. Friend the Member for Shipley (Mr. Hirst) and my hon. Friend the Member for Worthing (Mr. Higgins) I will give the House one illustration of the extent to which there is an element of capital levy in what is presented to us as a capital gains tax. It has never been presented honestly by the Chancellor as a capital levy. The longer the asset is held and the higher the rate of inflation during the term of the asset, the greater will be the element of capital levy in the taxable charge.

If this tax at the rate proposed by the Government had been in force in 1914 and continued unamended to the present day, we would have the situation that an asset worth £1,000 in 1914 if sold in 1964, 50 years later, would realise £4,930. That would have been the mystery change in the paper value to maintain its real value. There would be a gain of £3,930, which works out at a tax of £1,179, leaving £3,751. If that were scaled down with the depreciating value of money according to the Treasury Index, we find that in 1914 terms the person would be left not with £1,000 but with £761. That is an element of capital levy of somewhere between 23 per cent. and 24 per cent. over 50 years I hope that that simple illustration will show—[An hon. Member: "Nonsense."] There is no nonsense about it. These figures are taken from the Treasury Index. If the hon. Member for Westhoughton (Mr. J. T. Price) suggests that my arithmetic is wrong, let him say so.

Mr. J. T. Price (Westhoughton)

I did not say it was nonsense. Someone else may have used that description, but I did not. I was not saying that it was nonsense but I was disagreeing because the hon. Member has not presented all the factors in the argument. If he is dealing with a physical asset he knows from his business experience, which is considerable, that one has to deal with items of depreciation. One cannot discount the fact that the asset is wearing out.

Mr. David Price

The hon. Member for Westhoughton, with his normal understanding of these matters, is adding to my argument. I have tried to illustrate how much the element of capital levy there is in this so-called Capital Gains Tax. It would be much straighter of the Government to say that there is an element of capital levy in this and let us have that on the record. Let us also remember that this tax is chargeable not only on the living but on the dead. A famous English poet once wrote: Oh grave! where is thy victory? Oh death! where is thy sting? I can only observe that Alexander Pope had certainly never met Dr. Kaldor or his sidekick, the present Chancellor of the Exchequer.

7.30 p.m.

Mr. H. P. G. Channon (Southend, West)

Most hon. Members on this side would agree with the first half of the proposition advanced by the hon. Member for Manchester, Cheetham (Mr. Harold Lever), namely, that the Opposition have an unanswerable case. I am glad to have the hon. Gentleman's support on that. However, I do not think that our case is irremediable, as the hon. Gentleman went on to argue. I was particularly interested in the hon. Gentleman's reference to the Battle of Waterloo, because I was trying to calculate—it is an impossible task to calculate—what would have happened to an asset worth, say, £1,000 at the time of the Battle of Waterloo. Capital Gains Tax at 30 per cent., taking this rate, would probably have been paid on it about three or four times during the course of the 150 years which have since elapsed. I should not think that there would be anything left of the asset.

I agree with the remark made by my hon. Friend the Member for Worcester (Mr. Peter Walker), both in Committee and today, that the subject of this debate is the most important aspect of the Capital Gains Tax. If this country is to operate a Capital Gains Tax, which is something which I do not oppose, it must be a Capital Gains Tax which is equitable and fair. I am sorry that my definition of "equitable and fair" does not meet with the approval of the Government. I maintain that, if it is sought to introduce a tax on capital gains, it is totally unfair to levy it, not on real capital gains, but on notional capital gains. I am certain that as time passes no Government would ever be able to go on supporting this tax as at present conceived. As the years pass, the full force of what is proposed will become clear, and I do not think it will be possible for the tax to last for long.

What will happen after 50 years of the operation of this tax, if it remains totally unamended? My hon. Friend the Member for Eastleigh (Mr. David Price) pointed out how the value of any asset held over the past 50 years would have been reduced by as much as one-quarter had this tax been in force during that period. I see no reason for assuming that the rate of inflation over the next 50 years will be smaller than that which obtained over the last 50 years. At the present rate it will be much greater. What would happen to an investment worth £100 today which does not appreciate at all in real terms but on which Capital Gains Tax is paid in 15 years' time?

My hon. Friend the Member for Shipley (Mr. Hirst) reminded the House of some remarks made in Committee by the Financial Secretary about people whose investments have made no net gain. I ask the House to consider someone whose investments have made no real gain, someone who has been unfortunate, unskilful or unlucky enough to invest in a company whose assets have not in the past 10 years made any real gain and which will not in the next 10 years make any real gain. Such a person will be penalised to an enormous extent when he has to pay Capital Gains Tax. If the tax were to be levied at a rate much lower than 30 per cent., it would be possible to argue that this provision would not matter very much. It is totally inequitable and unfair to fix the rate at 30 per cent. but to make no allowance whatsoever for the fall in the value of money.

That is the only point I wish to make today. I support the idea of a Capital Gains Tax, but I do not support this Capital Gains Tax. Any capital gains tax introduced in this country must be one which taxes real capital gains. If such a tax were introduced, I, for one, would not oppose it. I hope that we shall fight to the bitter end in opposing this unfair tax.

Mr. MacDermot

This subject is one which a number of hon. Members said is a very important one in relation to the Capital Gains Tax. I would not disagree with that proposition. It is one which we discussed at some length in Committee. Hon. Members opposite have tabled a no doubt carefully considered Amendment raising the same question in a different form here again on Report. The arguments which we have heard today in support of the Amendment are, with one exception, the same as those which we heard in Committee. The one exception is the rather remarkable argument adduced by the hon. Member for Worthing (Mr. Higgins) which went slightly wide of the Amendment and suggested, indeed, that the whole of Capital Gains Tax was a form of double taxation. My hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), in his usual cogent way, disposed of that argument. If the argument were logical and right, it would, for example, mean that all forms of direct taxation would be forms of double taxation.

Mr. Higgins

I entirely accept the terminological point made by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) about double taxation, but I do not think that the fact that I used that term loosely to cover the point I was making affects the argument. The hon. Member for Cheetham merely made a terminological amendment to my argument.

Mr. MacDermot

Then the hon. Gentleman's argument is another form of the same argument, which is that one should build into the Capital Gains Tax a hedge against inflation. It is quite right that many people deliberately, when they are considering investment, rather than seeking from their investment to get a substantial addition to their income, seek a form of investment the primary object of which is to provide a hedge against inflation. An Amendment of this character, if carried, would benefit, in particular, people who have invested their money either in land or in equities.

The arguments which have been adduced in support of the Amendment gave us examples of the widow living on the rent from two small houses. We are used to hearing from hon. Members opposite the illustration of the widow in support of their arguments. They naturally do not support their arguments by deploying the case of the property dealer, for example, who would be the chief beneficiary from an exemption of this kind. If the concern of hon. Members opposite is with the widow, I must point out that their Amendment would not help the widow. [Interruption.] The hon. Member for Eastleigh (Mr. David Price) had not arrived in the Chamber when the Amendment was moved by the hon. Member for Worcester (Mr. Peter Walker), who supported his argument by quoting the example of the widow with two small houses.

I am merely pointing out to hon. Members opposite that the lady in question would not benefit from the Amendment, unless she were a Surtax payer or somebody very near to the Surtax class. The Amendment would benefit only those who would pay Capital Gains Tax at the flat rate of 30 per cent. What hon. Members opposite seem to forget, or choose not to remember, is that the flat rate of 30 per cent. is one which by and large will apply only to the Surtax payer. The vast majority of ordinary taxpayers, if called upon to pay Capital Gains Tax, would benefit from the alternative basis of charge.

If the Amendment were carried, the result would be that the person whose marginal rate of tax is the ordinary standard rate of Income Tax would pay Capital Gains Tax at just over 20 per cent. If the marginal rate were at the reduced rate of tax, which a very large proportion of taxpayers are paying, it would be lower still. None of those people is to be protected under the Opposition's Amendment. Their Amendment is one whose sole effect would be to assist the Surtax payer who is paying tax on his capital gains at the flat rate of 30 per cent.

The arguments have been stated very fully before. I never sought to deny in our debates in Committee that there can be an inflationary element in a capital gain. It is one of the deplorable effects of inflation—something which we all seek to cure. I respond to the invitation of my hon. Friend the Member for Cheetham to concede that fact, and I concede it as I did in Committee. I also entirely agree with him that the right way and the only practical way to give recognition to this factor in relation to a Capital Gains Tax is to take it into account and give proper weight to it when determining the rate of tax. This again is a point which I made, and indeed it is the first point which I made when we were discussing this matter in Committee.

In our debate on the rate of tax I was weighing up and showing the various factors which have got to be taken into consideration in determining a proper rate of tax. One of them is that in a time of inflation there will be this somewhat artificial inflationary element in the gain. Hon. Members know that, generally speaking, our starting point is that capital gains, insofar as they represent an increase in wealth, should be subject to taxation as much as income. If matters stood there and no other factors were taken into account, one would aim at fixing the Capital Gains Tax at a comparable rate to Income Tax and Surtax. That has been done in some countries which have imposed a capital gains tax.

However, there are other factors, and this is one of them. Giving effect to it is one of the reasons why my right hon. Friend has fixed the rate much lower than the rate of tax on income—as I say, 30 per cent. for the Surtax payer, 20 per cent. for the standard rate Income Tax payer, and lower rates than that for the person on the reduced rate.

Mr. Heath

Could the Financial Secretary address his mind to the one point to which I have never had an answer from the other side of the House? It is this. If out of one's savings one buys an article which is on a level which is subject to Capital Gains Tax—if, for example, one buys a grand piano and the money value of this increases with the rate of inflation, which is roughly what has happened since 1945 with these articles, and one wants to sell it and buy a similar article, one is subject to the rate. This means that one cannot get a comparable article. It does not matter what adjustments are made about the rates; it does not alter this fact.

Mr. Brian Walden (Birmingham, All Saints)

Bad luck.

Mr. Heath

The hon. Gentleman who is a distinguished economist and a Parliamentary Private Secretary says "Bad luck". I believe it is worse than that. It is a bad tax.

Mr. MacDermot

As I said to the right hon. Gentleman before, and as I said in Committee, the answer is that if one is to seek to build into the tax system a built-in hedge against inflation, the place to start is not with the investor in land and the owner of equity capital. That is, broadly speaking, the people for whose benefit this Amendment is designed. Looking at it from the capital point of view, the people who are really hardest hit in a period of inflation are not the equity owners. Part of the passage in which I dealt with this matter in Committee has been quoted. The fact is that during a period of inflation the inflation itself enhances the gain of the equity owner compared with other owners of property. It is the person who is living on a small fixed income who suffers most from inflation. There is no suggestion of a special form of tax rebate to assist the person who is living on a small fixed income derived from capital. These are the people who suffer most.

It is an impossible task to write into the taxation system hedges against inflation. One country has tried it but abandoned the attempt. If one is to attempt to do it, the place to start is not the place which hon. Members opposite have chosen in their Amendment. The argument which has already been used is perfectly sound, namely, that inflation affects not only the person who makes capital gains but the wage-earner as well. The wage-earner whose wages increase, even if the increase is such that it does not bring him into a higher marginal rate of tax, still on average will be paying a higher rate.

7.45 p.m.

Take the case of a wage-earner who has had an increase in his wages, which exactly keep pace with the increase in the cost of living, and nothing more. Because the proportion of his earnings taxed at the marginal rate increases, the effect is that his average rate of tax over his whole earnings will increase. There is no built-in protection against that. So the argument can continue. This is a fact that affects people throughout our taxation system.

The other argument that was put forward boldly by the hon. Member for Eastleigh was that there was no other country that had introduced a capital gains tax that had not got some built-in provision against inflation. I think he suggested they all had an abatement system, as it is called, providing for a gradual reduction in the rate of tax depending on the length of time for which the asset is held. The hon. Gentleman is mistaken. The country which has a capital gains tax nearest in type to the one that we are introducing is America. America tried the abatement system in the 1920s. It has been abandoned there. They found in American that it did not work, that it did not produce justice, and they got rid of it.

We were given the example of Sweden. Sweden, like many other countries which have introduced the abatement system, did so in relation to an entirely different kind of capital gain tax. They did so starting with a tax comparable to our short-term tax, where the whole of the gains are added to the income and are liable to their equivalent of Income Tax and Surtax, a higher rate of tax. If one does that, one must provide for abatement provisions. But, as I said in Committee, I understand that there has been much criticism of these provisions in Sweden, and the Swedish Government have appointed a Committee to look into the question of a capital gains tax.

Mr. John Hall

The hon. and learned Gentleman mentioned America. Would he tell the House the rate at which the capital gains tax is charged in America and the point in income at which it impinges on the individual?

Mr. MacDermot

I think I am right in saying that the rate is 25 per cent. Our proposed rate is 30 per cent. for the Surtax payer and 20 per cent. for the ordinary taxpayer. I do not know what comfort the hon. Gentleman gets from that. He is presumably talking about the federal taxes. There are also the State taxes. If I may remind hon. Members of of "MacDermot's Law", is they want to compare the rate of one tax in America with ours, they must also compare the rate of other taxes in order to draw a true comparison.

Mr. Julian Ridsdale (Harwich)

Does not the rate begin at £10,000 a year there?

Mr. MacDermot

I do not know if it is correct—

Mr. Harold Lever

It is not relevant.

Mr. MacDermot

—but if it is correct, as my hon. Friend says, it is not relevant to the argument at all. What we are concerned with here is whether there ought to be a built-in provision for hedging against inflation. The Amendment proposes such an abatement for Surtax payers. What difference does it make if the tax with which we are concerned in America begins with people receiving £10,000 a year?

Mr. Peter Walker

If I may take up the point about this being a large Surtax payer, if the only objection that the hon. and learned Gentleman has to the Amendment is that it will apply only to those on the 30 per cent. rate I must tell him that we obviously meant it to apply in proportion to the lower rate as well. I want to make it quite clear to the House that we would welcome any further Amendment needed to ensure that this applies to the lower rate.

Mr. MacDermot

As this is the Report stage of the Bill and one has no opportunity to amend them, I can only address my argument to the Amendments which are moved; but, for the reasons which I have given, we would not in any event find acceptable any provision which attempted to build in a hedge against inflation.

Mr. John Hall

I should like to take up the point raised by my hon. Friend the Member for Worcester (Mr. Peter Walker) in trying to correct the apparently false impression which the Minister has of the effect of our Amendment. It was intended to cover the whole range of people likely to be affected by Capital Gains Tax. It is not our intention to confine it to people in the upper ranges of tax. The Financial Secretary knows that we had an extremely good Amendment, with an extremely good formula in it, debated in Committee. We were driven off that one and, for reasons which the hon. and learned Gentleman understands, we could not table the same Amendment again.

It is clear that over the whole of our debates on the Capital Gains Tax our discussions have been coloured by what I would describe as the "Kaldor culture". Hon. Members will remember two couplets by Pope and by Sir John Squire which deal with Newton and Einstein. These can be adapted to the economic thinking and policies of the present Government, I suggest, in this way: Economics and economic laws lay hid in night: God said, Let Keynes be! and all was light. It did not last: the Devil howling, 'Ho! Let Kaldor be ! restored the status quo. That is what has been happening in these debates.

My hon. Friend the Member for Worcester, supported by my hon. Friend the Member for Worthing (Mr. Higgins), pointed out that the Government had a vested interest in inflation under this form of Capital Gains Tax. Indeed, my hon. Friend the Member for Worthing expounded this with his outstanding analysis of what underlay Government thought, if "thought" is the right word. I am sorry that the hon. Member for Heywood and Royton (Mr. Barnett) is not here. In his intervention he stated that no account was taken of inflation in Income Tax. The Financial Secretary repeated this, but it is not true.

It is true that inflation forces incomes up into higher tax brackets and that if nothing is done to reduce the starting point of tax and to adjust allowances no account is taken of inflation in our Income Tax system. But the fact is that the starting point of taxation is reduced and allowances are adjusted to take account of inflation and therefore there is some provision to take account of inflation in our Income Tax system, although I do not suppose that any of us would necessarily agree that sufficient account is taken of it. It would be wrong, however, to say that no account at all is taken of it.

Mr. Harold Lever

How is the effect of inflation taken into account in taxing the profits of the company to which I referred where the profits are an additional asset during the year? Will the hon. Gentleman tell the House also how inflation is taken into account in the case of those who invest in gilt-edged, even under a Conservative Government, when their income is taxed and inflation all the time is lessening their capital by considerably more than the income which they receive?

Mr. Hall

We are covering a great deal of previous debates in this matter and I am sure that the hon. Member would not wish me to go into a long discussion of inflation and the Income Tax system, nor would I suggest that the system takes full account of inflation in every case. I accept that it does not, but the fact that it does not take sufficient account is no reason for introducing another form of tax which ignores inflation.

The Financial Secretary made a great mistake in trying to answer what the hon. Member for Manchester, Cheetham (Mr. Harold Lever) described as an unanswerable case. It is unanswerable and there is no point in the Financial Secretary trying to answer it. The hon. Gentleman should say that the Government's intention is to introduce a tax not only on capital gains but on capital. Let us be clear that that is their intention. Why not say so? Why try to evolve elaborate arguments to justify the unjustifiable and to answer the unanswerable?

Mr. Harold Lever

The irremediable.

Mr. Hall

We do not take such a pessimistic view on this side of the House. Nothing will be irremediable to my right hon. Friends when they return to office. Why not make clear exactly what the Government are trying to do? They are trying in the long run to destroy capital. It is as simple as that. Let us be frank about this and not try to produce arguments which convince no one.

I am happy to say that, not for the first time, we are at one with members of the Liberal Party and I was interested to read again the contribution to the Committee stage by the hon. Member for Orpington (Mr. Lubbock) when he said: I do not think that the Financial Secretary or the Chief Secretary or any member of the Labour Party appreciates how seriously the question of inflation is taken in relation to the Capital Gains Tax outside the Committee in the country as a whole. They must address their minds to this great objection to the Capital Gains Tax in its present form which many people who are sympathetic to the idea of the Capital Gains Tax hold."—[OFFICIAL REPORT, 25th May, 1965; Vol. 713, c. 360.] Let us be clear that we on this side of the House are not opposing a Capital Gains Tax. What we are opposing, and I think the Liberal Party is opposing, is a capital tax, which is quite different.

In view of the fact that the spirit of the Amendment has the support in principle of both Opposition parties who together represent the majority of the electorate, and in view of the extremely unsatisfactory answer given by the Financial

Secretary who completely failed to answer our unanswerable case, I would advise my hon. and right hon. Friends to divide the House on the Amendment.

Question put, That those words be there inserted in the Bill:—

The House divided: Ayes 273, Noes 276.

Division No. 241.] AYES [7.58 p.m.
Agnew, Commander Sir Peter Dance, James Iremonger, T. L.
Alison, Michael (Barkston Ash) Davies, Dr. Wyndham (Perry Barr) Irvine, Bryant Godman (Rye)
Allan, Robert (Paddington, S.) d'Avigdor-Goldsmid, Sir Henry Jenkin, Patrick (Woodford)
Allason, James (Hemel Hempstead) Dean, Paul Jennings, J. C.
Amery, Rt. Hn. Julian Digby, Simon Wingfield Jones, Arthur (Northants, S.)
Anstruther-Gray, Rt. Hn. Sir W. Dodds-Parker, Douglas Jopling, Michael
Astor, John Doughty, Charles Joseph, Rt. Hn. Sir Keith
Atkins, Humphrey Douglas-Home, Rt. Hn. Sir Alec Kaberry, Sir Donald
Awdry, Daniel Drayson, G. B. Kerby, Capt. Henry
Baker, W. H. K. du Cann, Rt. Hn. Edward Kerr, Sir Hamilton (Cambridge)
Balniel, Lord Eden, Sir John Kilfedder, James A.
Barber, Rt. Hn. Anthony Elliot, Capt. Walter (Carshalton) Kimball, Marcus
Barlow, Sir John Elliott, R. W. (N'c'tle-upon-Tyne, N.) King, Evelyn (Dorset, S.)
Batsford, Brian Emery, Peter Kirk, Peter
Bell, Ronald Eyre, Reginald Kitson, Timothy
Bennett, Sir Frederic (Torquay) Farr, John Lagden, Godfrey
Berkeley, Humphry Fell, Anthony Lambton, Viscount
Berry, Hn. Anthony Fisher, Nigel Lancaster, Col. C. G.
Biffen, John Fletcher-Cooke, Charles (Darwen) Langford-Holt, Sir John
Biggs-Davison, John Fletcher-Cooke, Sir John (S'pton) Legge-Bourke, Sir Harry
Birch, Rt. Hn. Nigel Foster, Sir John Lewis, Kenneth (Rutland)
Black, Sir Cyril Fraser, Rt. Hn. Hugh (St'fford & Stone) Litchfield, Capt. John
Blaker, Peter Fraser, Ian (Plymouth, Sutton) Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)
Bossom, Hn. Clive Galbraith, Hn. T. G. D. Lloyd, Ian (P'tsm'th, Langstone)
Bowen, Roderic (Cardigan) Gammans, Lady Lloyd, Rt. Hn. Selwyn (Wirral)
Box, Donald Gibson-Watt, David Longden, Gilbert
Boyd-Carpenter, Rt. Hn. J. Giles, Rear-Admiral Morgan Loveys, Walter H.
Boyle, Rt. Hn. Sir Edward Gilmour, Ian (Norfolk, Central) Lubbock, Eric
Braine, Bernard Gilmour, sir John (East Fife) McAdden, Sir Stephen
Brewis, John Glover, Sir Douglas Mackenzie, Alasdair (Ross & Crom'ty)
Brinton, Sir Tatton Godber, Rt. Hn. J. B. Mackie, George Y. (C'ness & S'land)
Brooke, Rt. Hn. Henry Goodhart, Philip McLaren, Martin
Brown, Sir Edward (Bath) Gower, Raymond Maclean, Sir Fitzroy
Bruce-Gardyne, J. Grant, Anthony Macleod, Rt. Hn. Iain
Bryan, Paul Grant-Ferris, R. McMaster, Stanley
Buchanan-Smith, Alick Gresham Cooke, R. McNair, Wilson, Patrick
Buck, Antony Grieve, Percy Maginnis, John E.
Bullus, Sir Eric Griffiths, Eldon (Bury St. Edmunds) Maitland, Sir John
Burden, F. A. Griffiths, Peter (Smethwick) Marten, Neil
Butcher, Sir Herbert Grimond, Rt. Hn. J. Mathew, Robert
Buxton, Ronald Gurden, Harold Maude, Angus
Campbell, Gordon Hall, John (Wycombe) Maudling, Rt. Hn. Reginald
Carlisle, Mark Hall-Davis, A. G. F. Mawby, Ray
Carr, Rt. Hn. Robert Hamilton, Marquess of (Fermanagh) Maxwell-Hyslop, R. J.
Cary, Sir Robert Hamilton, M. (Salisbury) Maydon, Lt.-Cmdr. S. L. C.
Channon, H. P. G. Harris, Frederic (Croydon, N.W.) Meyer, Sir Anthony
Chataway, Christopher Harris, Reader (Heston) Mills, Peter (Torrington)
Chichester-Clark, R. Harrison, Brian (Maldon) Mills, Stratton (Belfast, N.)
Clark, Henry (Antrim, N.) Harvey, Sir Arthur Vere (Macclesf'd) Miscampbell, Norman
Clark, William (Nottingham, S.) Harvey, John (Walthamstow, E.) Mitchell, David
Harvie Anderson, Miss Monro, Hector
Clarke, Brig. Terence (Portsmth, W.) Hastings, Stephen More, Jasper
Cole, Norman Hawkins, Paul Morrison, Charles (Devizes)
Cooke, Robert Hay, John Mott-Radclyffe, Sir Charles
Cooper, A. E. Heald, Rt. Hn. Sir Lionel Munro-Lucas-Tooth, Sir Hugh
Cooper-Key, Sir Neill Heath, Rt. Hn. Edward Murton, Oscar
Cordle, John Hendry, Forbes Neave, Airey
Corfield, F. V. Higgins, Terence L. Nicholson, Sir Godfrey
Costain, A. P. Hill, J. E. B. (S. Norfolk) Noble, Rt. Hn. Michael
Courtney, Cdr. Anthony Hirst, Geoffrey Nugent, Rt. Hn. Sir Richard
Craddock, Sir Beresford (Spelthorne) Hobson, Rt. Hn. Sir John Onslow, Cranley
Crawley, Aidan Hooson, H. E. Orr, Capt. L. P. S.
Crosthwaite-Eyre, Col. Sir Oliver Hopkins, Alan Osborn, John (Hallam)
Crowder, F. P. Hordern, Peter Osborne, Sir Cyril (Louth)
Cunningham, Sir Knox Hornby, Richard Page, John (Harrow, W.)
Curran, Charles Hornsby-Smith, Rt. Hn. Dame P. Page, R. Graham (Crosby)
Currie, G. B. H. Hunt, John (Bromley) Pearson, Sir Frank (Clitheroe)
Dalkeith, Earl of Hutchison, Michael Clark Peel, John
Percival, Ian Smith, Dudley (Br'ntf'd & Chiswick) Walder, David (High Peak)
Peyton, John Smyth, Rt. Hn. Brig. Sir John Walker, Peter (Worcester)
Pickthorn, Rt. Hn. Sir Kenneth Soames, Rt. Hn. Christopher Walker-Smith, Rt. Hn. Sir Derek
Pike, Miss Mervyn Spearman, Sir Alexander Wall, Patrick
Pitt, Dame Edith Speir, Sir Rupert Walters, Dennis
Pounder, Rafton Stainton, Keith Ward, Dame Irene
Powell, Rt. Hn. J. Enoch Stanley, Hn. Richard Weatherill, Bernard
Price, David (Eastleigh) Steel, David (Roxburgh) Webster, David
Prior, J. M. L. Studholme, Sir Henry Wells, John (Maidstone)
Pym, Francis Talbot, John E. Whitelaw, William
Quennell, Miss J. M. Taylor, Sir Charles (Eastbourne) Williams, Sir Rolf Dudley (Exeter)
Ramsden, Rt. Hn. James Taylor, Edward M. (G'gow, Cathcart) Wills, Sir Gerald (Bridgwater)
Redmayne, Rt. Hn. Sir Martin Teeling, Sir William Wilson, Geoffrey (Truro)
Rees-Davies, W. R. Temple, John M. Wise, A. R.
Renton, Rt. Hn. Sir David Thatcher, Mrs. Margaret Wolrige-Gordon, Patrick
Ridley, Hn. Nicholas Thomas, Sir Leslie (Canterbury) Wood, Rt. Hn. Richard
Ridsdale, Julian Thompson, Sir Richard (Croydon, S.) Woodhouse, Hn. Christopher
Roberts, Sir Peter (Heeley) Thorpe, Jeremy Wylie, N. R.
Rodgers, Sir John (Sevenoaks) Tiley, Arthur (Bradford, W.) Yates, William (The Wrekin)
Roots, William Tilney, John (Wavertree) Younger, Hn. George
St. John-Stevas, Norman Turton, Rt. Hn. R. H.
Sandys, Rt. Hn. D. Tweedsmuir, Lady TELLERS FOR THE AYES:
Scott-Hopkins, James van Straubenzee, W. R. Mr. Ian MacArthur and
Sharples, Richard Vaughan-Morgan, Rt. Hn. Sir John Mr. Geoffrey Johnson Smith.
Sinclair, Sir George Vickers, Dame Joan
Abse, Leo Edwards, Robert (Bilston) Hunter, A. E. (Feltham)
Albu, Austen English, Michael Hynd, H. (Accrington)
Allaun, Frank (Salford, E.) Ennals, David Irving, Sydney (Dartford)
Alldritt, Walter Ensor, David Jackson, Colin
Atkinson, Norman Evans, Albert (Islington, S.W.) Janner, Sir Barnett
Bacon, Miss Alice Evans, Ioan (Birmingham, Yardley) Jay, Rt. Hn. Douglas
Bagier, Gordon A. T. Fernyhough, E. Jeger, Mrs. Lena (H'b'n & St. P'cras, S.)
Barnett, Joel Finch, Harold (Bedwellty) Jenkins, Hugh (Putney)
Baxter, William Fitch Alan (Wigan) Johnson, Carol (Lewisham, S.)
Bence, Cyril Fletcher, Sir Eric (Islington, E.) Johnson, James (K'ston-on-Tull, W.)
Bennett, J. (Glasgow, Bridgeton) Fletcher, Ted (Darlington) Jones, Dan (Burnley)
Binns, John Fletcher, Raymond (Ilkeston) Jones, Rt. Hn. Sir Elwyn (W. Ham, S.)
Bishop, E. S. Floud, Bernard Jones, J. Idwal (Wrexham)
Blackburn, F. Foley, Maurice Jones, T. W. (Merioneth)
Blenkinsop, Arthur Foot, Sir Dingle (Ipswich) Kelley, Richard
Boardman, H. Foot, Michael (Ebbw Vale) Kenyon, Clifford
Boston, T. G. Ford, Ben Kerr, Mrs. Anne (R'ter & Chatham)
Bottomley, Rt. Hn. Arthur Freeson, Reginald Kerr, Dr. David (W'worth, Central)
Bowden, Rt. Hn. H. W. (Leics S.W.) Galpern, Sir Myer Leadbitter, Ted
Boyden, James Garrett, W. E. Ledger, Ron
Braddock, Mrs. E. M. George, Lady Megan Lloyd Lee, Rt. Hn. Frederick (Newton)
Bradley, Tom Ginsburg, David Lee, Miss Jennie (Cannock)
Bray, Dr. Jeremy Gourlay, Harry Lever, Harold (Cheetham)
Broughton, Dr. A. D. D. Greenwood, Rt. Hn. Anthony Lever, L. M. (Ardwick)
Brown, Rt. Hn. George (Belper) Gregory, Arnold Lewis, Arthur (West Ham, N.)
Brown, Hugh D. (Glasgow, Provan) Griffiths, David (Rother Valley) Lewis, Ron (Carlisle)
Buchan, Norman (Renfrewshire, W.) Griffiths, Rt. Hn. James (Llanelly) Lipton, Marcus
Buchanan, Richard Griffiths, Will (M'chester, Exchange) Mabon, Dr. J. Dickson
Butler, Herbert (Hackney, C.) Gunter, Rt. Hn. R. J. McBride, Neil
Butler, Mrs. Joyce (Wood Green) Hale, Leslie McCann, J.
Callaghan, Rt. Hn. James Hamilton, James (Bothwell) MacColl, James
Carmichael, Neil Hamilton, William (West Fife) MacDermot, Niall
Chapman, Donald Hamling, William (Woolwich, W.) McGuire, Michael
Coleman, Donald Hannan, William Mclnnes, James
Conlan, Bernard Harper, Joseph McKay, Mrs. Margaret
Corbet, Mrs. Freda Harrison, Walker (Wakefield) Mackenzie, Gregor (Rutherglen)
Craddock, George (Bradford, S.) Hart, Mrs. Judith Mackie, John (Enfield, E.)
Crawshaw, Richard Hattersley, Roy McLeavy, Frank
Crosland, Rt. Hn. Anthony Hazell, Bert Mahon, Peter (Preston, S.)
Crossman, Rt. Hn. R. H. S. Healey, Rt. Hn. Denis Mahon, Simon (Bootle)
Cullen, Mrs. Alice Heffer, Eric S. Mallalieu, J. P. W. (Huddersfield, E.)
Dalyell, Tam Henderson, Rt. Hn. Arthur Manuel, Archie
Darling, George Herbison, Rt. Hn. Margaret Mapp, Charles
Davies, Ifor (Gower) Hobden, Dennis (Brighton, K'town) Marsh, Richard
Davies, S. O. (Merthyr) Holman, Percy Mason, Roy
Delargy, Hugh Horner, John Maxwell, Robert
Dell, Edmund Houghton, Rt. Hn. Douglas Mayhew, Christopher
Dempsey, James Howarth, Harry (Wellingborough) Mellish, Robert
Diamond, Rt. Hn. John Howarth, Robert L. (Bolton, E.) Mendelson, J. J.
Dodds, Norman Howell, Denis (Small Heath) Mikardo, Ian
Doig, Peter Howie, W. Millan, Bruce
Driberg, Tom Hoy, James Miller, Dr. M. S.
Duffy, Dr. A. E. P. Hughes, Cledwyn (Anglesey) Milne, Edward (Blyth)
Dunn, James A. Hughes, Emrys (S. Ayrshire) Molloy, William
Dunnett, Jack Hughes, Hector (Aberdeen, N.) Monslow, Walter
Edelman, Maurice Hunter, Adam (Dunfermline) Morris, Alfred (Wythenshawe)
Morris, Charles (Openshaw) Rees, Merlyn Taylor, Bernard (Mansfield)
Morris, John (Aberavon) Rhodes, Geoffrey Thomas, George (Cardiff, W.)
Mulley, Rt. Hn. Frederick (Sheffield Pk) Richard, Ivor Thomas, Iorwerth (Rhondda, W.)
Murray, Albert Roberts, Albert (Normanton) Thomson, George (Dundee, E.)
Neal, Harold Roberts, Goronwy (Caernarvon) Thornton, Ernest
Newens, Stan Robertson, John (Paisley) Tinn, James
Noel-Baker, Francis (Swindon) Robinson, Rt. Hn. K. (St. Pancras, N.) Tomney, Frank
Noel-Baker, Rt. Hn. Philip (Derby, S.) Rodgers, William (Stockton) Tuck, Raphael
Norwood, Christopher Rogers, George (Kensington, N.) Urwin, T. W.
Oakes, Gordon Rose, Paul B. Varley, Eric G.
Ogden, Eric Ross, Rt. Hn. William Wainwright, Edwin
O'Malley, Brian Rowland, Christopher Walden, Brian (All Saints)
Oram, Albert E. (E. Ham, S.) Sheldon, Robert Walker, Harold (Doncaster)
Orbach, Maurice Shinwell, Rt. Hn. E. Wallace, George
Orme, Stanley Shore, Peter (Stepney) Watkins, Tudor
Oswald, Thomas Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.) Weitzman, David
Owen, Will Short, Mrs. Renée (W'hampton, N. E.) Wells, William (Walsall, N.)
Page, Derek (King's Lynn) Silkin, John (Deptford) White, Mrs. Eirene
Paget, R. T. Silkin, S.C. (Camberwell, Dulwich) Whitlock, William
Palmer, Arthur Silverman, Julius (Aston) Wigg, Rt. Hn. George
Pannell, Rt. Hn. Charles Silverman, Sydney (Nelson) Wilkins, W. A.
Pargiter, G. A. Skeffington, Arthur Willey, Rt. Hn. Frederick
Park, Trevor (Derbyshire, S.E.) Slater, Mrs. Harriet (Stoke, N.) Williams, Alan (Swansea, W.)
Parkin, B. T. Small, William Williams, Clifford (Abertillery)
Pavitt, Laurence Snow, Julian Williams, Mrs. Shirley (Hitchin)
Pearson, Arthur (Pontypridd) Soskice, Rt. Hn. Sir Frank Williams, W. T. (Warrington)
Peart, Rt. Hn. Fred Spriggs, Leslie Willis, George (Edinburgh, E.)
Pentland, Norman Steele, Thomas (Dunbartonshire, W.) Wilson, Rt. Hn. Harold (Huyton)
Perry, Ernest G. Stewart, Rt. Hn. Michael Wilson, William (Coventry, S.)
Popplewell, Ernest Stonehouse, John Winterbottom, R. E.
Prentice, R. E. Stones, William Woof, Robert
Price, J. T. (Westhoughton) Strauss, Rt. Hn. G. R. (Vauxhall) Wyatt, Woodrow
Probert, Arthur Summerskill, Hn. Dr. Shirley Yates, Victor (Ladywood)
Pursey, Cmdr. Harry Swain, Thomas Zilliacus, K.
Randall, Harry Swingler, Stephen
Rankin, John Symonds, J. B. TELLERS FOR THE NOES:
Redhead, Edward Taverne, Dick Mr. Charles Grey and
Mr. George Lawson.
Mr. Marcus Kimball (Gainsborough)

I beg to move Amendment No. 321, in page 15, line 13, after "deducting", to insert: the cost of any valuation necessary to determine the amount of chargeable gain so accruing". The object of the Amendment is to deal with the problem of valuation expenses, which seems much more serious than the Chancellor or the Financial Secretary has ever given credit for during the course of the Bill. The problem is the same old one that we mentioned in the Committee, that of a beneficiary who receives a small amount of capital from a trust and by receiving it creates a liability to capital gains. It is grossly unfair that such a beneficiary should have to pay large bills, amounting even to hundreds or perhaps thousands of pounds, for the valuation of real property held in a trust.

Under the Bill the trustees of a settlement are not liable for the Capital Gains Tax. The liability for it falls upon the beneficiary. The trustees could very well argue that they had no power to have these necessary valuations made at the expense of the trust fund. If the tax were payable by the trustees and not the beneficiary, I am advised that the provisions of the 1925 Trust Act would give them adequate power and, what is more important, adequate protection to enable them to pay and employ agents to make the valuation.

I have made the case very briefly. It is a perfectly simple and straightforward one. The proposed words represent an essential alteration to the Bill if trustees and others are to be protected. I sincerely trust that the Financial Secretary will accept the Amendment.

Mr. MacDermot

The hon. Member for Gainsborough (Mr. Kimball) referred to the application of the Amendment particularly in relation to trusts. The Amendment itself is drawn in wider terms and not limited to this problem, and I do not follow completely the particular problem which the hon. Member has in mind.

I would say generally that, as I understand it, the Amendment is probably unnecessary unless there is a particular point which has been overlooked. It proposes to insert words to make it clear that before chargeable gains become taxable there has to be deducted from them the cost of any valuation necessary to determine the amount of such gains. As a matter of form, expenses such as those of valuation are not a deduction from chargeable gains but are a deduction in computing the chargeable gains. For this reason, the matter of deductible expenses is dealt with in Schedule 6, in paragraphs 4 and 5, which deal with the computation of gains. Paragraph 4(2,b) provides that the incidental cost of the acquisition or disposal may be deducted in arriving at the amount of the chargeable gains and to be included are: costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation under this Schedule". Therefore, the purpose of the Amendment, as we understand it, appears to be met to the extent anyway that it relates to the valuations which are necessary because they will be required by the Bill.

I give an assurance to the House that in practice it is the intention of the Revenue to interpret this requirement as meaning that the cost of any valuation which was actually used in the computation of the chargeable gains would be allowable as a deduction. I hope that meets the hon. Member's point.

Mr. Kimball

In view of the assurance given by the Financial Secretary, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.