HC Deb 08 July 1965 vol 715 cc1833-52

4.18 p.m.

Mr. Peter Walker (Worcester)

I beg to move Amendment No. 75, Clause 34, in page 40, line 19, at the beginning to insert: (1) If in accordance with section 63 of this Act the chargeable gains of a unit trust for an accounting period are apportioned to shares in the unit trust the amount apportioned to any such shares other than shares of which the holder is an individual person whose total income in the year of assessment in which the apportionment is made is such that he is not liable to surtax for that year shall be treated for the purposes of this Part of this Act as if it were—

  1. (a) a capital distribution received by him at the time of the apportionment and paragraph 3 of Schedule 7 to this Act shall apply thereto accordingly; and
  2. (b) expenditure allowable under paragraph 4 of Schedule 6 to this Act and incurred by the person holding the shares at the time when the amount was apportioned to those shares.

Mr. Speaker

I suggest to the House that we discuss, with this Amendment, Amendment No. 76, Clause 34, in page 40, line 20, leave out "a unit trust or" and insert "an".

Amendment No. 225, Clause 34, in page 40, line 26, at end insert: () A person holding shares in respect of which an apportionment is made under (1) above shall be deemed to have made a chargeable gain in the accounting period in which such apportionment is made equal to the aggregate amount of so much of the net gains as has been apportioned on his shares and of the tax deducted in arriving at so much of those net gains as has been so apportioned: and shall be deemed to have paid the tax deducted in arriving at so much of the net gains as has been so apportioned and shall accordingly be entitled to repayment of tax overpaid. A claim for relief under this subsection must be made to the Board not later than six years after the end of the accounting period in which the apportionment was made and the provisions of subsections (3) to (5) of section 200 of the Income Tax Act, 1952 shall apply in relation to claims under this subsection as they apply in relation to the claims mentioned in that section. and Amendment No. 226, Clause 34, in page 40, line 27, leave out "and the said section 63".

By reason of certain exciting events, Amendment No. 224, Clause 34, in page 40, line 19, to insert a new subsection (1) has become out of order.

Mr. Walker

We are discussing here a matter of principle and of practice which has already been ventilated in Committee. The basic point which we are pressing yet again is what we consider to be the injustice of a system whereby those investing through the media of investment and unit trusts will suffer a rate of Capital Gains Tax considerably higher than they would have suffered had they invested as individuals.

When new Clause No. 43 was accepted by the House, this principle, which had been argued on the other side was, completely and utterly violated. We observe various comments today attributed to Government sources, that they consider that the principle involved in new Clause No. 43 was of no great importance and implied that they were, therefore, willing for it to stand part of the Bill.

If they stick to the view that the principle is of little importance, they should be able and willing to accept Amendment No. 75. If they consider that the principle involved in new Clause No.43 has no great financial importance in terms of the position of the Revenue, this is true also of Amendments Nos. 75 and 225. I guess that the reason that they are willing that new Clause No. 43 should stand part of the Bill, and that probably they are not willing to accept these Amendments, is that they would very much object to the considerable publicity which would be focused on the recommittal of the Bill, whereby the country would fully realise the injustice of the system of taxation which is being imposed by the Government's refusal to give any concession towards investment and unit trusts.

These Amendments are of greater importance since the passing of certain Amendments yesterday. Amendments proposed by the Chancellor, resulting from the original approach which we made in Committee, have led to the position that the person paying the standard rate of Income Tax will be subject to Capital Gains Tax of a little over 20 per cent. This Amendment, creating the situation in which the individual paying the standard rate is subject to tax of only 20 per cent., makes an even wider gap between the tax which will be imposed on the unit and investment trusts and the taxation of the individual. On this year's basis, within the trusts, taxation would be 35 per cent., whereas the normal rate for the individual at the standard rate of Income Tax would be 20 per cent. Vast numbers of people who invest in the unit trust movement will be paying individual rates far lower than 20 per cent.

I will comment, first, on Amendment No. 75. Its object is to see that the details of the capital gains which take place within the trust are given to the unit trust holders and that those unit trust holders paying Surtax will then have that amount of gain treated as if it were a capital distribution. They would, then, immediately, pay their appropriate rate of tax. Therefore, the Amendment completely meets the point made by the Treasury, that, otherwise, Surtax payers and people on high rates of tax would be able to retain investments in the unit trusts and not pay as realisations were made. Thus, the objection to the original proposals that unit and investment trusts should be deleted altogether is fully met by Amendment No. 75.

Amendment No. 225 would establish a position whereby a person will pay the correct rate of tax by being able to obtain a rebate of taxation in respect of the extra tax created by the measures the Government have introduced. Both these Amendments are reasonable. I warn the Government that their general hostility to savings throughout our debates on the Bill is doing considerable harm. National Savings figures, for the first three months of this year, are alarming. The fact that new savings are 75 per cent. lower than in the corresponding three months last year must be a blow to the Government. The fact that investments in unit trusts in recent months have been at far lower levels than in previous months must also alarm the Government. Yet they introduce a Finance Bill in which those individuals using this very common means of investing through investment and unit trusts will suffer a penal rate.

Throughout the Committee and Report stages of the Bill both opposition parties have endeavoured to make the Government see the importance of recognising this principle. Several hon. Members on the other side of the House have also constantly pointed out to the Government the injustice of these provisions. Finally, a few nights ago, the principle which the Government have stuck to was completely and utterly defeated by a vote of the House. There has been constant hostility from every commentator throughout the country to the manner in which the Government had dealt with this problem. I defy the Chief Secretary or the Chancellor to name or quote one responsible and respected financial journalist who has given any support to the manner in which the Government have dealt with this problem. Every such journalist has been opposed to the manner in which the Government intend to tax investments in unit and investment trusts at a far higher rate. Exactly the same argument applies to investments in life funds.

I appeal to the Chancellor, after the defeat of two night ago, to accept the principle that the individual using the media of unit and investment trusts, or life assurance, as the method of saving should be treated in exactly the same way as if, as an individual, he decided to invest direct in to the market. This is surely not an unreasonable principle for the Chancellor to accept. It is completely unrealistic of him to suggest that a unit trust is exactly the same as any other form of company. He knows that it is a company designed to provide a means and a vehicle for the individual to invest. Because the individual has chosen this media, the Chancellor has decided to impose on him or her a higher rate of tax.

It would be wrong to debate this Clause at length. The principle is clear, and has been established constantly by this side of the House. It was affirmed in new Clause No. 43 which we passed two nights ago. I hope that, on reflection, the Government will, in some wisdom, at last repent their position and do something which will give encouragement to savings instead of discouragement.

4.30 p.m.

Mr. Geoffrey Lloyd (Sutton Coldfield)

We on this side of the House have constantly said that the only solution to this problem which would be both satisfactory and simple is exemption of the capital gains in unit and investment trusts and fixing the tax payment on the individual. The effect would be that the tax would then be payable at one point of time instead of two, and at the first moment that the gain could give rise to spendable income, which is a point on which the Chief Secretary has often dwelt. The Government have not accepted this position and have, instead, put forward a scheme which is not only complicated but also unfair. In passing, I would say that it will also be expensive for the investment trusts, in particular, to provide the staff to carry out meticulously the complicated rigmarole being laid down by the Government.

If the Chief Secretary is prepared to accept complication, would it not be better to "go the whole hog" and adopt a comprehensive scheme which would be both logical and fair and which has stood up for many years to the test of practical administration? The right hon. Gentleman has told us on many occasions that the Government are modelling their Capital Gains Tax—perhaps "modelling" is going too far—on the United States scheme.

Amendment No. 225, in effect, is the American scheme used with regard to investment trusts under the Capital Gains Tax system of the United States, which has stood the test of administration and criticism for many years. Under this scheme, embodied in Amendment No. 225, the shareholder in an investment or a unit trust holder would receive a certificate from the Inland Revenue showing the relevant capital gain arising in relation to his shares and the actual tax paid thereon. Both these figures would be incorporated in the taxpayer's return for the year. He would, therefore, in effect, pay Capital Gains Tax at his own individual rate which, following the passage of new Clause No. 43 the other night, would be not exceeding 30 per cent.

The Surtax payer would not benefit. He would pay the same rate as that paid by investment or unit trusts under the new Clause. But those with smaller incomes would effectively pay much less because there would be due to them from the Inland Revenue a rebate or repayment in excess of the actual tax paid by the investment trust. Another important point is that charities and superannuation funds would get the proper benefit of their exemption from tax and would be able to claim back the whole of the tax.

Our proposals would establish a far fairer and more logical scheme for this tax than the Government scheme, and there is an aspect which surely must appeal especially to the right hon. Gentleman. He has made considerable play with the fact that shareholders in investment trusts are not only individuals, but also companies. Under our Amendments, companies would, of course, be liable to a higher rate of tax than investment trusts—at present, 35 per cent. compared with 30 per cent. The companies would have to pay the excess between the rate paid by the investment trusts and that for which they would be due in their corporate capacity as Corporation Tax. They would, incidentally, have to pay that in the relevant year.

The right hon. Gentleman has made considerable play with the possibility of deferment in these matters and, in this respect at any rate, the Revenue would be getting its tax at an earlier point than it would under the scheme proposed by the Government. I want to quote what the right hon. Gentleman said when resisting new Clause No. 43 the other night. Again and again he emphasised that he would not be concerned with the amount of money involved, because it was not very important, but with the principle, which was tremendously important.

The right hon. Gentleman said: Therefore, we could not accept the Clause because the rate of tax which should be borne by a corporation is that which is appropriate to a corporation … It would be a major breach of the principle of the tax to attempt to look through the corporation to the individual. The following passage shows what he especially had in mind: It would be inappropriate to regard all investment trust shareholders as individuals when, in fact, a large number of them are companies."—[OFFICIAL REPORT, 6th July, 1965; Vol. 715, c. 1543.] Now that the new Clause has been passed, the only way in which the right hon. Gentleman can realise this principle in practice is by accepting Amendment No. 225.

The Chief Secretary to the Treasury (Mr. John Diamond)

It is clear that it is the wish of the House that there should not be a long debate on these Amendments, which have been debated in similar form in Committee. It will suffice, therefore, if I repeat what I have said many times.

The Government are anxious to encourage savings, large and small, in all forms. It must not be assumed from that, as the hon. Member for Worcester (Mr. Peter Walker) occasionally assumes, that this means that the Government are exclusively committed to encouraging savings in the form of unit or investment trusts, or, as he suggested, in life insurance funds.

The Government like to see savings of all kinds and through all the appropriate channels and machinery for saving. It would not be inappropriate for me to say that it certainly cannot be said on behalf of unit and investment trusts that their case has not been fully put, fully pressed and fully presented to this House on every conceivable occasion. And, of course, individual negotiations have taken place. We are, therefore, very well aware of their problems.

I can only repeat that, as far as the machinery of the collection of the tax is concerned, we stand exactly where we stood—namely, that a Corporation Tax does differentiate between the individual and the company. That is an essential basis. We are prepared, as far as unit and investment trusts are concerned, to avoid what might otherwise be called "double taxation" in the sense that we would regard the unit and the investment trusts as a method whereby savings take place and, incidentally, gains arise.

But it would not be right so to construct the tax system that individuals who, instead of investing by themselves, invested through these trusts, obtained a considerable benefit over the individual investing by himself. Therefore, I am bound to say that, in so far as some of these Amendments would create administrative nightmares for the Revenue, they could not be accepted. I appreciate the endeavour made to meet the Surtax point, but, administratively, it is quite unworkable.

First, then, administration of this proposal would result in nightmares for the Revenue and our job in this House is to see that taxation is so devised as to be capable of being collected without very much difficulty. Secondly, inasmuch as the other Amendments would breach the principle to which I have referred, I must recommend the House not to accept any of these Amendments.

Mr. Geoffrey Lloyd

Will not the right hon. Gentleman deal with Amendment No. 225? He talked about administrative nightmares, but this method has been in use for many years in the United States. Surely he cannot say that the Inland Revenue is incapable of coping with a problem with which the Internal Revenue Service of the United States is dealing every day?

Mr. Diamond

A different situation exists with regard to trusts in the United States.

Mr. Edward Heath (Bexley)

I want to say a few words in concluding the debate on these matters, which we have discussed frequently before. Once again, we heard the Chief Secretary express his desire to encourage savings, in all forms. We agree that he is interested not exclusively in unit and investment trusts and life assurance, but in all forms of savings. But the Government do something only when they are compelled to do so by being defeated in this House. They drove us to that dire extreme the other night.

Mr. Harold Lever (Manchester, Cheetham)

Is the right hon. Gentleman correct in saying that? Have not the Government made unnumerable constructive concessions on these and related matters, without being defeated in the House?

Mr. Heath

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) cannot point to one thing which the Government have done which has not been done under pressure. I know that the Socialist Commentary has attributed Government Amendments to the pressure of the hon. Member for Cheetham. It said that by adopting the process of persuading them with his voice and never supporting them with his vote he has transformed the Finance Bill. Some of us may draw very different conclusions from his activities during recent weeks.

The other point that emerged from the Chief Secretary's speech was that, once again, a distinction was to be drawn between the company and the individual. What the defeats the other night did quite precisely and clearly was to break down that view. The Amendments on which they were defeated provided that, in the matter of unit trusts and investment trusts, companies would be treated in exactly the same way as individuals were treated. The Government had therefore accepted that there is no longer this distinction between the company and the individual. Defeats in the Division Lobby have forced them to accept what, intellectually, they have always quite unjustifiably tried to deny hitherto.

I am glad to have the support of the right hon. Gentleman's Parliamentary Private Secretary, who is not allowed to speak by reason of his occupation, but has been nodding vigorously. We all recognise that he is one of the best economists on the Government Benches. It is clear that the Chief Secretary's argument is not valid. We regret the fact that he has not accepted the Amendments, and has put forward such untenable reasons for rejecting them, but at this stage the House must accept his view, and I do not advise my hon. Friends to divide the House.

Amendment negatived.

4.45 p.m.

Mr. Diamond

I beg to move Amendment No. 150, Clause 34, in page 40, line 29, after "company", to insert: which is not a close company as defined in Schedule 17 to this Act and which is". Perhaps it would be convenient to discuss, at the same time, the Government Amendment No. 151.

Mr. Deputy-Speaker (Dr. Horace King)

If there is no objection. I have a note that with Amendment No. 151 we are taking Amendment No. 130, Clause 34, in page 40, line 32, leave out "(a)", and Amendment No. 131, Clause 34, in line 33, leave out from "securities" to end of line 43 and insert "or other investments", so that all these will now be taken together.

Mr. Diamond

I am sure that that would be for the convenience of the House, Mr. Deputy-Speaker.

This Amendment, together with Amendment No. 151, implements the undertaking which the Financial Secretary gave in Committee. He spoke at some length, and is reported in the OFFICIAL REPORT of 31st May, when he indicated the Government's acceptance of the general ideas then being put forward. The first Amendment makes it clear that a company cannot be an investment company approved by the Board if it is a close company as defined in Part IV. The objective is to distinguish the genuinely public investment trust from an investment trust company under private control. The second Amendment contains a substantive alteration to the criteria which have to be satisfied before an investment trust can be approved by the Board for the purpose of Clauses 34 and 63.

A number of criteria are altered in this way. First, the figure of 10 per cent. is increased to 15 per cent. That is the percentage of an investment trust company's investments which may take the form of a holding in any one other company. In this respect there is a saving in favour of an investment trust which had a holding of up to 25 per cent. in one other company at Budget day.

Secondly, there is the provision that the 15 per cent. test is not to apply if the second company is itself an approved investment trust; thirdly, there is the requirement that shares or securities are quoted on a recognised Stock Exchange in the United Kingdom, thus ensuring that the investment trust is one in which the public has a substantial interest. Then there is the requirement that the investment company has no power to distribute capital gains as dividend.

A clause to this effect appears in a standard form in the memorandum and articles of association of investment trust companies. I believe that it is known as the "self-denying clause". There is a continuation of the test in Clause 34(2,d) in respect of a company which regularly distributes its income derived from the shares or securities, but the test is relaxed from 90 per cent. to 85 per cent.

There is a further provision with respect to a Budget day holding, to which I have already referred, so as to avoid the disqualification of existing investment trust companies which by the accident of their origin had at Budget day a holding in another company which forms more than 15 per cent., by value of its investments, and thus is larger than that allowed by the new paragraph (b).

The remaining alterations are minor in character, and are clearly expressed in the Amendments. I should be only too glad to go into them in further detail, if the House thought it necessary, in order to meet the points which have been put forward and have been considered. The Amendments meet the needs of the situation.

Mr. Harold Lever

I wanted my right hon. Friend to tell the House whether he could now answer the question that was put in Committee, and to which an answer was given. Can he tell the House why the Government want these restrictions at all? What mischief are the Government afraid might occur if no such restrictions were placed on this relief from double taxation? Can we have an example of what might occur if we do not have these restrictions?

Mr. Peter Walker

I thank the Chief Secretary for bringing forward these Amendments. They are in keeping with various Amendments that I moved in Committee. We then pointed out how completely impossible the original definitions were. It is probably correct to say that if the Bill had remained as originally worded virtually no investment trust company would have been included in the provisions of the Clause.

I suppose that, like several other Clauses, this must be described as a tentative Clause. It was left for the Opposition to make it at least a feasible Clause. We are delighted that the Chief Secretary has accepted our Amendments and drafted them properly and legally.

I was attracted by the right hon. Gentleman's description of the provision in the memorandum and articles of investment trusts, which he described as a self-denial clause. I would describe almost every one of the 90 Clauses of the Bill as such.

Mr. Harold Lever

rose—

Mr. Deputy-Speaker

The hon. Gentleman has already made a speech.

Mr. Lever

I asked a question, I thought, Mr. Deputy-Speaker.

Mr. Deputy-Speaker

Order. The hon. Gentleman must resume his seat while the occupant of the Chair is standing. The hon. Gentleman has already made a speech, even if it was couched in interrogatory form, but, in view of the misunderstanding, I think that it would be hard if the House did not give him permission to speak now.

Mr. Lever

I shall be greatly obliged if the House will give me leave to speak again, and I am greatly obliged to you, Mr. Deputy-Speaker, for assisting me to obtain that leave. I take it that I am right in thinking that one or two of my Amendments are being considered at the same time, but that is of no consequence because I am concerned with the Amendments by my right hon. Friend more than with any modest attempt that I have made to improve the Bill.

I may be alone in this, but I find it extraordinary that the Opposition do not think it necessary before passing this Clause to ask why we should have it at all in the form in which it has been offered to us. The Opposition, who congratulate themselves on improving the Clause, did not in Committee and have not on this occasion asked the Government to explain why we should assent to any such restriction as is proposed in the Amendment except the one which I concede about the distribution of income.

This is of considerable importance. I shall be as non-combative and as helpful as I can towards the exceptionally able team who have conducted the Finance Bill. They have served the House with great and indefatigable zeal. I do not want to obscure my appreciation of what they have done. On the other hand, I want my argument to be made.

This is a Clause which will, so far as is reasonably practicable, avoid double taxation on capital gains. When an investment trust realises capital gains, its shareholders will receive a certificate which will enable them to recover Capital Gains Tax paid on their behalf or have it set off against a subsequent Capital Gains Tax payment on their own shares. That is sensible. The Government are thereby declaring that they do not wish to have double taxation inflicted on shareholders in that way. It seems to me that if the Government then say that they are going to restrict this right to relief from double taxation—I emphasise that the Clause is concerned only with relief on double tax—on shareholders in particular types of investment trust companies, they must tell us why the penal payment of double tax is right in the case of other investment trust companies.

If I invest in an investment trust company which is quoted on the Stock Exchange but which fulfils every single one of the Chancellor's requirements except that, why should I pay double tax, whereas, say, the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd), who invests in a company which is identical with regard to its investments, size, number of shareholders, nature of its investments, and the amount of its capital profit, is exempt from double taxation merely because the company is quoted on the Stock Exchange?

No one on this side of the House is more sympathetic to the constructive aspects of the Stock Exchange than I am. I am delighted that the Government show this sympathetic understanding of its functions. But I do not want them to carry it too far. I do not think the fact that one has a Stock Exchange quotation means that one's shareholders should be exempt from double tax and that other people should pay double tax. I cannot understand it.

I cannot understand why if one hypothesises two such companies—the one being identical to the other as an investment trust company except that one company is quoted on the Stock Exchange and the other is not, the one company fulfilling every one of the Chancellor's requirements except the one about quotation on the Stock Exchange—the shareholders in the investment trust company not quoted should not be relieved from double tax in the same way as a man in a company which is quoted on the Stock Exchange.

This is a simple enough question. I have asked it before. I am entitled to an answer. I very much hope that my right hon. Friend will, in clear and simple language which even I can understand, tell me why the Treasury should be able to collect double tax from a shareholder whose company does not happen to be quoted on the Stock Exchange but in every way fulfils the other aspects of the Chancellor's requirements. We have heard words uttered with gravity and solemnity about the Treasury's anxiety to ensure that the investment trust company, before its shareholders get relief, is a genuine public trust company. What has that to do with it? If I have a private trust company, does it mean that I must pay double Capital Gains Tax?

I have no doubt that at some point the word "avoidance" will rear its head. But the Clause cannot create tax avoidance because all it does is to give to an investment trust shareholder a piece of paper which says "Tax has been paid, and your proportion is so much." So nobody can avoid tax under the Clause. All he can do is to avoid paying double tax.

I say very seriously to my right hon. Friend that unless he has a very comprehensive and sober look at the reasons for this provision he will be liable to the charge not that he is preventing tax avoidance but that he is permitting further relief avoidance by the Inland Revenue. In the case that I have mentioned, if I do not get relief from double taxation by this provision I shall be paying double tax. I am sure that my right hon. Friend does not want that to happen. Why should I pay double tax because my fellow shareholders do not want to have the shares quoted on the Stock Exchange?

Another provision which is rather odd is that about the 10, 15 or 20 per cent. interest in one company. I cannot understand the reason for it. I do not normally mention names, but one springs to my mind here. However, it does not involve controversy. Let us say that the Daily Mail and General Trust has 40 or 50 per cent. of its assets in Associated Newspaper shares. I do not know the figures, but that is a convenient supposition. Let us imagine that the rest of its assets are in a miscellany of investments. Let us say that this qualifies it to be treated as what my right hon. Friend has called a genuine public investment trust.

Suppose I hold shares in the Daily Mail and General Trust and the right hon. Member for Bexley (Mr. Heath) holds shares in the Second British Assets Trust. Let us suppose that both trusts own the same number of steel shares. Let us imagine that the right hon. Gentleman opposite has the same percentage of shares in Second British Assets Trust as I have in the Daily Mail and General Trust, and that identical profits are made by the two companies. Let us say that identical proportions of the profits are attributable to a £1 million profit on the steel shares when they are taken over, and that that will be double taxation. When I come to realise my shares I shall not get a certificate but the right hon. Gentleman will. Why? What need to protect the Revenue exists and demand that when the Daily Mail and General Trust sells its Imperial Chemical Industry and steel shares and makes a profit its shareholders cannot get double taxation relief, although that relief is available to the shareholders in the other company, which is in every respect identical except that the Daily Mail and General Trust has 30–40 per cent. of its assets in Associated Newspapers? What has that to do with it?

5.0 p.m.

To put it even more simply. Suppose my right hon. Friend excludes from the relief profits made on excessively large shareholdings, although I do not know why the Government care two hoots whether an investment trust has a 2 per cent., 20 per cent. or 80 per cent. share in a company. If the Government do care, then penalise such a company by saying that any profits made on such an excessive holding will be taxed in this way; but why so penalise an innocent little shareholding from the point of view of the shareholders in such an innocent shareholding? I cannot understand this.

I could go through every Clause of this part of the Bill and ask similar questions—that is, apart from one provision. To simplify the discussion, I have deliberately avoided questioning my right hon. Friend about a company which does or does not distribute all of its income, but I have not proceeded with that matter because I have been told that by some means people may avoid paying Surtax. I am not sure how that would arise, but suffice to say that by introducing that argument the whole thing would become more complex and my questions not more logical.

Are we in favour of double tax relief for people who hold shares in investment trusts? If we are, why do we allow the Government to collect this form of tax on some such trusts and exempt others? Is it not unjust that the Government should propose this course? There is a vast number of cases where it is exceedingly convenient for people to have family investment trusts. Consider the case, for example, of a man with a number of children of different ages who considers it convenient for the family assets to be held in a family investment trust. There, when a capital gain is realised, Capital Gains Tax is automatically paid on it. Why should that Capital Gains Tax, having been paid once, not redound to the relief of the shareholders, even if they are members of a private family investment trust and irrespective of the assets they are holding?

Another matter in this connection appears equally important. I have already asked my right hon. Friend to say why he has this apparent compassion for Stock Exchange quotations before he will give relief against double taxation. Will he also say why the Government are so concerned about the nature of the investments? Why must they be in stocks and shares? What difference does it make? Consider this situation. An investment trust decides to invest in the Shell Mex building. Suppose that an investment trust bears all the apparently desirable characteristics mentioned in the Government's proposals and, therefore, qualifies for double tax relief, but sells all its stocks and shares and buys a number of properties as an investment with the money. Suppose, further, that after a number of years it sells the properties at a considerable profit, thereby making a capital gain. The trust would then pay Capital Gains Tax, but suppose, yet further, that it is then wound up. The capital gain will then pay tax again on the realisation of the shares by the shareholders, although that would not have been the case if it had been stocks and shares on which the gain had been made.

Mr. Deputy-Speaker

Order. I am afraid the hon. Gentleman is going back to subsection (2,a). That is not within the compass of the Amendment.

Mr. Lever

With respect, Mr. Deputy-Speaker, I thought that I was in order. I assure you that I am not trying to avoid the rule of order. I would be exceedingly ungrateful if I did so. On reflection, however, I would appear to be going back to subsection (2,a).

Mr. Deputy-Speaker

We are not discussing amending subsection (2,a).

Mr. Lever

I agree, Mr. Deputy-Speaker, and I will not pursue the matter further. I have made my point and I regret that I did not make it at a more appropriate time. I trust that if my right hon. Friend has time he will consider, by analogy, what I have said in connection with subsection (2,a) with the Amendment we are discussing.

In short, for I do not wish to delay the House on such a complex question, I hope that my right hon. Friend will explain the matter clearly. One of my difficulties in the exposition of my questioning is that I have raised these matters in Committee had I still do not know the precise position. After matters in Committee and I still do not not know why these restrictions are thought to be necessary and why the Opposition accept them as being necessary. I am still waiting for a satisfactory explanation.

Mr. Geoffrey Lloyd

I thank the Chief Secretary, on behalf of the investment trust movement, for these important concessions.

Mr. Diamond

In replying to the questions put so clearly and succinctly by my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), I say straight away how grateful I am to him for the kind comments he made about what he was pleased to call the Treasury team and the obvious desire on the part of the members of that team to answer all the questions put to them. I reciprocate by saying that, having listened to many of the arguments adduced by my hon. Friend, nobody could ever say that there was anything wrong with the steps in those arguments or his steps in the Division Lobby. I am glad to know that.

I am anxious to answer—not to explain, because my hon. Friend's understanding of these matters is as great, if not greater than any other hon. Member's—why the Government's approach does not run on all fours with his. In doing so, I must go back one step further. I must make it absolutely clear to my hon. Friend that Corporation Tax recognises that a company pays tax on its profits, be they drawn from income or capital, and that a shareholder in a company pays Capital Gains Tax on any capital gain to which he may be chargeable on the disposal of his shares.

If my hon. Friend wants to call that double taxation as a form of shorthand, then I do not object to that phrase as a method of understanding just what we are talking about, for we are talking about the separation of the tax—the tax being paid by the company on its profits, be they capital gains or not, and the tax paid by the shareholder himself on the disposal of his shares. That form of double taxation, if my hon. Friend wishes to give it that title, applies almost universally. Why have the Government made an exception to that universality? The answer is that the Government want to encourage all forms of saving, in particular, but not exclusively, unit trusts and investment trusts.

Therefore, the Government say, "We will go as far as giving special exemption from this general principle as a matter of public policy where certain broad considerations, and only where such considerations, are satisfied." The conditions are those defined in the Clauses and Amendments. They are, broadly, that there should be a machinery by which the small investor can get the benefit of guidance and expert management of his investments, that there should be a genuine public investment and that there should be a wide spread of investments. These are the general criteria on which, if satisfied, the Government are prepared to go exceptionally as far as I have indicated and not to ask for the kind of double taxation to which my hon. Friend has referred.

I do not, therefore, have to answer my hon. Friend's questions in the precise form in which he put them because his argument rested on a different philosophical point. As usual, my hon. Friend and I are ad idem. We understand one another perfectly and it is even possible that we will see each other in the same Division Lobby. If my hon. Friend wants me to go further—although I do not think that he will—then of course he is right in saying that, this, by itself, has no relevance to tax avoidance. However, he will also know that the machinery of using other than a commercial investment trust—what I might call an ordinary private investment trust company— as a method of holding family funds is a method which has many, shall I say, tax advantages—although I will not put it as high as tax avoidance.

There are Income Tax advantages, for instance, in converting unearned income into earned income by appointing oneself a director of one's own family trust and getting as director's salary what otherwise would arise as ordinary unearned income. There are methods of obtaining advantage for Surtax by leaving income in the company and collecting it only on a liquidation, paying a lower rate of Capital Gains Tax. There are methods of obtaining Estate Duty advantages. All these, which one might shortly describe at tax avoidance methods, are open to those with the possibility of having private family investment trust companies, and therefore it is not appropriate that the Government should extend these special exemptions to these kinds of investment trusts.

With that explanation, I hope the House will be good enough to approve the Amendment which I am proposing.

Amendment agreed to.

Further Amendment made: Clause 34, in page 40, line 34, leave out paragraphs (b), (c) and (d) and insert: (b) subject to subsection (3) of this section that no holding in a company, other than an investment trust or a company which would qualify as an investment trust but for paragraph (c) of this subsection, represents more than fifteen per cent. by value of the investing company's investments, and (c) that the shares or securities of the company, or a class of them, are quoted on a recognised stock exchange in the United Kingdom, and (d) that the distribution as dividend of surpluses arising from the realisation of investments is prohibited by the company's memorandum or articles of association, and (e) that the company does not retain in respect of any accounting period more than fifteen per cent. of the income it derives from shares and securities. (3) Subsection (2)(b) above shall not apply—

  1. (a) to a holding in a company acquired before 6th April 1965 which on that date represented not more than twenty-five per cent. by value of the investing company's investments, or
  2. (b) to a holding in a company acquired on or after that date which, when it was acquired, represented not more than fifteen per cent. by value of the investing company's investments.
so long as no addition is made to the holding. (4) For the purposes of subsection (3) above—
  1. (a) "holding" means the shares or securities (whether of one class or more than one class) held in any one company, and
  2. (b) an addition is made to a holding whenever the investing company acquires shares or securities of that one company, otherwise than by being allotted shares or securities without becoming liable to give any consideration, and if an addition is made to a holding that holding is acquired when the addition, or the latest addition, is made to the holding, and
  3. (c) where in connection with a scheme of reconstruction or amalgamation, a company issues shares or securities to persons holding shares or securities in a second company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings in the second company, without those persons becoming liable to give any consideration, a holding of the shares or securities in the second company and a corresponding holding of the shares or securities so issued shall be regarded as the same holding,
and in subsection (2)(c) above 'recognised stock exchange in the United Kingdom' has the same meaning as in the Prevention of Fraud (Investments) Act 1958 except that it includes the Belfast Stock Exchange."—[Mr. Diamond.]