HC Deb 08 July 1965 vol 715 cc1878-927
Mr. MacDermot

I beg to move Amendment No. 79, Schedule 6, in page 56, line 18, to leave out "on" and to insert: to income tax as income of". This is a drafting Amendment, as is the next one.

Amendment agreed to.

Further Amendments made: Schedule 6, page 56, line 20, at end insert: (2) The foregoing sub-paragraph shall not be taken as excluding from the consideration so taken into account any money or money's worth which is taken into account in the making of a balancing charge under Part X or Part XI of the Income Tax Act 1952 (Capital allowances).

Schedule 6, in page 57, line 2, leave out "to the person becoming" and insert: deemed to be effected by him under section 24(3) of this Act when a person becomes".—[Mr. MacDermot.]

Mr. MacDermot

I beg to move Amendment No. 159, Schedule 6, in page 57, line 46, to leave out sub-paragraph (9).

This is not quite a drafting Amendment. It is a minor Amendment to remove an unduly restrictive definition of the date of disposal for the purposes of the long-term tax. The effect of the Amendment is that the date of disposal will depend on the facts in each case.

Amendment agreed to.

Mr. Michael Alison (Barkston Ash)

I beg to move Amendment No. 280, Schedule 6, in page 58, line 7, after "behalf" to insert: for the purpose of managing the asset whether alone or in conjunction with other assets or for the purpose of preserving the value of the asset or". The aim of the Amendment is straightforward. It is to encourage systematic and scientific attempts to enhance and increase the value of an asset by making any expenditure on professional or other similar advice from specialists an allowable expense in computing the capital gain. The sort of advice that we have in mind in this context is the specialist advice which is available today from such bodies as management consultants. An example is to be found in the Management Consultants' Association report, which was recently commissioned by N.E.D.C. Other bodies are the Centre for Business Research, different kinds of investment analysts, the stock study sections of banks and similar houses, and, last but not least, the sort of advice which may be derived from chartered accountants.

It is not without irony that I received through the post today a prospectus of the advice which Members and others may receive from chartered accountants. Amongst such lines of advice the prospectus lists advice on the "costing" and "productivity". Again, it is not without irony that the advice which it claims to be able to give is summed up in a little paragraph under the heading, "for tax purposes", which says: you may be paying more tax than is necessary. With the help of a Chartered Accountant you need pay no more tax than the law requires. I cannot help feeling that one chartered accountant with whom we have all become familiar will require us to pay more tax than we are paying at the moment.

Those are the professional people who are available to give what is becoming increasingly desirable, namely, the sort of systematic and professional advice on investment policy and appraisal which the present situation demands. I shall elaborate a little why we need to encourage this sort of professional advice from specialists. It is because the present state of affairs is very unsatisfactory in regard to investment appraisal, and so on, and is likely to become more so as a result of the proposals in the Bill.

Perhaps I might give one or two reasons why we need more of this professional advice. First, it is the avowed aim of the Chancellor in this Bill to encourage retentions, as a result of the provisions of Corporation Tax, but the point that cannot be made too often is that there is no logical and necessary connection between a high level of retentions in any corporation or company and the productive growth which one seeks to derive from those retentions, or, necessarily, a high rate of return on the assets or capital retained. There is no logical connection between these two phenomena. Indeed, it has been pointed out that within the quoted company sector the highest retention ratios at the present time are commonest among two particular groups of company. First, companies having a dominant family ownership—and it is self-evident why there should be high retentions there, and, secondly, the group consisting of the smaller quoted companies.

It is, I suppose, a matter of dispute as to whether the smaller companies are the fastest growers, but there is no direct evidence that they are and one tends to think that probably they are not. The real question is, what is the relevant rate of return on the sort of retentions which the Chancellor is trying to encourage through the imposition of Corporation Tax? The snag is that one can have high retention ratios for very poor reasons. One reason for having high retention ratios may be that the return on the sums retained in a business is so low that it is expensive to raise capital in the market, and one therefore has to retain the income to finance the business oneself. In other words, high retention ratios are no sure guide to the productive use of the sums retained. These considerations are important, because we have evidence from the N.E.D.C. Report and the Management Consultants Association—

Mr. MacDermot

I am trying to follow the hon. Gentleman's argument, but I cannot see what this interesting dissertation on retention rates has to do with the Amendment.

6.30 p.m.

Mr. Alison

The point is quite simple. The Bill proposes to try to encourage higher retention ratios than at present and we are seeking to provide an Amendment whereby the sums retained may be better applied and better used, that is to say, by encouraging the use of professional advice by a tax concession. I should have thought that that was desirable. The Report of N.E.D.C., which the Government themselves commissioned, made it plain that this sort of professional advice was desirable and that the proportion of companies using it was very small.

Mr. J. T. Price (Westhoughton)

Listening to the hon. Gentleman's argument, the thought running through my mind is that he is presupposing that all professional advice is necessarily good advice. All through these debates we have been told by hon. Members opposite that in framing the Bill the Government have received bad professional advice. The suggestion that all professional advice is of necessity good advice does not make sense.

Mr. Alison

I agree that one has to choose and be selective, but let us at least give an incentive through our tax system to people who know that their knowledge is limited to go to the specialist concerned. This is increasingly the habit nowadays and we want to encourage this sort of recourse to professional advice when it is necessary.

The N.E.D.C. Report on the analysis of investment in machine tools in the engineering industry made it evident that less than 5 per cent. of all the firms it considered were using D.C.F. methods, for example.

Mr. MacDermot

I am sorry to interrupt again, but I am still trying to follow the argument. Surely fees for the kind of professional advice of which the hon. Gentleman is speaking, professional consultants and so on, would be taken into account when assessing expenditure for Income Tax purposes.

Mr. Alison

We are seeking to extend it so that it is allowable not only for Income Tax purposes but for computing the enhancement of gains. If enhancement can be measured, surely it is permissible to set against a proportion of the growth some of the expenditure which has been applied to causing the growth. That seems to be a perfectly straightforward argument. When encouraging the growth of the value of the asset, one wants to make certain that the value is enhanced as much as possible, and if it can be enhanced by spending money on professional advice in this direction, that is something which we ought to encourage.

I refer to some explicit words written in a paper published only today by the Professor of Political Economy at the University of Manchester: The Government should give an incentive to these desirable reforms"— and he is referring to modern capital investment appraisal methods— by finding a tax incentive which really did affect decisions on lines suggested in the N.E.D.C. Report on investment in machine tools. As the Financial Secretary is no doubt aware, the N.E.D.C. Report says: Methods of investment appraisal in use by the United Kingdom engineering industry are either non-existent or largely inaccurate and misleading. We should try to give some deliberate encouragement in our tax system to the use of greater and more scientific methods of investment appraisal.

The economic aspects of the Bill, particularly the Corporation Tax proposals, are by no means wholly good or necessarily creative and productive. There are at least three snags. First, the Corporation Tax proposals generally are inflationary. Secondly, there is no guarantee that the quantity of capital retained in a business will be used productively. It is quality as well as quantity which we should encourage. Finally, Corporation Tax will discourage the buoyancy of the capital market which has always been one of the severest disciplines applied to assessments of capital projects. Against this we need to find some means to write into the Bill specific allowances for those who spend money on professional advice about capital appraisal, and for those reasons I ask the Financial Secretary to consider the Amendment sympathetically.

Mr. MacDermot

The short answer to the arguments deployed by the hon. Member for Barkston Ash (Mr. Alison) is to refer him to paragraph 5 of the Schedule, which deals with the exclusion of expenditure by reference to Income Tax or Corporation Tax. He has argued his case in relation to expenditure which is allowed for Income Tax purposes and will be allowed for Corporation Tax purposes and would therefore automatically be excluded from any allowance for Capital Gains Tax purposes.

However, to take the wider point of the Amendment, what it seeks to do is to effect the change that in computing a gain or loss on a disposal of an asset there shall be added to the cost of acquisition expenditure incurred in managing the asset or preserving its value, in other words, to depart completely from the capital account basis for the assessment of Capital Gains Tax.

I must make it plain that this would strike at the root of our approach to this tax and would be quite unacceptable. The repercussions would be very wide, for an enormous range of expenditure would be opened up to be set off against Capital Gains Tax. I have been interested to learn of some remarkable kinds of expenditure which have been claimed against the short-term Capital Gains Tax. Owners of valuable pictures and other works of art have sought to claim part of the cost of heating the mansion in which they house them an a necessary expenditure incurred in preserving the value of the pictures.

The ingenuity—I have no doubt of professional advisers—in these cases is almost without limit. We do not intend to allow that kind of expenditure, or that on the gardener who cuts the grass or the person who paints the house periodically, to be allowed for set-off against capital gains. If a person is carrying on a business or trade, some of those expenditures might be allowable for purposes of Income Tax and Corporation Tax, and that is the proper sphere in which to allow them. They are maintenance costs and in effect are the costs incurred in enjoying the asset.

But this proposal is something quite different. Expenditure which goes to enhance the value of the asset and which is allowed to be set off is covered in paragraph 4(1,b) of the Schedule. I hope that I have said enough to show that on principle the Amendment is quite unacceptable.

Amendment negatived.

Mr. Jasper More (Ludlow)

I beg to move Amendment No. 122, Schedule 6, in page 58, line 36, at the end to insert: (3) Where at the time of its acquisition, or if an election is made under paragraph 24 of Schedule 6 to this Act then at 6th April 1965, agricultural land within the meaning assigned thereto by subsection (2) of section 1 of the Agricultural Holdings Act 1948, was held—

  1. (a) subject to a contract of tenancy on other interest in land other than a charge on incumbrance within the meaning of subsection (8) of section 21, and prior to the first disposal of the land after 6th April 1965 that tenancy or other interest in land terminates, then in computing the gain accruing on that disposal for the purposes of this Part of this Act there shall be added to the sums allowable as a deduction from the consideration in the computation of that gain the amount of any appreciation in the value of the land accruing by reason of the said termination of the tenancy or other interest in land; or
  2. (b) free of any tenancy or such interests in land as are referred to in (a) hereof but prior to the first disposal of the land after 6th April 1965 became subject to a tenancy or any such interest in land, then in computing the gain accruing on that disposal for the purposes of this Part of this Act there shall be subtracted from the sums allowable as a deduction from the consideration in the computation of that gain the amount of any depreciation in the value of the land caused thereby.

Mr. Speaker

With this Amendment we are to discuss Amendment No. 123, Schedule 6, in page 71, line 33, at end insert: (5) Where at the time of its acquisition, or if an election is made under this paragraph, then at 6th April 1965, agricultural land within the meaning assigned thereto by subsection (2) of section 1 of the Agricultural Holdings Act 1948, was held subject to a contract of tenancy between the owner of the land as landlord and members of a partnership as joint tenants of which one is the landlord, and prior to the first disposal of the land after 6th April, 1965 that tenancy terminates, then in computing the gain accruing on that disposal for the purposes of this Part of this Act there shall be added to the sums allowable as a deduction from the consideration in the computation of that gain the amount of any appreciation in the value of the land accruing by reason of the said termination of the tenancy.

Mr. More

This Amendment relates to the valuation of agricultural land for the purposes of Capital Gains Tax according to whether the land is leased to a tenant or with vacant possession. The subject was not specifically discussed on an Amendment in Committee, but, by a great deal of indulgence on the part of the Chair, we were able to discuss the matter when we debated Schedule 6, a debate which the Financial Secretary may still possibly remember. I shall not misrepresent the hon. and learned Gentleman if I say that, broadly, his reply to us on that occasion could be summed up as a summary dismissal of the case as being an ordinary and obvious instance of capital increase which would justify the levying of Capital Gains Tax. But, as the point was not made in an Amendment specifically moved in Committee, it is right now to give what was not properly given to the Committee, that is, something of the background against which the whole question has to be viewed.

It arises from the traditional system of agricultural tenancies followed in this country in the present century. Although leases of farms and agricultural properties can be of many kinds, it is fair to say that for many years there has been a large preponderance in favour of what is called the year-to-year tenancy, a tenancy which, as its name implies, normally carries on from year to year. When there is any question of bringing the tenancy to an end, the position as between landlord and tenant farmer is that either has the right, before a certain date, usually Lady Day, to give one year's notice. Thus, the tenant is able to secure release from his obligations in 12 months and, likewise, the landlord is able to recover possession of his holding in 12 months. Strangely enough, after all these years, that is still the background as between landlord and tenant on which most of our farming tenancies still rest.

Various Acts of Parliament have been passed affecting the relationship between agricultural landlords and tenants. Provisions were enacted before the war for a certain limited compensation to tenants to receive notice. During the war, there was legislation under which landlords were prevented from giving notice if the object was to sell the holding, and this carried on until the passing of the 1947 Act, which was re-enacted in the Agricultural Holdings Act, 1948, a consolidation Act, which brought into force the restrictions on eviction and the security of tenure provisions with which the agricultural community is now familiar and which have been in force now for about 18 years. But the presence of these provisions on the Statute Book does not alter the fact that there are still thousands of farms, probably tens of thousands, still held on the traditional year-to-year tenancy and which, as between landlord and tenant, are still liable to this purely contractual agreement that, on one year's notice, either the tenant can go or the landlord can get his holding back.

The new legislation bit immediately on all tenancies in force before 1947, but, curiously enough, such tenancies have continually been made as a matter of course in the following years and the position is simply that the post-1947 tenancies are caught in exactly the same way as those made before. This is how landlord and tenant farming has been carried on for the past 18 years. Everyone knows why the new provisions were introduced. The object was to give farming tenants the opportunity for longer-term farming than was implied by the traditional year-to-year tenancy. It was thought that, if a tenant could plan his cropping programme for some years ahead, this would be of benefit to agriculture and to the land, more scientific techniques could be used, and general advantage would result.

However, I do not think that anyone at that time—I have read some of the debates in the House in both 1947 and 1948—visualised what has been the most striking result of this legislation, the astonishing disparity in values which has been brought about by the operation of the Statute. Part of the reason, perhaps, was that, for a number of years, the disparity was not very great. Until the middle 1950s, there was not a very great disparity, and the marked increase which gives rise to the concern felt about the operation of the Capital Gains Tax as now proposed has really developed in the last few years, particularly in the last five years. When we discussed the matter in Committee, my hon. Friend the Member for Windsor, (Sir C. Mott-Radclyffe) gave several examples of the disparity in values, which he reckoned at about £100 an acre, and I suggested, on the basis of cases in my own experience in my part of the world, that it might be more like £200 an acre. There is no need to elaborate on this because it is generally known and admitted.

6.45 p.m.

As I recall it, the discussion in Committee was sufficiently wide to cover not only agricultural tenancies but urban tenancies as well. The present Amendment is confined to agricultural tenancies and is related to the specific legislation to which I have referred. I wish now, without wanting to sound critical, to make one or two observations about the Financial Secretary's comments on tenancies in that debate. He was speaking of all tenancies, of course, but the way he put the matter to the Committee would not be recognised by the ordinary agricultural owner as a very good representation of how he views his position under his tenancy agreement and the relevant legislation. The hon. and learned Gentleman said: If there is an unrestricted freehold the interest is far more valuable than if there is a reversion of a tenancy or a reversion of a lease. What happens when vacant possession is acquired in these circumstances is that a restricted interest in the land is converted into a full and unrestricted interest in the land, and this is the clearest possible example of a capital gain."—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1403.] I do not think that any agricultural landlord would readily recognise himself in the description of an owner of a restricted interest. He is, in fact, the owner of the land. He has at some time signed with a particular tenant a document giving that tenant the right to farm the land from year to year, and it is only in consequence of an Act passed either before or after this document was signed that the present difficulty arises. The landlord's interest, in fact, never alters. It is not really true to say that it is a restricted interest. He is the victim of a statute which has come in fortuitously in such a way as to upset the balance of the contract voluntarily entered into between himself and a farming tenant.

When we look at the matter in the context of the Capital Gains Tax, we see that there is, as between landlord and tenant, a double uncertainty. The Capital Gains Tax can fall on sale, on death, at the end of a 15-year period, on gift, or in the event of compulsory purchase. Equally, on the tenant's side, a tenancy can come to an end by death, by dispossession, by the tenant's voluntary departure, by notice, and so on. Consequently, there is here a double uncertainty, and this is really the essence of the difficulty in which the agricultural community will find itself.

It is a situation which can hardly be familiar except to a very small section of the community which is interested in this particular matter, and it may be quite unfamiliar to many hon. Members. But there is a fairly close parallel with what happens when a Division is called in the House. Whether we are talking about the farming situation or the situation in a Division in the House, there are always two questions: at what time is the Division called or does the event occur, and what is the state of the territory, whether it is the farm or the precincts of the House of Commons, at the relevant time? It may fall at a time which is known or which is not known. The question will be, is the farm let or, in the House of Commons, are Government Members in bed, as was the Prime Minister? Has the notice to quit the farm expired or are Members of Parliament absent from the House unpaired at a Committee on Nuclear Disarmament? These questions are uncertainties of a double kind.

It is then too late probably to do anything effective. One cannot let the farm on the telephone when one of these things has happened, just as one cannot always telephone Members to get them back to the House of Commons, even if one may get the Chancellor of the Exchequer back for the first Division. There are two differences about this comparison. First, there is a Patronage Secretary on the Government side of the House, whom we on this side of the House believe is responsible for co-ordination. There is nothing similar for a taxpayer faced with a problem in Capital Gains Tax matters. Equally, if things go wrong, as apparently they can go wrong in the House of Commons, the victim is the Government which introduced the Finance Bill. If they go wrong in Capital Gains Tax matters, presumably it is the unfortunate taxpayer who is the victim, and he was certainly not responsible.

How is it possible to correct these anomalies, because anomalies they obviously are? I repeat what I said in Committee: we are not asking for an exemption or a privilege. The way to correct these anomalies must be to amend the valuation formula for Capital Gains Tax purposes in Schedule 6.

Mr. William Baxter (West Sterlingshire)

To which anomalies is the hon. Member referring—anomalies appertaining to the House of Commons or anomalies appertaining to agriculture?

Mr. More

They are the anomalies which I am about to explain in regard to the differences between the value of properties on acquisition if they are let and on disposal if they are vacant. The Amendment which I put to the House relates, as the hon. and learned Gentleman will see, to the two converse occasions—one on which it is acquired let and disposed of vacant and the other on which it is acquired vacant and disposed of let. To rectify that the Amendment has been drawn to produce what in the previous debate we called "like-with-like".

It is entirely possible—and this might be unique in an Amendment to a Finance Bill moved from the Opposition side of the House—that the effect of the Amendment would be to benefit the Revenue and not to benefit the taxpayer. This is unlikely, however, because, as one of my hon. Friends pointed out on a previous occasion, it is almost certain that the tendency of owners will be to avoid making these leases which tend to produce these anomalous results.

May I refer the hon. and learned Gentleman once again to the previous debate. He faced this problem, as reported in column 1405. He realised that this could bite both ways, and he said, We certainly intend to apply this logically and fairly."—[OFFICIAL REPORT, 31st May, May, 1965; Vol. 713, c. 1405.] That can mean only that it will be a case of swings and roundabouts. In either case there may be injustice on the one hand to the taxpayer and on the other hand to the Revenue. We wish to avoid individual cases which might involve very substantial sums of money and in which there might be severe injustice to taxpayers who are owners of land and who, by no operation of cause of their own, find themselves caught in one of these unfortunate circumstances.

With this Amendment, Mr. Speaker, you have also called Amendment No. 123, and I will briefly refer to it because it highlights the problem which we face and shows how grotesque the situation can be. Amendment No. 123 relates to the case of an agricultural landowner who at the time of acquisition has the farm in lease to a partnership of which he is one of the partners. It assumes that at the time of the disposal the lease has come to an end, and it seeks to correct the consequences of this situation. It is necessary to point out the grotesque result in respect of Capital Gains Tax which can occur in a case of that kind where the owner is also a partnership tenant.

I hope that the hon. and learned Gentleman, having considered this matter, will be able to give us a more favourable reply and to accept both Amendments. If he cannot accept the first, I hope that at any rate he will accept the second, which highlights the grotesque results to which I have drawn attention.

Mr. J. E. B. Hill (Norfolk, South)

I should like to support and to reinforce what was said by my hon. Friend the Member for Ludlow (Mr. More). I do not want to take up the time of the House except to stress one very practical point which is likely to arise if the Amendment is not accepted.

It is thought to be quite clear that there is a disparity at the moment between the value of land let and the value of that land with vacant possession. This is based on average figures. But when one comes to the valuation of any farm, unless one has a sale to test the market, the problem of valuation where there is a disposal arising from death or inheritance of the owner can be very great. It is no longer a question of valuing the land and its fixed equipment or even deriving the valuation from a total based on the rent.

Nowadays, it is common to have to take into account such factors as the age of the tenant and the tenant's health and whether there are any other prospects of obtaining possession. For example, the farm might be in a bad condition, in which case an energetic landlord might obtain possession by reason of a certificate for bad husbandry. Without the test of the market it may be extremely difficult to arrive at a valuation.

This difficulty would be avoided if the Financial Secretary accepted our Amendment. In its favour there is the longer-term reason that in pure economic theory there should be no difference between the value of land let and the value with vacant possession. It is only the temporary restrictions to which my hon. Friend referred which have produced the disparity. That can be seen by anyone who studies land values in the period up to the war and up to control, when there was no distinction in value between vacant possession and let land.

In fact, in the 1930s, with a rather different economic atmosphere, land was sometimes more valuable if it had a tenant in it. At the moment we are perhaps passing through a peculiar period which may not last, and as presumably taxation is based on long-term principles and considerations, I hope that the Financial Secretary will accept the Amendment.

7.0 p.m.

Mr. MacDermot

As the hon. Member for Ludlow (Mr. More) said, we discussed this topic in Committee. On that occasion hon. Members opposite put down a very similar Amendment, which was not selected, and, as has been known to happen before, the subject therefore became a matter for discussion on the Question, That the Schedule be Schedule 6 to the Bill.

The hon. Member referred to the rather categorical terms in which I rejected the underlying idea in Committee. He is showing an unusual spirit of hope today if he thinks that I have changed my mind on a matter such as this.

In introducing his Amendment, the hon. Gentleman gave us an interesting dissertation on the history of the agricultural holdings legislation. In doing so he betrayed the mentality which, I suggest, underlies the Amendment, which I would describe as a nineteenth-century landlord's mentality. The hon. Gentleman calmly asserted that the ownership of land is all one and the same thing whether it is an unrestricted freehold ownership or whether the land is tenanted. If a man has land which is subject to a tenancy and then it comes into possession with vacant possession, the suggestion is that his ownership of the land and the value of his holding are the same thing and that it is extremely artificial to suggest that there has been any capital gain.

I remind the hon. Gentleman that the value of land to a person is the value of his interest in the land, and if a person who is a freehold owner of land decides that he wants to derive an income from it by letting it out, he thereby limits and restricts the capital value of that land, so that when he wants to dispose of it it has a lesser value. The land is less valuable to him because his interest in the land has, by his own action, been qualified and restricted by the tenancy which he has granted from it. Then, when through one means or another, maybe by accident, the tenancy comes to an end and the man has unrestricted ownership, the land is in some cases greatly enhanced in value. As I said in Committee, this is the clearest possible example of a capital gain.

I also remind the hon. Member that this is a form of investment, more particularly in the case of rented housing, which is deliberately undertaken by many people as a way of obtaining a capital gain. People choose to invest in rent restricted property which is tenanted by elderly people, hoping and expecting that within a few years' time they will get the property with vacant possession and make a considerable capital gain. That is something which up to now has been outside the tax net. The purpose of this Capital Gains Tax legislation is to bring that kind of gain within the tax net.

This is just another example—I would hold it up as being a classic example—of the type of capital gain on which this tax is intended to bite. I reject the suggestion that hardship will be involved. The owner who finds himself, in the position of having the land with vacant possession has a most realisable asset. It is because he has obtained that gain that he is liable to the tax.

The Amendment is limited in its scope and is expressed to apply only to the first disposal of the land after Budget day. If the principle is sound, I should have thought that it would have been sound for all time. But I suppose that the idea underlying this restriction to Budget day is that if the owner of the land who granted a tenancy before Budget day had known that there was a Capital Gains Tax coming along which might render him liable to taxation when he made the gain on recovering vacant possession he would never have let the land at all.

Mr. J. E. B. Hill

He would have entered into a partnership and thereby preserved his freedom of action and his right to get back the farm. He would have struck a blow for landlord and tenant.

Mr. MacDermot

If the hon. Gentleman is suggesting that we shall see landlords entering into partnerships with their tenants—

Mr. Hill

indicated assent.

Mr. MacDermot

—that is a most interesting proposition and perhaps one that has considerable attraction. But what we are discussing is the effect upon a tenancy, and what I am suggesting is that we must follow through this hypothesis of a man who before the introduction of the tax had decided that he was not going to let the land. He then either retains it in the form of a partnership, in which case no question arises, or he decides to realise his asset and sell it. What is he then to do with the money? He invests it somewhere else, and again will be liable as from Budget day on any capital gain which he makes from his investment.

What hon. Gentlemen opposite are seeking to do is to put the agricultural landlord in a privileged position where he is to be exempted when other owners of capital are liable in respect of the capital gains which they make. The suggestion that the effect will be to make landlords less willing to relet their land is, I should have thought, contrary to the facts. The security of tenure provisions for tenant farmers are already in existence, and it is the security which is given under the Agricultural Holdings Act—I thought I saw a tendency on the part of the hon. Member to deplore it—which diminishes the value of the landowner's asset when a tenancy is granted. If a man finds himself with the land in vacant possession and he is concerned that some circumstance may occur to make him liable to Capital Gains Tax as a result of that gain, all he has to do is to relet the land, when it reverts to its former value.

I find it surprising that there is in many arguments an underlying assumption that everybody will be so anxious never to have to pay any Capital Gains Tax that they will never want to realise any capital gain. If that is the case, they will not be liable to the tax. In fact, it is because people are anxious to realise in some circumstances their capital gains that they will become liable to the tax. But the interest of the landlord who wants to avoid his liability in the case we are considering will lie in reletting the land, when it will, while in his hands, revert to its former value and he will no longer be burdened with the problem of how to avoid Capital Gains Tax.

Mr. Simon Wingfield Digby (Dorset, West)

Is the hon. and learned Gentleman aware—I do not know what knowledge he has of agriculture—that there is a growing tendency on the part of landlords, particularly new landlords, to keep their land in hand and farm through a manager, and that that is creating a very serious social problem in respect of tenant farmers who have not the money with which to buy farms but hope to rent them? Every time a farm becomes vacant a tremendous number of people wish to have it. Surely the hon. and learned Gentleman's argument will encourage landlords never to relet their farms but to keep them in hand, and that will create very serious social problems in the countryside.

Mr. MacDermot

The hon. Gentleman knows that there are other economic forces which have led to the kind of development about which he is talking and which long preceded any question of Capital Gains Tax. In the particular circumstances that I am asked to consider, the incentive of the tax will be to operate the other way round.

Mr. James Scott-Hopkins (Cornwall, North)

I am sorry that the Financial Secretary has followed the line that he has in rejecting the Amendment. On the whole, it is a fair and sensible one. I would impress on the hon. and learned Gentleman that by rejecting the first Amendment, and particularly the second one, he is encouraging bad practices, as was brought out just now by my hon. Friend the Member for Dorset, West (Mr. Wingfield Digby).

It would seem that the position in the past has been that if there was a partnership between a landlord and his tenant in this respect and if a tenancy had not been given, then the landlord got the benefit of that earned income—and I repeat, earned income—and on disposal, if the premises were still with vacant possession, he paid no Capital Gains Tax, that is, other than the tax payable on the normal increase in the value of the land or property between the two periods.

If the landlord had been following good practices and had given a tenancy to his partner he would have been charged at the let value at the time of giving the tenancy. Now, however, if he breaks the partnership it will be on the basis of vacant possession and he would have to pay—as the Bill is drafted—a greater amount of Capital Gains Tax. In that case there would be the consideration of his having received no earned income benefit because it would have been unearned income.

In both cases, whether the landlord follows good practices or whether he does not, he will suffer under the Bill. I am sure that the Financial Secretary, who is a fair man, will appreciate the injustice of this and will accept Amendment No. 123, if he cannot accept Amendment No. 122. I fear that this provision will encourage bad practices and will encourage landlords not to let but to enter into partnerships. No security of tenure will be given to the tenant and I am sure that insecurity of this sort is what the hon. and learned Gentleman and I both wish to avoid.

I fear, too, that the Financial Secretary is trying to draw too fine a distinction when considering these Amendments. He is trying to equate them with the possibility of placing the agricultural landlord in a special position. I trust that he will realise that the matter is narrowly defined and that such a landlord would be in no better a position than any other landlord in similar circumstances, except that he would be completely circumscribed, as I pointed out in Committee.

The 1947 and 1948 Acts completely removed from the landlord his right to

Compensation and insurance money
13.—(1) If the recipient so claims receipt of a capital sum within paragraph (a), (b), (c) or (d) of section 21(3) of this Act derived from an asset which is not lost or destroyed shall not be treated for the purposes of this Part of this Act as a disposal of the asset if—
5 (a) the capital sum is wholly applied in restoring the asset, or
(b) the capital sum is applied in restoring the asset except for a part of the capital sum which is not reasonably required for the purpose and which is small as compared with the whole capital sum, or
(c) the amount of the capital sum is small, as compared with the value of the asset, but, if the receipt is not treated as a disposal, all sums which would, if the receipt had been so treated, have been brought into account as consideration for that disposal in the computation under this Schedule of a gain accruing on the disposal shall be deducted

give notice to his tenant. My hon. Friends and I welcome that step and the result has been that agricultural tenants have had a greater degree of security of tenure. However, we must remember that, as a result of the passing of those Acts, the relationship between the landlord and tenant was radically changed. The Financial Secretary accepted this on an earlier occasion, as he accepted the fact that this change did not apply in any of the other spheres which are concerned with the Capital Gains Tax.

Because a totally different situation was created when the Bill was introduced—or even before that, with the Budget Statement—my hon. Friends have tabled the Amendment in the hope that even at this late stage we can persuade the hon. and learned Gentleman to be more reasonable. If he cannot accept Amendment No. 122, I trust that he will consider Amendment No. 123, which is particularly concerned with partnerships and in a much narrower way. That Amendment deals with a glaring injustice and shows that if the hon. and learned Gentleman does not accept our proposal he will be encouraging bad agricultural husbandry practices. He would be striking a blow at the agricultural industry, which is something I am sure he does not want to do.

Perhaps he will take further advice on the matter. I hope that he will realise the blow that will be caused to agriculture if our proposal is not accepted. If he cannot accept Amendment No. 122, I trust that he will accept Amendment No. 123, for it is much more narrowly drafted and would greatly improve the Bill.

Amendment negatived.

7.15 p.m.

Mr. MacDermot

I beg to move Amendment No. 83, Schedule 6, in page 63, line 48, at the end to insert:

from any expenditure allowable under this Schedule as a deduction in computing a gain on the subsequent disposal of the asset.
15 (2) If, in a case not falling within sub-paragraph (1)(b) above, a part of a capital sum within paragraph (a) or paragraph (b) of section 21(3) of this Act derived from an asset which is not lost or destroyed is applied in restoring the asset, then if the recipient so claims, that part of the capital sum shall not be treated as consideration for the disposal deemed to be effected on receipt of the capital sum but shall be deducted from any expenditure allowable under this Schedule as a deduction in computing a gain on the subsequent disposal of the asset.
25 (3) If an asset is lost or destroyed and a capital sum received by way of compensation for the loss or destruction, or under a policy of insurance of the risk of the loss or destruction, is within one year of receipt, or such longer period as the inspector may allow, applied in acquiring an asset in replacement of the asset lost or destroyed the owner shall if he so claims be treated for the purposes of this Part of this Act—
(a) as if the consideration for the disposal of the old asset were (if otherwise of a greater amount) of such amount as would secure that on the disposal neither a loss nor a gain accrues to him, and
30 (b) as if the amount of the consideration for the acquisition of the new asset were reduced by the excess of the amount of the capital sum received by way of compensation or under the policy of insurance, together with any residual or scrap value, over the amount of the consideration which he is treated as receiving under paragraph (a) above.
35 (4) A claim shall not be made under sub-paragraph (3) above if part only of the capital sum is applied in acquiring the new asset but if all of that capital sum except for a part which is less than the amount of the gain (whether all chargeable gain or not) accruing on the disposal of the old asset is so applied, then the owner shall if he so claims be treated for the purposes of this Part of this Act—
40 (a) as if the amount of the gain so accruing were reduced to the amount of the said part (and, if not all chargeable gain, with a proportionate reduction in the amount of the chargeable gain), and
45 (b) as if the amount of the consideration for the acquisition of the new asset were reduced by the amount by which the gain is reduced under paragraph (a) of this sub-paragraph.
(5) This paragraph shall not apply in relation to a wasting asset.
Mr. Speaker

I suggest that it would be convenient to discuss at the same time Amendment No. 120, Clause 21, in page 20, line 25, at end insert: (11) Where, under the provisions of subsection (3) of this section, there is a disposal of assets and those assets are agricultural or forestry land or fixed equipment which at the time of the disposal is let, then the capital sum following within the terms of subsection (3) of this section shall be treated as if it constituted a consideration within the scope of section 31 of this Act, and the owner of the assets as if carrying on a trade (notwithstanding that the letting of agricultural or forestry land does not for the other purposes of this Part of this Act constitute a trade), and the assets disposed of, and the other assets subsequently acquired and put into use, as if they satisfied the conditions of the said section 31. For the purposes of this subsection "agricultural land" and "fixed equipment" shall have the meaning assigned to these terms by sections 1 and 94 of the Agricultural Holdings Act 1948, and "forestry land" means any woodlands in the United Kingdom which are occupied together with, and wholly or mainly for the purposes of, such woodlands.

Mr. MacDermot

During our debates in Committee a number of hon. Members were concerned to ensure that the Bill made provision for compensation payments for damage to be excluded from the scope of the Capital Gains Tax to the extent that they were ploughed back into the replacement or restoration of the asset. The Amendment is designed to do that.

It is a somewhat complicated Amendment and I will try to explain its provisions. It proposes to insert a new paragraph 13 into the Schedule to do two things. The first is that in the case of an asset which is not lost or destroyed, it allows the taxpayer to claim that a capital sum should be treated not as a disposal of that asset in whole or in part but as reducing the acquisition cost of the asset in question. Three tests must be satisfied before a claim of that nature can be allowed. First, the capital sum must be wholly applied in restoring the asset or, secondly, it must be so applied, except for a part of it which is not reasonably required for that purpose and which is small in comparison with the amount of the capital sum as a whole or, thirdly, the capital sum itself must be small in comparison with the value of the asset.

I will give some examples of the kind of situation which could arise and to which these provisions would be applicable. On ecould imagine damage to an asset, say by fire, and the insurance money is paid out in respect of the damage and the whole of the money is used on the restoration of the asset. In that case there will be no liability to charge. Secondly, if one takes a similar case of damage and the insurance money is not all used to restore the damage, then if there is only a small part which is unused, the liability in respect of that small part will be deferred until eventually there is a disposal of the whole asset.

The third illustration which I will give is one which was raised by the right hon. Member for Rushcliffe (Sir M. Redmayne) in Committee; the case of a land owner who grants wayleave or easement across his land where there is theoretically and in fact a small realisation of the capital value. Only a small capital gain may be involved, and it may be small in relation to the total value of his land. If that is the case the effect of these provisions will be to defer any liability in respect of that capital gain until such time as there is a disposal of the whole of the estate.

One may get the case where a part of the compensation which is not used to restore an asset remains, as it were, in the pocket of the owner. When that part is not small compared with the whole capital sum and where he has realised a substantial part of his capital gain, then the part of the compensation which was applied to restore the asset would be deducted from the cost and would be balanced by an allowance for the expenditure undertaken in restoring it; the remainder would be treated as a part disposal and would be taxed.

I suggest that these results are reasonable and do not offend against the general principle that the incidence of the Capital Gains Tax should not be such that a man is not able, out of the compensation which he receives, to replace or restore his asset.

Subsections (3) and (4) deal with the case of an asset which is lost or destroyed. If in that situation the owner of the asset applies the compensation in acquiring a replacement asset within one year of the receipt of the compensation—and the one year may be extended in special circumstances—then, if he so claims, he is to be treated as if no loss or gain had accrued on the disposal of the old asset, but as if the cost of the new asset was reduced by any gain which would have been taxed if the receipt of the compensation had been treated as the disposal of the old asset plus any scrap value of the old asset.

I was asked yesterday by my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) what the effect of the word "replacement" was in this context, and he raised the question of the replacement of a work of art. Most works of art, by definition, are unique, and, it could be argued, irreplaceable. We do not intend to and the Revenue will not apply "replacement" in that sense. They will apply an ordinary, sensible, commonsense test to the matter and if a painting is destroyed and another painting is acquired in its place, that will come within the term "replacement".

Subsection (5) provides that these provisions are not to apply to wasting assets, and there was an Amendment to omit this, so I ought to explain that the reason for it is simply that, by definition, a wasting asset is one where the original cost wastes away to nothing over the predictable life of the asset, and any Capital Gains Tax has to be charged in such cases at the time when the capital sum is received. The reason is simple. To deduct the capital sum from the cost of the asset would do no more than hasten the process by which the cost wastes away, and the tax on the capital gain would as a result be lost in perpetuity.

I apologise for wearying the House with a somewhat tedious explanation of complicated provisions, but it may be of interest to some people outside the House.

Mr. Speaker

I think it is convenient for the hon. Member for Manchester, Cheetham (Mr. Harold Lever) to speak before I call the Amendment.

Mr. Harold Lever

I do not wish to speak before the Amendment is called, Sir.

Mr. Scott-Hopkins

I must confess that I listen with wonderment and amazement to the Financial Secretary whenever he is discussing this particular subject. Last night, we had a splendid run round the course with him. I am not certain what course it was, because he lost me halfway round, and he is doing the same thing this afternoon. I think that my hon. Friends will be taking up those parts of his explanation which sounded more like "Alice in Wonderland" than ever before.

In the initial drafting of the Amendment there was some doubt as to whether it included fixed equipment as defined in the Agricultural Holdings Act, though I think that there was some argument that it might have done so. If the Financial Secretary will say that in the new drafting "the assets" has a very much wider definition—because I think that it mast cover the point completely, although there was some doubt in our minds why the Amendment was put down—I will not move the Amendment.

Mr. MacDermot

Yes, it has.

Mr. Scott-Hopkins

In that case, I can turn to the actual Amendment the hon. and learned Gentleman is himself moving. This concerns compensation, and it appears to provide a satisfactory solution for part disposals.

Mr. Speaker

We are heading for confusion, I think. If I have understood what the hon. Gentleman is saying, the position is that he does not intend to move the Amendment. If that is so, he must ask for leave not to move it.

Mr. Scott-Hopkins

Then I beg leave not to move that particular Amendment. However, I did understand you to say, Mr. Speaker, that we were also discussing Amendment No. 120.

Mr. Speaker

I had misunderstood. I beg the hon. Gentleman's pardon.

Mr. Scott-Hopkins

I do not wish to move Amendment No. 120 formally or to discuss it. However, I would like to say a few words about the Amendment which the Financial Secretary himself has moved, because it is relevant and germane to what I had intended to say.

It seems satisfactorily to dispose of the point which arose and to which the Financial Secretary referred just now about disposals of large or small assets. This is of particular value with reference to mineral workings as well as to such minor disturbances as would arise in the case of roads, pipelines, and so on. To arrive at the valuation of a part, one has to value the whole, and the resultant valuation for this purpose would be an expensive business. I hope that the Financial Secretary will look at that.

Amendment No. 120 refers to moneys received in compensation, or insurance payments for other reasons than those set out in subsection (2) of Clause 21, and it relates to Clause 31 as well. Under the terms of that Clause, a trader can reinvest moneys and escape liability to Capital Gains Tax. However, in those particular circumstances, the landlord engaged in the letting of agricultural land or forestry land is not a trader within the meaning of that Section, as we have already discovered.

As a result, if a landlord receives an insurance payment following a total or partial loss of agricultural land or fixed equipment which is let, because he is not a trader he is prohibited from reinvesting the moneys without the penalty of paying Capital Gains Tax if they are invested in assets other than those destroyed. It could well be that the landlord would want to repair some other building with those moneys, but he would not be allowed to do it under the existing definition. That was the main point that my right hon. Friend the Member for Rushcliffe (Sir M. Redmayne) and I put forward in our Amendment to the Financial Secretary's Amendment.

Under the definition, that person can replace the asset as it stood, but he cannot reinvest in an alternative asset on the same farm, as we say he should be able to do, and as he could do under Clause 31. There is an anomaly here, and that is why we put our Amendment down. I hope that the Financial Secretary will see the reason for it. It is important that it should be established how exactly it will work.

Mr. Harold Lever

It is to be welcomed, from every point of view that this Amendment should be put down. It mitigates quite substantially the original ferocity of the Clause, which deemed a man to have disposed of his asset at a profit when he had it burned and merely collected the insurance money. I would not like my gratitude to overflow in such bounteousness as to imply any approval in principle of Clause 21. That Clause has been sufficiently debated, and the Amendment is a significant and substantial mitigation of hardship.

I ask my hon. and learned Friend to reflect whether the exercise was really worth while. He has added a substantial chapter to our tax law for the purpose of treating the revenue which comes to a man, not from his assets but from his insurance policy, as a capital gain from an asset. In consequence, the Inland Revenue inspectors will have to learn a complex chapter of the law. The hon. and learned Gentleman must bear in mind that those inspectors already have a formidable burden placed upon them by our new legislation and that we ought to keep it within some bounds.

7.30 p.m.

I am also troubled by the fact that the wording is rather loosely drawn. My hon. and learned Friend has given me an assurance—I know with full sincerity and candour—that "replacement of the asset" will be interpreted sensibly. I do not know what "sensibly" means here. I know that my hon. and learned Friend would interpret it sensibly, and that most inspectors of taxes, if told to do so will interpret it sensibly, but I think that my hon. and learned Friend should consider issuing a standard directive to apply to all parts of the country when this provision comes into force.

Is it a "sensible" replacement of a lost painting if, instead of buying a painting, I buy a sculpture? I may have a Degas, which is burnt. I get £20,000, but it is difficult to find something to replace the painting—I have to find it within 12 months. If I fail but, instead, find a satisfactory sculpture, would the Inland Revenue regard that as a sensible replacement, not prejudicial to the interests of the Revenue? We should have a clear definition of replacement.

There is also the question of partial restoration. My valuable painting, worth £100,000, may catch fire. As a result of a corner being burnt off, it is thereafter probably worth only £20,000 in the market. The insurance company pays me £80,000 as compensation for the loss I have suffered. I may need to spend only a fraction of that sum in restoring the corner of the painting. What am I to do to get the relief offered in the Amendment in respect of, say, £79,000? Have I to lavish all that money on the corner of a painting that cannot be restored, or am I allowed to buy another painting, or must I treat myself as having realised a partial gain because I have received £79,000 or £80,000 compensation for the diminution in the market value of my asset because of damage?

Will my hon. and learned Friend help me here? Am I trapped—because the asset has been only partly damaged—into paying the tax because I cannot replace an asset that has not been totally destroyed, and where compensation is not an assessment of the cost of putting it right—because it cannot be put right—but an estimate of the depreciation in the capital value of the asset? In those circumstances, would it be possible for me, as I now have a burnt Rembrandt with a corner missing, to use the other £80,000 to buy another, small Rembrandt and then be deemed not to have had a partial depreciation in that Rembrandt?

I regret having to trouble my hon. and learned Friend with these questions, and I also regret that the general public have to be troubled with these questions.

Mr. Peter Walker

I beg to move, as an Amendment to the proposed Amendment, in line 46, to leave out subparagraph (5).

I am sure that the House has listened with sympathy to the account of the potential ravages to the art collection of the hon. Member for Manchester, Cheetham (Mr. Harold Lever) —

Mr. Lever

Purely hypothetical.

Mr. Walker

I hope that the Financial Secretary will be able to put the hon. Gentleman's mind at rest, lest any of his more valuable paintings are damaged.

The hon. Member for Cheetham is one of those who yesterday pointed out what a complete nonsense the Government's attitude to insurance payments has been, and although it would be out of order for me to discuss Clause 21, which was discussed yesterday, the fact is that this entire Government Amendment is required to try in some way to repent for what has been a basically completely wrong principle. I say with sincerity that there are many parts of this Bill with which I have disagreed, and probably the disagreements have been due to political attitudes, and so on, but I think that this major part of the Bill is a fundamental nonsense of the first order. I therefore very much regret that we should have imposed on us an Amendment that has the aim somewhat to reduce that nonsense.

Sub-paragraph (5) of the Government Amendment relates to the exclusion from the provisions of the paragraph of wasting assets. The Financial Secretary said that by its very nature a wasting asset is one that diminishes in value but, as defined by the Bill, a wasting asset may be an asset which, in certain possibilities, reduces in vail, but the items specified in paragraph (9) of Schedule 6 as being wasting assets are all items which should enjoy the benefits of this provision.

First of all, paragraph 9(1,b) states: … animals shall not be regarded as wasting assets so long as they are immature … There must be mature animals which will be insured, and it could well be that payments under an insurance policy could result in a capital gain. The owner of the mature animal might immediately reinvest in a similar mature animal of the same age, and wasted to the same extent, but not enjoy the benefit of this Clause. The same thing applies to sub-paragraph (c), relating to property involved in a life tenancy, and to sub-paragraph (b), which relates to plant and machinery.

There could be leasehold property with a lease of less than 50 years, where the wasting asset provision would apply, yet there would have been a capital gain at the time of the insurance payment, and although the person invests in a similar leasehold property he will not enjoy the benefit of the Clause.

The deletion of sub-paragraph (5) would slightly improve the provisions of an Amendment that I regard as wholly unnecessary in the sense of making capital gains on insurance payments subject to Capital Gains Tax. To impose Capital Gains Tax upon something that has resulted from the payment of premiums is wrong in the first place, but, the Government having tried to mitigate the wrong, I believe that the mitigation would be improved by the deletion of the subparagraph.

Mr. MacDermot

Perhaps I may have permission to speak again. First, I can tell the hon. Member for Cornwall, North (Mr. Scott-Hopkins) that the particular matter to which he referred in speaking of this Amendment is largely covered by the Government's Amendment, or is to a substantial extent. Dealing with the question of insurance money in the particular case to which the hon. Gentleman referred, if the landowner who has suffered damage or loss to his property uses the insurance moneys to replace the assets, he will be able to enjoy the advantage of the new paragraph.

Applying this to agriculture, I would say again that the intention is to make a sensible approach to the problem. If, for example, certain farm buildings have been destroyed, the requirement will not be that identical farm buildings must be put up in their place. The owner will no doubt want to take the opportunity to put up a more modern type of buildings, and there is no reason why he should not do so if it amounts substantially to a replacement of the old buildings. A sensible approach would be made, but this would not enable him to use those moneys for some quite other type of investment elsewhere. Therefore, it will certainly not be as wide as the kind of provisions we find in Clause 31. I must make that quite clear.

I sometimes feel that I should put wax in my ears when my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) is speaking because the temptation to be drawn on to the rocks by the carefully thought out examples upon which he entices me to try to comment are such that Ministers ought to avoid. [HON. MEMBERS: "Why?"] For a reason which I have stated a number of times during our discussions. All that it is right or sensible for me to try to do in these matters is to state the principles underlying a Clause or Amendment and to say again the principles upon which it is proposed to administer it if the House sees fit to accept them. It would always be a mistake to try off the cuff to give an answer to detailed borderline cases carefully thought out, which are the sort of problems which will have to be worked out in the course of the application of this or any similar sort of legislation.

My hon. Friend said that he was glad to hear that the Inland Revenue—whom yesterday, I think, he called pedants—would be sensible in the administration of these provisions. He asked about replacement of a Dégas. He asked a question about initial damage to a Rembrandt. I find it difficult to follow through the circumstances of his particular illustrations, but in any event I shall not be drawn into trying to comment upon it.

The hon. Member for Worcester (Mr. Peter Walker) spoke in support of his Amendment to leave out sub-paragraph (5), which deals with wasting assets. I do not think he challenged what I said—that the provisions in this sub-paragraph, which grant relief which I think have been generally welcomed by the House, would not be apt to be applied to wasting assets. The form in which they are cast would be impossible to apply to wasting assets. Possibly he is the only hon. Member who would be interested in a detailed explanation of the precise reasons for them. I shall gladly explain them to him in greater detail if he wishes.

The effect, therefore, is that when a wasting asset is destroyed and insurance

moneys are received, if there has been a capital gain realised at that time—and, of course, it does not follow by any means that there will have been—I am afraid there will be liability to tax on that gain.

Mr. Peter Walker

If I may have leave of the House to speak again, I must say that the reply by the Financial Secretary was completely unsatisfactory. He must realise that it is completely wrong that if one suffers a loss of what is defined by the Bill as a wasting asset and one replaces it with a similar asset one should not receive the full benefits of this Amendment. I therefore urge my hon. Friends to divide the House.

Question put, That the words proposed to be left out stand part of the proposed Amendment:—

The House divided: Ayes 277, Noes 267.

Division No. 245] AYES [7.43 p.m.
Abse, Leo Darling, George Hale, Leslie
Albu, Austen Davies, S. O (Merthyr) Hamilton, James (Bothwell)
Allaun, Frank (Salford, E.) de Freitas, Sir Geoffrey Hamilton, William (West Fife)
Alldritt, Walter Delargy, Hugh Hamling, William (Woolwich, W.)
Atkinson, Norman Dell, Edmund Hannan, William
Bacon, Miss Alice Dempsey, James Harper, Joseph
Bagier, Gordon A. T. Diamond, Rt. Hn. John Harrison, Walter (Wakefield)
Barnett, Joel Dodds, Norman Hart, Mrs. Judith
Baxter, William Doig, Peter Hattersley, Roy
Bellenger, Rt. Hn. F. J. Driberg, Tom Hazell, Bert
Bence, Cyril Duffy, Dr. A. E. P. Healey, Rt. Hn. Denis
Benn, Rt. Hn. Anthony Wedgwood Dunn, James A. Heffer, Eric S.
Bennett, J. (Glasgow, Bridgeton) Dunnett, Jack Henderson, Rt. Hn. Arthur
Binns, John Edelman, Maurice Herbison, Rt. Hn. Margaret
Bishop, E. S. Edwards, Rt. Hn. Ness (Caerphilly) Hobden, Dennis (Brighton, K'town)
Blackburn, F. Edwards, Robert (Bilston) Holman, Percy
Blenkinsop, Arthur English, Michael Howarth, Harry (Wellingborough)
Boardman, H. Ennals, David Howarth, Robert L. (Bolton, E.)
Boston, T. G. Ensor, David Howell, Denis (Small Heath)
Bowden, Rt. Hn. H. W. (Leics S. W.) Evans, Albert (Islington, S. W.) Howie, W.
Boyden, James Evans, Ioan (Birmingham, Yardley) Hughes, Emrys (S. Ayrshire)
Braddock, Mrs. E. M. Fernyhough, E. Hughes, Hector (Aberdeen, N.)
Bradley, Tom Finch, Harold (Bedwellty) Hunter, Adam (Dunfermline)
Bray, Dr. Jeremy Fitch, Alan (Wigan) Hunter, A. E. (Feltham)
Broughton, Dr. A. D. D. Fletcher, Sir Eric (Islington, E.) Hynd, H. (Accrington)
Brown, Rt. Hn. George (Belper) Fletcher, Ted (Darlington) Irvine, A. J. (Edge Hill)
Brown, Hugh D. (Glasgow, Provan) Fletcher, Raymond (Ilkeston) Irving, Sydney (Dartford)
Brown, R. W. (Shoreditch & Fbury) Floud, Bernard Jay, Rt. Hn. Douglas
Buchan, Norman (Renfrewshire, W.) Foley, Maurice Jeger, George (Goole)
Buchanan, Richard Foot, Sir Dingle (Ipswich) Jeger, Mrs. Lena (H'b'n & St. P'cras, S.)
Butler, Herbert (Hackney, C.) Foot, Michael (Ebbw Vale) Jenkins, Hugh (Putney)
Butler, Mrs. Joyce (Wood Green) Ford, Ben Johnson, Carol (Lewisham, S.)
Callaghan, Rt. Hn. James Fraser, Rt. Hn. Tom (Hamilton) Johnson, James (K'ston-on-Hull, W.)
Carmichael, Neil Freeson, Reginald Jones, Dan (Burnley)
Chapman, Donald Galpern, Sir Myer Jones, Rt. Hn. Sir Elwyn (W. Ham, S.)
Coleman, Donald Garrett, W. E. Jones, J. Idwal (Wrexham)
Conlan, Bernard George, Lady Megan Lloyd Jones, T. W. (Merioneth)
Corbet, Mrs. Freda Ginsburg, David Kelley, Richard
Craddock, George (Bradford, S.) Gourlay, Harry Kenyon, Clifford
Crawshaw, Richard Gregory, Arnold Kerr, Mrs. Anne (R'ter & Chatham)
Cronin, John Grey, Charles Kerr, Dr. David (W'worth, Central)
Crosland, Rt. Hn. Anthony Griffiths, David (Rother Valley) Leadbitter, Ted
Crossman, Rt. Hn. R. H. S. Griffiths, Rt. Hn. James (Llanelly) Ledger, Ron
Cullen, Mrs. Alice Griffiths, Will (M'chester, Exchange) Lee, Rt. Hn. Frederick (Newton)
Dalyell, Tam Gunter, Rt. Hn. R. J. Lever, Harold (Cheetham)
Lever, L. M. (Ardwick) Page, Derek (King's Lynn) Spriggs, Leslie
Lewis, Arthur (West Ham, N.) Paget, R. T. Steele, Thomas (Dunbartonshire, W.)
Lewis, Ron (Carlisle) Palmer, Arthur Stewart, Rt. Hn. Michael
Lipton, Marcus Pannell, Rt. Hn. Charles Stonehouse, John
Loughlin, Charles Pargiter, G. A. Stones, William
Mabon, Dr. J. Dickson Park, Trevor (Derbyshire, S. E.) Strauss, Rt. Hn. G. R. (Vauxhall)
McBride, Neil Parker, John Stross, Sir Barnett (Stoke-on-Trent, C.)
McCann, J. Parkin, B. T. Summerskill, Hn. Dr. Shirley
MacColl, James Pavitt, Laurence Swain, Thomas
MacDermot, Niall Pearson, Arthur (Pontypridd) Swingler, Stephen
McGuire, Michael Pentland, Norman Symonds, J. B.
McInnes, James Perry, Ernest G. Taverne, Dick
McKay, Mrs. Margaret Popplewell, Ernest Taylor, Bernard (Mansfield)
Mackenzie, Gregor (Rutherglen) Prentice, R. E. Thomas, George (Cardiff, W.)
Mahon, Peter (Preston, S.) Price, J. T. (Westhoughton) Thomas, Iorwerth (Rhondda, W.)
Mahon, Simon (Bootle) Probert, Arthur Thornton, Ernest
Mallalieu, J. P. W. (Huddersfield, E.) Pursey, Cmdr. Harry Tinn, James
Manuel, Archie Randall, Harry Tomney, Frank
Mapp, Charles Rankin, John Tuck, Raphael
Marsh, Richard Redhead, Edward Urwin, T. W.
Mason, Roy Rees, Merlyn Varley, Eric G.
Mayhew, Christopher Reynolds, G. W. Wainwright, Edwin
Mellish, Robert Rhodes, Geoffrey Walden, Brian (All Saints)
Mendelson, J. J. Richard, Ivor Walker, Harold (Doncaster)
Mikardo, Ian Roberts, Albert (Normanton) Wallace, George
Millan, Bruce Roberts, Goronwy (Caernarvon) Warbey, William
Miller, Dr. M. s. Robertson, John (Paisley) Watkins, Tudor
Milne, Edward (Blyth) Robinson, Rt. Hn. K. (St. Pancras, N.) Weitzman, David
Molloy, William Rodgers, William (Stockton) Wells, William (Walsall, N.)
Monslow, Walter Rogers, George (Kensington, N.) Whitlock, William
Morris, Alfred (Wythenshawe) Rose, Paul B. Wigg, Rt. Kn. George
Morris, Charles (Openshaw) Ross, Rt. Hn. William Wilkins, W. A.
Morris, John (Aberavon) Rowland, Christopher Willey, Rt. Hn. Frederick
Mulley, Rt. Hn. Frederick (Sheffield Pk) Sheldon, Robert Williams, Alan (Swansea, W.)
Murray, Albert Shinwell, Rt. Hn. E. Williams, Clifford (Abertillery)
Neal, Harold Shore, Peter (Stepney) Williams, Mrs. Shirley (Hitchin)
Newens, Stan Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.) Williams, W. T. (Warrington)
Noel-Baker, Francis (Swindon) Short, Mrs. Renée (W'hampton, N. E.) Willis, George (Edinburgh, E.)
Noel-Baker, Rt. Hn. Philip (Derby, S.) Silkin, John (Deptford) Wilson, Rt. Hn. Harold (Huyton)
Norwood, Christopher Silkin, S. C. (Camberwell, Dulwich) Wilson, William (Coventry, S.)
Oakes, Gordon Silverman, Julius (Aston) Winterbottom, R. E.
Ogden, Eric Silverman, Sydney (Nelson) Woodburn, Rt. Hn. A.
O'Malley, Brian Skeffington, Arthur Woof, Robert
Oram, Albert E. (E. Ham, S.) Slater, Mrs. Harriet (Stoke, N.) Wyatt, Woodrow
Orbach, Maurice Slater, Joseph (Sedgefield) Yates, Victor (Ladywood)
Orme, Stanley Small, William Zilliacus, K.
Oswald, Thomas Snow, Julian
Owen, Will Soskice, Rt. Hn. Sir Frank TELLERS FOR THE AYES:
Mr. Lawson and Mr. Ifor Davies.
Agnew, Commander Sir Peter Brown, Sir Edward (Bath) Currie, G. B. H.
Alison, Michael (Barkston Ash) Bruce-Gardyne, J. Dalkeith, Earl of
Allan, Robert (Paddington, S.) Bryan, Paul Dance, James
Allason, James (Hemel Hempstead) Buchanan-Smith, Alick Davies, Dr. Wyndham (Perry Barr)
Anstruther-Gray, Rt. Hn. Sir W. Buck, Antony d'Avigdor-Goldsmid Sir Henry
Astor, John Bullus, Sir Eric Dean, Paul
Atkins, Humphrey Burden, F. A. Digby, Simon Wingfield
Awdry, Daniel Butcher, Sir Herbert Dodds-Parker, Douglas
Baker, W. H. K. Buxton, Ronald Doughty, Charles
Balniel, Lord Campbell, Gordon Drayson, G. B.
Barber, Rt. Hn. Anthony Carlisle, Mark du Cann, Rt. Hn. Edward
Barlow, Sir John Carr, Rt. Hn. Robert Eden, Sir John
Batsford, Brian Cary, Sir Robert Elliot, Capt. Walter (Carshalton)
Bell, Ronald Channon, H. P. G. Elliott, R. W. (N'c'tle-upon-Tyne, N.)
Bennett, Sir Frederic (Torquay) Chataway, Christopher Emery, Peter
Berkeley, Humphry Chichester-Clark, R. Errington, Sir Eric
Berry, Hn. Anthony Clark, William (Nottingham, S.) Eyre, Reginald
Biffen, John Cole, Norman Farr, John
Biggs-Davison, John Cooke, Robert Fell, Anthony
Birch, Rt. Hn. Nigel Cooper, A. E. Fisher, Nigel
Black, Sir Cyril Cooper-Key, Sir Neill Fletcher-Cooke, Charles (Darwen)
Blaker, Peter Cordle, John Fletcher-Cooke, Sir John (S'pton)
Bossom, Hn. Clive Corfield, F. V. Foster, Sir John
Box, Donald Costain, A. P. Fraser, Ian (Plymouth, Sutton)
Boyd-Carpenter, Rt. Hn. J. Courtney, Cdr. Anthony Galbraith, Hn. T. G. D.
Boyle, Rt. Hn. Sir Edward Craddock, Sir Beresford (Spelthorne) Gammans, Lady
Braine, Bernard Crawley, Aidan Gibson-Watt, David
Brewis, John Crosthwaite-Eyre, Col. Sir Oliver Giles, Rear-Admiral Morgan
Brinton, Sir Tatton Crowder, F. P. Gilmour, Ian (Norfolk, Central)
Bromley-Davenport, Lt.-Col. Sir Walter Cunningham, Sir Knox Gilmour, Sir John (East Fife)
Brooke, Rt. Hn. Henry Curran, Charles Glover, Sir Douglas
Glyn, Sir Richard Lloyd, Rt. Hn. Selwyn (Wirral) Ridley, Hn. Nicholas
Godber, Rt. Hn. J. B. Longden, Gilbert Ridsdale, Julian
Goodhew, Victor Loveys, Walter H. Roberts, Sir Peter (Heeley)
Gower, Raymond Lucas, Sir Jocelyn Rodgers, Sir John (Sevenoaks)
Grant, Anthony McAdden, Sir Stephen Roots, William
Grant-Ferris, R. Mackenzie, Gregor (Rutherglen) Royle, Anthony
Gresham Cooke, R. Mackie, George Y. (C'ness & S'land) St. John-Stevas, Norman
Grieve, Percy McLaren, Martin Scott-Hopkins, James
Griffiths, Sldon (Bury St. Edmunds) Maclean, Sir Fitzroy Sharples, Richard
Griffiths, Peter (Smethwick) Macleod, Rt. Hn. Iain Shepherd, William
Grimond, Rt. Hn. J. McMaster, Stanley Sinclair, Sir George
Gurden, Harold McNair-Wilson, Patrick Smith, Dudley (Br'ntf'd & Chiswick)
Hall, John (Wycombe) Maginnis, John E. Smyth, Rt. Hn. Brig. Sir John
Hall-Davis, A. G. F. Marples, Rt. Hn. Ernest Soames, Rt. Hn. Christopher
Hamilton, Marquess of (Fermanagh) Marten, Neil Spearman, Sir Alexander
Hamilton, M. (Salisbury) Mathew, Robert Speir, Sir Rupert
Harris, Frederic (Croydon, N. W.) Maude, Angus Stainton, Keith
Harris, Reader (Heston) Maudling, Rt. Hn. Reginald Stanley, Hn. Richard
Harvey, John (Walthamstow, E.) Mawby, Ray Stodart, Anthony
Harvie Anderson, Miss Maxwell-Hyslop, R. J. Studholme, Sir Henry
Hastings, Stephen Maydon, Lt.-Cmdr. S. L. C. Talbot, John E.
Hawkins, Paul Meyer, Sir Anthony Taylor, Sir Charles (Eastbourne)
Heald, Rt. Hn. Sir Lionel Mills, Peter (Torrington) Taylor, Edward M. (G'gow, Cathcart)
Heath, Rt. Hn. Edward Mills, Stratton (Belfast, N.) Temple, John M.
Hendry, Forbes Miscampbell, Norman Thatcher, Mrs. Margaret
Higgins, Terence L. Mitchell, David Thomas, Sir Leslie (Canterbury)
Hill, J. E. B. (S. Norfolk) Monro, Hector Thompson, Sir Richard (Croydon, S.)
Hirst, Geoffrey Morrison, Charles (Devizes) Thorpe, Jeremy
Hobson, Rt. Hn. Sir John Mott-Radclyffe, Sir Charles Tiley, Arthur (Bradford, W.)
Hopkins, Alan Munro-Lucas-Tooth, Sir Hugh Tilney, John (Wavertree)
Hordern, Peter Murton, Oscar Turton, Rt. Hn. R. H.
Hornby, Richard Neave, Airey Tweedsmuir, Lady
Hornsby-Smith Rt. Hn. Dame P. Nicholson, Sir Godfrey van Straubenzee, W. R.
Howard, Hn. G. R. (St. Ives) Noble, Rt. Hn. Michael Vaughan-Morgan, Rt. Hn. Sir John
Hunt, John (Bromley) Nugent, Rt. Hn. Sir Richard Vickers, Dame Joan
Hutchison, Michael Clark Onslow, Cranley Walder, David (High Peak)
Iremonger, T. L. Orr, Capt. L. P. S. Walker, Peter (Worcester)
Irvine, Bryant Godman (Rye) Orr-Ewing, Sir Ian Walker-Smith, Rt. Hn. Sir Derek
Jenkin, Patrick (Woodford) Osborn, John (Hallam) Wall, Patrick
Jennings, J. C. Osborne, Sir Cyril (Louth) Walters, Dennis
Johnson-Smith, G. (East Grinstead) Page, John (Harrow, W.) Ward, Dame Irene
Jopling, Michael Page, R. Graham (Crosby) Weatherill, Bernard
Jones, Arthur (Northants, S.) Pearson, Sir Frank (Clitheroe) Webster, David
Joseph, Rt. Hn. Sir Keith Peel, John Wells, John (Maidstone)
Kaberry, Sir Donald Percival, Ian Whitelaw, William
Kerby, Capt. Henry Peyton, John Williams, Sir Rolf Dudley (Exeter)
Kerr, Sir Hamilton (Cambridge) Pickthorn, Rt. Hn. Sir Kenneth Wills, Sir Gerald (Bridgwater)
Kershaw, Anthony Pike, Miss Mervyn Wilson, Geoffrey (Truro)
Kilfedder, James A. Pitt, Dame Edith Wise, A. R.
Kimball, Marcus Pounder, Rafton Wolrige-Gordon, Patrick
King, Evelyn (Dorset, S.) Powell, Rt. Hn. J. Enoch Wood, Rt. Hn. Richard
Kirk, Peter Price, David (Eastleigh) Woodhouse, Hn. Christopher
Kitson, Timothy Prior, J. M. L. Woodnutt, Mark
Lagden, Godfrey Pym, Francis Wylie, N. R.
Lancaster, Col. C. G. Quennell, Miss J. M. Yates, William (The Wrekin)
Langford-Holt, Sir John Ramsden, Rt. Hn. James Younger, Hn. George
Legge-Bourke, Sir Harry Rawlinson, Rt. Hn. Sir Peter
Lewis, Kenneth (Rutland) Rees-Davies, W. R. TELLERS FOR THE NOES:
Litchfield, Capt. John Renton, Rt. Hn. Sir David Mr. MacArthur and Mr. More.

Proposed words there inserted in the Bill.

Mr. MacDermot

I beg to move Amendment No. 84, Schedule 6, after "trees", insert "standing or".

Perhaps it would be convenient also to discuss Amendments Nos. 85 and 86.

These three Amendments implement an undertaking which I gave in the Committee stage to preserve for woodlands, in relation to the Capital Gains Tax, the existing favourable treatment which they enjoy for Income Tax. We went into the matter in some detail in Committee and I think it is fully covered.

Mr. Wingfield Digby

These three Amendments, taken together, are of some considerable importance to forestry, in which I must declare an interest. I have an interest in this, in contrast to shipping, where I have none at all. The Financial Secretary gave an undertaking, at about 2 o'clock on the morning of 1st June, that he would take steps to remove the Capital Gains Tax from growing trees. We could never see that there was any case for imposing it in the first instance.

The first of these Amendments makes he exemption quite clear in the case of growing trees for sale to the timber merchant. The other two are of even greater importance, as they make it quite clear that in no case will the actual growing tree have to bear the Capital Gains Tax. This is a logical position, because I cannot think of anything else which is growing and which bears the tax. I understand the Timber Growers' Organisation have examined these Amendments and are quite satisfied that they cover the case completely. I am therefore glad to be able to welcome the Amendments which I think are only right.

It might be worth mentioning to the House that last year we spent £545 million on the import of timber and timber products, which is more than double the total amount that we have spent since 1919 on the Forestry Commission. It will be seen that our efforts towards our timber requirements are not very great, and that is why we are importing 90 per cent. of timber required. These Amendments deal with the private sector of the industry, which has a very big part to play. Planting by private owners is very considerable. In 1961 it was not less than 36,800 acres. I am sure those who are interested in forestry, and interested in saving imports of timber, would wish to see this planting encouraged.

Had this Amendment not been moved there would have been two consequences. The first would have been that far less timber would have been grown, and the second would have been that far more trees would have been felled during the lifetime of an owner, so that we should have seen a depletion of our woodlands. At least we are grateful to the Government on this occasion for saying, "Woodman, spare that tree". I welcome this Amendment, which I think is going to give more confidence to those who plant timber. Unlike farmers, they have no guaranteed market and no guaranteed prices. Planting trees which will be of benefit only in 60 or 100 years' time is a considerable act of faith in the future. We are today benefiting from trees which were planted by our forefathers.

I am sure that there are many hon. Members on both sides of the House who have an affection for trees and who believe that it is right to encourage, or at any rate not to discourage, their planting. I therefore welcome these Amendments.

Amendment agreed to.

Further Amendments made: Schedule 6, in page 66, line 23, at end insert "under Schedule B".

In line 27, leave out sub-paragraph (3) and insert: (3) In the computation under this Schedule of the gain accruing on a disposal of woodland in the United Kingdom so much of the consideration for the disposal as is attributable to trees growing on the land shall be excluded.—[Mr. MacDermot.]

8.0 p.m.

Mr. MacDermot

I beg to move Amendment No. 164, Schedule 6, in page 67, line 36, at the end to insert: (2A) For the purpose of ascertaining the market value of any shares or securities in accordance with sub-paragraph (2) above—

  1. (a) section 40(3)(a) of this Act shall have effect as if for the words "one-quarter" there were substituted the words "one-half", and as between the amount under paragraph (a) and the amount under paragraph (b) of the said section 40(3) the higher, and not the lower, amount shall be chosen;
  2. (b) section 40(4) of this Act shall have effect as if for the reference to an amount equal to the buying price there were substituted a reference to an amount half-way between the buying and selling prices;
  3. (c) where the market value of any shares or securities not within the said section 40(3) falls to be ascertained by reference to a pair of prices quoted on a stock exchange, an adjustment shall be made so as to increase the market value by an amount corresponding to that by which any market value is increased under paragraph (a) above.
This Amendment, which is of some importance, has been tabled as a result of a point raised by the hon. Member for Worcester (Mr. Peter Walker) in Committee. Clause 40(3) as originally drafted laid down that the way to assess the market value on Budget day of shares in unit trusts was to calculate a figure of a quarter up from the lower price of the Stock Exchange quotation, or the mean of the bargains for the day if that be lower. The criticism was made that this would be unduly severe and, in its application to Budget day valuations, would give the Revenue a somewhat artificially increased gain in the event of later disposal.

I think that the estimate which the hon. Member for Worcester made of the gain was slightly exaggerated, but we take his point as being valid. We think it right, therefore, to take instead the halfway figure between the highest and lowest prices or the mean of the bargains, whichever is the lower. I think that in this way we will get a fairer Budget day valuation with the result that on subsequent disposals a better assessment of the gain involved will be given.

Mr. Peter Walker

I am grateful to the Financial Secretary for this Amendment. I accept his point that perhaps the estimates which I made were slightly exaggerated. I feel rather guilty at perhaps having robbed the Treasury of a potential taxable capital gain of a little less than £477 million. I appreciate the generous way in which the hon. and learned Gentleman moved the Amendment. I forgive him for the fact that at one o'clock in the morning of 31st May, when replying to an almost identical Amendment, he said: I cannot accept the arguments advanced by the hon. Member for Worcester (Mr. Peter Walker). They are based on a fallacy."—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1371.] I am pleased that he has now recognised that they are not based on a fallacy. I am sure that justice has been done by this Amendment.

Amendment agreed to.

Mr. MacDermot

I beg to move Amendment No. 87, Schedule 6, in page 67, line 48, to leave out "but" and to insert: and accordingly the amount of the gain or loss accruing on the disposal shall be computed without regard to the provisions of this Part of this Schedule except that". This is a drafting Amendment.

Mr. Heath

I wish to ask whether this Amendment is only a drafting Amendment. The same applies to Amendments Nos. 88, 89 and 90. They are all connected with the same part of the Schedule. This is an extremely difficult section of the Schedule to understand, and the Amendments seem to make it even more difficult to understand in many ways.

Those who have been studying the matter with great care, particularly the actuaries, find themselves completely at a loss to understand what this part of the Schedule means. It would therefore be of great assistance to them and, in particular, to those concerned with the gilt edged market if the Financial Secretary could tell us exactly what it will mean after these Amendments are made to it.

Mr. MacDermot

I should be assisted if the right hon. Gentleman could tell me what his difficulty is. I do not know whether he wants me to go back and to give a full account of the whole paragraph. Obviously he has a particular point in mind which I should be glad to try to answer. Alternatively, if it is a detailed matter, if he cares to get in touch with me I shall be glad to try to assist.

Mr. Heath

May I, with the leave of the House, say that the problem arises, in particular, when one takes Amendments Nos. 88, 89 and 90 together. However, these are extremely detailed points and, if the Financial Secretary is prepared to explain them to me in writing later, I will put them to him.

Amendment agreed to.

Mr. MacDermot

I beg to move Amendment No. 88, Schedule 6, in page 68, line 8, after "of" to insert "(a)".

This Amendment, and Amendments Nos. 89, 90 and 91, which can be taken with it, are all drafting Amendments, connected with these rather complicated provisions. They are intended to make them clearer, and, in spite of what the right. hon. Member for Bexley (Mr. Heath) said, I hope that they do that.

Amendment agreed to.

Further Amendments made: Schedule 6, in page 68, line 9, after "acquired", insert: and (b) identifying the shares or securities held on that date with shares or securities subsequently disposed of, and distinguishing them from shares or securities acquired subsequently".

In page 68, line 13, after "shares", insert "or securities".

In page 69, line 9, leave out "but" and insert: and accordingly the amount of the gain or loss accruing on the disposal shall be computed without regard to the provisions of this Part of this Schedule except that".—[Mr. Mac-Dermot.]

Mr. J. E. B. Hill

I beg to move Amendment No. 230, Schedule 6, in page 70, line 21, to leave out "not be earlier than 6th April 1945" and insert: be the beginning of the period of ownership". This Amendment refers to the time apportionment formula which was first mentioned in the Budget speech on 6th April when the Chancellor of the Exchequer said: For other assets"— that is, other than quoted shares and market valued securities— I do not propose that there should be an immediate valuation. Instead, my solution is that the taxable fraction of the total gain realised—that is, the part which accrues after today—shall be arrived at by a simple process of time apportionment. A little later he said: Where an asset was acquired more than 20 years ago, however, the period of time between acquisition and disposal will be treated as the period between today"— that is, Budget day— and the date of disposal plus 20 years. I think that 20 years is far enough to look back for this purpose."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 248.] There is some confusion as to what that meant and whether looking back no further than 20 years was confined to time or included value, but it is clear that the Bill and its accompanying memorandum mean that the value to be taken for this computation is the value at the time of the original acquisition before or after 1945, and that value is to be the base value for computing the capital gain.

Sub-paragraph (6) of paragraph 23 says that the period over which the gain or the loss shall be spread shall not begin before 6th April, 1945. The object of the Amendment is to substitute the true period of ownership for this arbitrary limitation to 20 years.

This limitation is important when making the calculation of liability for Capital Gains Tax. By the formula which can be seen in sub-paragraph (3) of paragraph 23 of the Schedule, there is a rather complicated formula of T/P+T, where T is the time from Budget day to disposal of the asset—that is, the numerator of the fraction—and P in the denominator is the time from acquisition to Budget day, plus T, again the time from 1965 to disposal. That fraction is applied to th notional capital gain. Where the asset was acquired before 1945, it will be found that the fraction of Capital Gains Tax is markedly higher than if the true period of ownership were allowed.

It is, perhaps, easier to explain this rather complicated conception by an example. Of many examples, I hope that this one is reasonably simple. Suppose that one has an asset which was acquired in 1925 and is sold in 1970. The time of ownership before Budget day would be 1965 less 25, or 40 years. The time of ownership between Budget day and disposal would be from 1965 to 1970, or 5 years. Therefore, under the Bill the numerator of the fraction would be 5 and the denominator would be, not 40, which is the actual time of ownership, but limited by sub-paragraph (6) to 20 years. Therefore, the denominator would be 20 plus 5 and the fraction 5/25, or one-fifth, as the relevant fraction to apply to the capital gain. If, on the other hand, the Amendment were accepted, the denominator in the fraction would be 40 plus 5 and the fraction 5/45, or one-ninth, which 45, is little more than half the liability to tax under the existing Schedule.

Many other cases could be worked out, but to save time I will summarise by saying that in all cases the Capital Gains Tax is higher than if the true dates were chosen. Therefore, we say that this is an element of retrospection despite the general belief that this tax contains no retrospection, which was confirmed by the Financial Secretary yesterday, when he said: There is no retrospective element in the Capital Gains Tax. It applies only as from Budget day and there is no taxation of any pre-Budget day gains."—[OFFICIAL REPORT, 6th July, 1965; Vol. 715, c. 1533.] I would say that there is here an element of retrospection, because it is hitting more severely the asset that is held longer and which has grown over a longer period than an asset which has been held for a shorter period.

The Financial Secretary may say that if the taxpayer dislikes the time apportionment rule, he can opt for a Budget day—1965—valuation as an alternative. When one thinks of actual circumstances, however, there may be many cases when it is not possible to get a 1965 valuation, or, at least, one that is not markedly unfavourable, often through temporary circumstances.

8.15 p.m.

To take the example of farmland, on Budget day, 1965, a farm might be under a severe disability, which might only be temporary but would make it difficult to value or, if it had to be valued, might result in an unfairly low valuation. I have in mind a farm that might recently have had a severe outbreak of foot-and-mouth disease or which may be under threat of a motorway route going right through it and destroying it as a farm.

Perhaps the most likely case will in future arise precisely because the Financial Secretary rejected an earlier Amendment in not disregarding the fact that a farm was tenanted when valuing the land. If a farm were purchased in, say, 1925 with vacant possession and subsequently let so that it was tenanted at Budget day, 1965, and if in 1970 or later it had vacant possession, there would be a marked difference in value between Budget day, 1965, and the date of disposal, so marked that it would be clearly against the taxpayer's interest to adopt the alternative Budget day option.

The same considerations and similar difficulties will arise in respect of other assets and chattels, particularly works of art, for which it may be impossible to get a satisfactory Budget day valuation. In each case the taxpayer will have to revert to the method of the time apportionment with its existing discrimination against assets acquired more than 20 years before Budget day. Those assets, however, might often be the ones that have been held without any thought of disposal—for example, family portraits or an agricultural estate which a family is trying to keep intact and to pass on as a going concern from generation to generation.

It may be argued that the 20-year limit is necessary because one has to stop somewhere for reasons of administrative convenience. I suggest that there is no argument, certainly no overwhelming argument, for that decision. Admittedly, this tax will involve complicated calculations. In any event, one would have to find the original value at the time of acquisition, and that can hardly be done without ascertaining at the same time the date of acquisition. I suggest, therefore, that the taxpayer should be allowed to put in the correct date and thereby have a fraction which works not more markedly in his favour than any other fraction where the asset has been held for less than 20 years. This calculation will operate only once in respect of each chargeable asset on the occasion of its first disposal after Budget day, 1965.

It is desirable that any new tax, particularly a tax as sweeping, as drastic and as novel in conception as this one, should in its detail operate as fairly as possible between different taxpayers in the light of the principles on which the tax is said to be based. I understood the idea to be that there would be no retrospection. Although I agree that it is arguable exactly how retrospective this tax is, I regard it as incontrovertible that there is an element of retrospection. For these reasons, the Amendment should be accepted.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I should like to support my hon. Friend the Member for Norfolk, South (Mr. J. E. B. Hill) because I referred to this on Tuesday night when the Financial Secretary was good enough to wind up the debate we had on chattels and at that time I said that I was thoroughly unhappy about the time apportionment formula, and this seems the moment to raise the point which I have in mind.

The Financial Secretary was very pleased with the time apportionment formula and thought it very fair and he thought it would encourage people to accept the tax because it was an alternative to the valuation on Budget day. I personally feel one very great disadvantage of the formula remains. For a long past valuation, for something which was acquired 60 or 80 years ago, it is necessary, to have the time apportionment valuation, to value it at the time of its acquirement those many years ago, and that, I think, is a very much more difficult and unfair thing to ask the taxpayer to do than to ask him to accept the Budget day 1965 valuation, when it is much easier to get somewhere near the right point. With this formula which my hon. Friend mentioned T over P+T, there is really an element of retrospection coming in, because the figure P in the bottom half of the fraction is limited by Clause 23(6) to 20 years ago, though the actual period may have been 46, 60 or 70 years, to be within the scope of a man's lifetime. Nevertheless, because the Government are limiting the bottom half of the fraction to an arbitrary period of 20 years from Budget day in the bottom half of the fraction it seems to me it must work against the interests of those who have possessed objects for a long time, longer than 20 years. There is no complaint in the case of possessions owned for 20 years or less, but where the possession is of older origin there must be an element of retrospection.

I will give another example from chattels to support my hon. Friend's case. Suppose that a picture worth £10,000 was inherited in 1895 and that it was sold or got rid of for £50,000 in 1975, in that 80-year period there was a gain of £40,000, an ascertainable gain, which is what we are considering. On the facts of the case, the Capital Gains Tax would have been, in effect, only for 10 out of those 80 years. Therefore, one would expect that man to pay one-eighth or 10 over 80 of the gain which would amount to £5,000, but as the Schedule is drafted the portion of the gain which he has to pay is 10 over 30, or one-third, making the total sum of £13,333 and that means he is being called upon to pay tax of £8,333 more on the gain than if the thing were organised on the principle of the genuine straight-line basis. So that £8,333 extra is retrospective and that cannot be denied.

I cannot for the life of me understand how the Financial Secretary came on Tuesday morning—or was it Tuesday night?—to claim that this tax was not retrospective. As he leaves this formula with the limiting date of April, 1945, there is bound to be a retrospective element, and I urge him most strongly to live up to his undertaking and to his desire not to have this tax made retrospective, and to accept this Amendment which, I believe, would do the trick.

I do not think that people will opt for the time apportionment formula as the Financial Secretary claimed, that in the vast majority of cases it will be in the interests of the taxpayer to adopt the straight-line basis because it will operate to his benefit. I do not think that is so. In nearly every case they will have to pay more Capital Gains Tax, and the longer a man has owned an object, an heirloom, say, or something going back many years in his possession, the more there will be a retrospective element in the taxable gain. This will bring more and more people to opt for Budget day valuation of the two methods, and this will put a greater strain upon the resources of the Treasury, about which, I know, both sides of the House are not entirely agreed, to provide the valuations which are necessary.

Finally, I would ask the hon. and learned Gentleman to tell us what is the reason for inserting this arbitrary date of April, 1945, in this Schedule? Why has he chosen this period of 20 years which gives an advantage to anybody who has acquired an asset within 20 years and must make any asset which was acquired more than 20 years retrospectively treated under the tax? Why cannot he accept this Amendment and cut out this extraordinary insertion of the 20-year period which must make his whole tax retrospective in regard to this formula? I feel certain that it is not his intention. Therefore, I urge him most strongly to accept the Amendment.

Mr. MacDermot

To deal first with the last point raised by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), I was not sure whether he was thinking that a person who had acquired an article less than 10 years before Budget day would have an advantage of a 20-year addition for purposes of calculating the straight-line apportionment?

Mr. Ridley


Mr. MacDermot

Of course he would not. In this we appear to be at one.

When the hon. Member for Norfolk, South (Mr. J. E. B. Hill) moved the Amendment he began by reading a passage from the Budget speech of my right hon. Friend. May I continue the passage he read by reading the next sentence: I hope that by this simple device we shall save a great deal of valuation work; but I should make it plain that in all cases which are prima facie subject to a time apportionment the taxpayer will have an option to take the actual value of the asset today"— that is, Budget day— as the starting figure, instead of the value calculated by means of the formula."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 248.] This tax is proposed on capital gains as from Budget day. The liability is in respect of capital gains as from Budget day. Therefore, whatever was the value on Budget day is the true base figure in assessing the capital gain. Therefore, since there is an option, the taxpayer will never be called upon to accept the time apportionment valuation if he thinks it is going to operate to his detriment.

Whenever it is accepted, it will be because the taxpayer thinks it is going to operate to his benefit and the Revenue is going to be the loser. This is an incontrovertible fact. Therefore, when the hon. Member for Cirencester and Tewkesbury and his hon. Friend suggest that there is some element of retrospection here, it is a complete fallacy. There is no element of retrospection at all. What we have devised—and devised in order to simplify the admittedly serious problem of Budget day valuation—is a formula which we believe the taxpayer will opt for in the vast majority of cases because it will operate to his advantage and to the detriment of the Revenue and save the trouble of valuation.

8.30 p.m.

The hon. Member for Cirencester and Tewkesbury said that this would result in the need for allowing past valuations in the case where the owner of a chattel had no idea what its value was at any past date—he may have acquired it by gift—and therefore one had to proceed by valuation. In most such cases he will want to proceed—in fact both sides will—on the basis of obtaining the best valuation that can be made of its value at Budget day. This time apportionment will normally apply when somebody has acquired an article, perhaps by inheritance, perhaps by purchase, and therefore has an Estate Duty valuation or a purchase price valuation.

What the Amendment is asking is that for the purposes of straight-line time apportionment we should accept that date of acquisition for the purposes of this calculation, and give an apportionment as from that date. Superficially that sounds attractive, but there is a fallacy in it, and it is that any straight-line valuation is unduly favourable to the taxpayer. The reason is that it assumes that the value increases at a simple interest rate, and not at a compound interest rate. One leaves out of account fluctuations in the market. One knows that works of art come into fashion and that a work increases in value because there is a sudden vogue for that artist. We must leave that kind of thing out of account altogether and assume an article which over a period of time has increased in value at a steady rate, to use a neutral term. If it increases at a steady rate, it will not increase at a straight line rate. It will increase at a rising curve, if one is to put it mathematically, and therefore to take a straight-line valuation is to take something which is very favourable to the taxpayer.

It is for that reason that we must put a limit on it. This is not a question of administrative convenience. I am not arguing the 20-year period for administrative convenience. I am saying that in this matter there should be a limit to the generosity of the Revenue, because that is all that it is. The whole of this straight-line valuation basis is always, ex hypothesi, a basis which is more favourable to the taxpayer than his true liability, which is his liability to his gains as from Budget day.

Mr. Robert Cooke (Bristol, West)

The hon. and learned Gentleman has talked about generosity. It means that the Revenue is taking away a little less.

Mr. MacDermot

The generosity lies in allowing tax to be assessed on a basis which will arrive at a figure which is less than the true liability.

It was suggested that by this means Capital Gains Tax would be higher than if the true dates were chosen. That is not so, because the true date is Budget day. The hon. Member for Norfolk, South shifted his ground and sought to support his argument by saying, "Your argument that you can choose the true valuation at Budget day may operate very unfairly, because at Budget day an asset may have been at a lower value, for example if it was agricultural land because it was subject to a tenancy, and later, at the time of disposal, the owner had it with vacant possession".

I would remind the hon. Gentleman that that is a classic example of the way in which a man is going to benefit by time apportionment, because his true gain will be hidden. If one assumes that he acquired the land with vacant possession, and he disposed of it with vacant possession, but at Budget day it is subject to a tenancy, he will in fact make a capital gain as between Budget day and the time of disposal, and that will be hidden. It will be lost to the Revenue because he will enjoy the benefit of time apportionment.

I was asked why we had chosen the arbitrary period of 20 years. The answer is that any period is arbitrary. Any period that we took could rightly be described as arbitrary, and so it is. One has to make an arbitrary decision as to the number of years. Bearing in mind the way in which this provision will operate, we think that the 20-year figure in general will produce a fair result. If we are wrong about that, we will be proved wrong very quickly, because taxpayers will opt for the Budget day valuation and not for the time apportionment. We will experience who is right, but, for the reasons which I have indicated, we think that the 20-year period will operate favourably to the taxpayer.

To take up the example given by the hon. Member for Cirencester and Tewkesbury about the picture which in 1895 was worth £10,000 and in 1975 will be worth £50,000, a £40,000 gain; the hon. Gentleman did not tell us what he was assuming to be the true Budget day valuation, and this is a very pertinent consideration. It may well be that a greater part of the gain in the value of that picture will have been through a sudden revival of interest in a Victorian artist, whoever it may have been, so as greatly to increase the value of the picture in the latter years of the post-Budget period. By the straight line method, the taxpayer will achieve a more favourable result, and if he does not think so he can proceed on the basis of the Budget day valuation.

We have put forward a figure which, we believe, will operate in the vast majority of cases to the benefit of the taxpayer and which is, therefore, what we believe to ge a fair figure.

Mr. Robert Cooke

Having heard the Financial Secretary, I must say that I am supremely unconvinced by his arguments. He said that the time apportionment formula would save the need for many valuations, which would suggest that it would find widespread acceptance. Yet he went on to say that it would probably always act to the disadvantage of the taxpayer who would be better to have a real valuation at Budget day. He then went on to explain that the 20-year period would be even more disadvantageous to the taxpayer and that it would be much better if he could have a true period and reckon the real life of the article and the gain applied over the actual period of ownership. Finally, he made the point that the greater part of the gain might have taken place because of changing fashions after Budget day.

I must leave the House with the thought that the value of almost any article of real property, any tangible moveable property, or anything else worth having, went down severely on Budget day and stayed down severely after that. As long as the present Government are in office, no doubt it will remain severely down. I do not think much of the argument on that score. I could go on a great deal longer on this subject, but I think that I have said enough to make it clear, when the OFFICIAL REPORT is read tomorrow, that the hon. and learned Gentleman has not answered our arguments.

Mr. J. E. B. Hill

By leave of the House, may I say that I disagree with the Financial Secretary's view? I grant that, given the time apportionment method with only simple interest, the straight line, the Treasury is being favourable to the taxpayer. Personally, I do not mind the Treasury being favourable to the taxpayer. The Financial Secretary ought not to have a guilty conscience about it.

With the 20-year rule, the Treasury is acting unfavourably to some taxpayers, which is the point of the Amendment. Sometimes, Budget day valuation may be impossible simply because there is no hope of agreement. For example, what would be the value on Budget day of an unrecognised Stubbs standing at £100 until discovery and valued after Budget day at £25,000? What hope would there be of getting a Budget day valuation?

I adhere to the view that this provision is retrospective. I would have liked to have pressed the Amendment to a Division, but, because I want to be much fairer and more helpful to the Financial Secretary than he is being to the taxpayer and in order to save him time, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendments made: Schedule 6, in page 70, line 48, at end insert: (10) If under this paragraph part only of a gain is a chargeable gain, the fraction in section 28(3) of this Act shall be applied to that part instead of to the whole of the gain.

Schedule 6, in page 71, line 36, leave out from "shares" to end of line 37 and insert: which are to be treated under this Part of this Act as if disposed of and immediately re-acquired by him on that date".—[Mr. MacDermot.]