HC Deb 31 May 1965 vol 713 cc1407-41

Amendment made: In page 146, line 48, leave out "5" and insert "3".—[The Solicitor-General.]

Mr. Heath

I beg to move Amendment No. 481, in page 147, line 50, at the end to insert: (iv) the disposal of a fixed interest Government, local authority or Dominion bond or stock where the proceeds of a sale are reinvested in a fixed interest Government, local authority or Dominion bond or stock. This is the third occasion in Committee on which we have debated the question of capital gains on stocks and bonds in the gilt-edged market. We debated it last Wednesday, when the Chancellor made a statement to the Committee. We debated it again on the Thursday night, when his hon. Friend the Chief Secretary answered the debate, and I make no apology for raising it again tonight because it is a matter of the utmost importance.

When the Chancellor made his statement many hon. Members voiced their anxieties, in their preliminary reactions, to the fresh arrangements which he was proposing. When we debated the matter on the second occasion we were able to point to the consequences which were already being seen in the gilt-edged market. The major and lamentable consequence was that dealings had been suspended that morning for about two and three quarter hours to enable the market to adjust itself to the consequences of the Chancellor's concession, as he termed it.

Now it is possible to weigh the further consequences of the Chancellor's action. I said last Thursday that I thought that one of the major results had been to make a sudden change in the relationship between the different stocks in the market. It is now clear that the Chancellor's concession made an arbitrary alteration in the relationship between the different stocks. I pointed out that from the point of view of affects on the management of the market, changes should be of a gradual kind, but in an unprecedented way there was introduced this sudden change in the relationship between the different stocks in the market.

This has had a number of results. One has been that because this change produced such arbitrary results, there is now a much greater degree of uncertainty in the market about any future action which may be taken. Both the jobbers and the institutions fear that there having been an arbitrary change of this kind once, further arbitrary changes may follow. This we must accept as a direct result of the Chancellor's intervention.

The second consequence of this is that because of the additional risk which stems from this uncertainty the jobbers' turn in the market has undoubtedly widened. This, again, is a direct result of the Chancellor's action and it is undesirable in the general running of the market although it is fully understandable in the position in which the market now finds itself.

2.45 a.m.

The result of this arbitrary change in the relationship between stocks means that the market is no longer the homogenous market which it was and has been throughout its history, until the intervention of the Chancellor last Wednesday night. This has certain consequences, too. It means that the stocks now have to be treated to a much greater extent individually as stocks in the market and the jobbers' books balanced for each stock in the market instead of the market being treated as one homogenous whole. This in itself has the further consequence that it makes switching extremely difficult, if not virtually impossible. Certainly, it is much more difficult than it was in the homogenous market. This is probably one of the most important consequences of the Chancellor's intervention.

It is with those particular points that this Amendment deals, because the consequence of this amendment is to remove the Capital Gains Tax in the case of stocks which are being switched in this market. The Chancellor will remember that in the original group of Amendments we separated these stocks and dealt with them individually. In this Amendment we are treating the market as a whole, which it is, and the Amendment covers the switching of all these stocks.

Since the Chancellor's intervention the position is that some stocks are Capital Gains Tax free and some are totally taxable and some, the majority, are halfway between the two. Each has a different character, depending on the relationship of the current price to the issue price to the redemption price. This means the relationship between the stocks is nothing like as close as it was in the past and has been throughout the history of the market.

It would have been possible for the Chancellor when he considered our Amendment last week and the important factors put before the Committee by my right hon. Friend the Member for West Flint (Mr. Nigel Birch), in his admirable speech, to have rejected the Amendment and to have said that he would have adopted this particular solution of allowing stocks being switched to be free of capital gains. This would have been an alternative course of action for him to have taken instead of the course which he put before the Committee.

I have considered whether, in the new context of his intervention, this Amendment is desirable and I have come to the conclusion that the Chancellor's intervention makes it even more desirable. As a result of his intervention the fluidity in the market is greatly diminished. This Amendment will restore to a considerable degree the fluidity of the gilt-edged market. This is important from the point of view of the market itself and also for the Chancellor in the management of the National Debt.

It is important this year for the double reason of the conversion operation which the Chancellor believes it is necessary to take and also because of the large amount of Debt which he has to raise about which he told us in his Budget and in the Second Reading of the Bill. For these reasons I believe that increased fluidity in the market is essential to the Chancellor, for his own purposes, and not only for the benefit of the market itself.

There is the other aspect of the institutions in the market, and particularly the life offices. It is well known that the life offices have a very great holding of gilt-edged—I believe the figure is 12 per cent. of non-official holdings—but the important thing is that the great bulk of the l2 per cent., certainly a very large amount of it, is long term. That means that 25 per cent. of the non-official holdings of long term are with the life offices. This matter, therefore, is of great importance for them, because the Bill as it stands, with the Chancellor's concession, militates against switching, and, therefore, militates against the effective management of their own securities—certainly that management which they have used in the past. But it is also important to the Chancellor, if I may say so, from the point of view of the management of the Debt, in which the switching by the life offices plays a very important part.

We are, therefore, constantly returning to the argument that the change we have suggested in the Amendment to exempt the gilt-edged market from Capital Gains Tax, and now to exempt switching from Capital Gains Tax, is not only important to the market itself, and what that means to the country as a whole, is not only important to the institutions which use it, but is also of fundamental importance to the Chancellor for the management of the Debt. All these things are interconnected.

I believe that the right hon. Gentleman's intervention, as we intimated at the time, caused great difficulty in the market. That has ensued. We have seen suspension of the market and a continuing state of confusion. In the market now we see uncertainty and a widening of jobbers' margins. We see a greatly decreased fluidity in the market, as well as the difficulty which the life offices will have in handling their own securities, with the difficulties this makes for the Chancellor's handling of the National Debt.

I therefore put it to the right hon. Gentleman as a matter of great importance that, particularly since his intervention last Wednesday, our Amendment should receive his urgent consideration. I urge that he should, particularly in the interests of his own high office and of the nation, consider accepting the Amendment, which would permit removing of Capital Gains Tax in respect of securities being switched in the gilt-edged market.

Mr. Callaghan

I will, of course, consider any such Amendment seriously, as the right hon. Gentleman knows. If I reached the conclusion that it was necessary to make changes, I would make changes, but I must say that at the moment I do not think that the right hon. Gentleman's case has been sustained. I must remind the Committee that I made this change at the request of the right hon. Gentleman the Member for Flint, West (Mr. Birch)—

Mr. Nigel Birch (Flint, West)


Mr. Callaghan

Oh, yes. It was the right hon. Gentleman who first put the point to me. He may feel that it was not a major point—and I am inclined to agree, in the light of a later Amendment—but it was on the basis of the letter he wrote to The Times, as well as his speech, that I felt—I should regret, perhaps, in the light of what has been said, that I should have been moved—that he had made out a case that should be answered.

Therefore, to the extent that there has been an arbitrary change in the taxation of Government stocks in this field I accept that I am responsible for it, but I should have thought that that would have been foreseen by those of the Opposition who asked that this change should be made. I think that I am entitled to say that to the Committee.

As to the question of the uncertainty created by the change amongst jobbers, we had better remove that uncertainty by my saying that I do not think that any further moves in this field need be made, so there need be no further uncertainty on that ground.

As to the switching point, I hope that the right hon. Gentleman will not mind my saying that I think that he is being very theoretical at the moment. He does not know how switching will settle down at all. I would put another opinion to him, that life offices will find—and, indeed, have found since last Thursday—many occasions for switching, and will continue to do so, and will find that it is extremely profitable that they should do so. They will be moving around in this field as they always have done from one kind of coupon to another, and there will be more variations and permutations and combinations now for them to try to find in order to get the best deal at that price.

I am no expert in this field—that I readily admit—but I can see enough of the possibilities, if one is in this field, of moving around, especially when the value of the stocks has been changed, and permanently changed, in the way it has. Therefore, I cannot accept the right hon. Gentleman's view that the fluidity of the market is impaired. It will be very interesting, over a period of six months or so, to see how the number of bargains marked up compares day by day with the period before the change and the period after. I shall be very surprised indeed if there is any more than a marginal difference or a difference which reflects other conditions quite unrelated to the change which has been made in the taxation arrangements.

The right hon. Gentleman said that switching becomes more difficult. I simply do not accept that it does. For the reason which I have given it seems to me that switching will be just as attractive—if not more attractive—to a number of institutions and persons in this market. What the Amendment would do would be to carry me far beyond the pledge, because no pledge was ever given about local authority or Dominions stocks. Therefore, I would not feel that there was any moral obligation on the Government to act in that field. The pledge which was given was in the interests of British Government stocks. Therefore, I could not accept it on those grounds.

Above all, I think that the whole idea of leaving out a section of the market such as the gilt-edged market would mean driving a coach and horses through a very big section of the taxation arrangements. We need not dwell on tax avoidance at any length tonight, but everybody who knows anything at all about this recognises the opportunities that acceptance of the Amendment would give in this field. It may be argued by some that we ought to try to strengthen the gilt-edged market. If that were felt to be the case, I must say that this is not the method that I would choose to strengthen it. The right hon. Gentleman did not advance that argument, but I have heard the argument advanced for getting rid of the Capital Gains Tax in this field that it would improve the tone of the market. If it is necessary to improve the tone of the gilt-edged market in the months ahead, I would certainly find other ways of doing it than accepting an Amendment like this one.

With respect to the right hon. Gentleman, I think that his case is unproven. I do not think that there is anything like enough experience for him to be so dogmatic about the conclusions that he arrived at, and, therefore, I cannot recommend the Committee to accept the Amendment.

Mr. Lubbock

I want to draw the attention of the Chancellor to the effects of his refusal on one very important class of investors, the building societies. The Chancellor said that if the Amendment were accepted it would drive a coach and horses through the tax provisions in the Bill. I say—I will give figures to prove my case—that the Chancellor is driving a coach and horses through the Government's declared policy of encouraging private home ownership.

I find this attitude a very odd one and inconsistent with what was said on a previous Finance Bill by the Chancellor of the Duchy of Lancaster when we were discussing taxation on building societies. It was on an Amendment moved by my hon. Friend the Member for Huddersfield, West, who is now Lord Wade. The Chancellor of the Duchy said: This is a proposal to relieve building societies of Profits Tax. I believe that there is a case—though I do not put it today—for relieving them of Income Tax as well. I think that in the light of this Finance Bill we have to get away from the conventional outlook of the Royal Commission on the principles of taxation."—[OFFICIAL REPORT, 29th May, 1963; Vol. 678, c. 1399.] That is what I ask the Chancellor of the Exchequer to do this evening. He will be aware that the effect of Section 58(1) of the Buildings Societies Act, 1962, is to permit building societies to invest only in those classes of investment which have been prescribed for the purpose by the Chief Registrar of Friendly Societies with Treasury consent.

This class of investment comprises Government quoted dated and Government guaranteed stock, Commonwealth and local authority securities, and the societies are also allowed to invest in local authority mortgages and deposits, but not in any shares issued by any limited company. The societies have invested very large amounts in the quoted securities which I have mentioned because by so doing they can have funds available through investment in easily realisable form for their day to day business and against demands which fluctuate with the period of the year. Any capital gain which building societies have been able to make hitherto from the judicious selection of their investments have been free from taxation apart from the short-term Capital Gains Tax which was imposed by the previous Government. That did not trouble them, and has constituted over the years a useful increment to reserve.

3.0 a.m.

Mr. Norman Ellis, Chairman of the Leicester Permanent Building Society, is reported in the May issue of "The Building Societies Gazette" as stating: We do strongly object to being penalised by retrospective taxation which destroys confidence in planning future development. On our present portfolio of Government stocks, the effect of a 35 per cent. Capital Gains Tax will be to deprive our reserves in the future of £428,000. As a result, our ability to attract funds for lending will be restricted by no less than £20 million. If this is to be the effect on our society holding £9,500,000 in Government securities, what will be the volume of funds denied to prospective house owners, bearing in mind that in total, building societies had £300 million invested in Government securities at the end of 1964? Of course, the answer, pro rata with that £300 million as against the £9½ million invested by the Leicester Permanent Building Society, will be that intending house purchasers will be deprived of about £600 million which would otherwise have been available for lending to them had it not been for the punitive provisions of the Bill. That is the blow which the Chancellor is dealing the ordinary would-be house owners.

Mr. Callaghan

No blow has been dealt either to the building societies or prospective house owners. Has the hon. Member no figures indicating the benefit which the Leicester Permanent Building Society will get from the Corporation Tax and for how much more money it will be able to lend because of the operations of that part of the Bill?

Mr. Lubbock

We are concerned only with Capital Gains Tax and I am quoting the Leicester Permanent Building Society figures to show the huge reduction in reserves which will be forced on it and the reduction in the amount of money consequently available for lending.

I have done my own calculations for the building societies as a whole, and when we come to Corporation Tax I shall have some Amendments which, I hope, the Chancellor will be prepared to accept. The unhappy effect of a Capital Gains Tax so far as the building societies are concerned is fairly obvious. While some societies have preferred to invest in local authority mortgages and deposits and will not, therefore, suffer in any way because of this new tax, most have invested in quoted securities because those are more speedily available. The new tax, working within circumscribed limits, makes for great inequality as between one society and another, notwithstanding that the law imposes stricter limits on building societies than on most other bodies.

Building societies must keep a certain proportion of reserves in order to maintain their trustee status, and if a society's reserves fall near to the minimum requirement any diminution in the amount transferred to reserve must mean a reduction in the society's rate of expansion when funds become more plentiful again at the end of the present credit squeeze. That, in turn, ultimately means that there will be fewer home loans not only from the Leicester Permanent Building Society, but also from all the others which are in exactly the same boat.

I put it to the Chancellor that not only myself but the Building Societies Association has said that this concession would be of great value to it and that it would like to see the Amendment accepted.

Mr. Birch

I thought that the exchange between the hon. Member for Orpington (Mr. Lubbock) and the Chancellor was hardly relevant to the Amendment. The hon. Member for Orpington was speaking against the application of the Capital Gains Tax to gilt-edged securities. That was the subject of an Amendment which we discussed last week, and was hardly relevant to the question of switching.

I hope that the Chancellor will not try to pin on me the muddle which he has created. I moved an Amendment to exempt all gilt-edged securities from the Capital Gains Tax. What he has done is to exempt some of them, to make some of them liable and to make some of them "spotted dogs", partially liable and partially not liable. Anybody should have realised that that would cause chaos in the market. If one introduces such a proposal at midnight on a Wednesday, one commits a bit of technical buffoonery which is beyond belief. It is staggering. For the Government Broker does not deal on a Thursday morning before Bank Rate is announced. If one intends to do something of this sort, which I believe to be wholly wrong, one should explain it over the weekend and possibly issue a White Paper so that people have some idea of what is intended. What the Chancellor did was wholly wrong and was bound to produce the results which were. in fact, produced.

One or two points have not been mentioned on the Amendments about switching. One of the troubles for the life offices at the moment arises from the fact that the prices of gilt-edged securities in the market are below their book price. When that happens, the life offices are locked in, as it were, in the sense that if they sell at below the book price they are immediately liable to Capital Gains Tax.

Suppose that gilt-edged securities rise to their book value. One of the reasons which induces life offices to hold gilt-edged securities is that they can get a rather better yield through switching operations. Dealing on the market one against another brings up the yield and makes gilt-edged more attractive relative to debentures than otherwise would be the case. The Bill makes that more difficult. There will, of course, be switching, but there will be far less of it, and dealings will be in smaller amounts.

We may be able to debate the point later, so I will not pursue it at this hour, but the Bill will make the management of the Debt more difficult. When a gilt-edged security is maturing, getting near its time, what generally happens is that people sell it and buy something else. Instead of that, in future the tendency will be to hold the security and to convert it, because if it is converted the Capital Gains Tax does not apply, whereas if it is held, it does apply.

The object of the Amendment is simply to provide that, if someone keeps his money in the gilt-edged market and does not disinvest, he does not pay the tax until he does finally disinvest. He does not get off the tax ultimately. but he does not have to pay it now. As matters stand, the whole business of Debt management will be about twice as difficult because the Government Broker, the Bank of England and the Treasury will not know what is likely to happen if they offer a conversion stock at the end. This is a very technical point, but I think that the Chancellor will find that the whole management of the Debt will be about twice as difficult.

The effect of the prohibition of switching will be that people will stay fixed and they will not swap out of a security which is maturing. The Chancellor will face a situation in which the Government will either have to pay in cash or offer a conversion stock but not know how it will be received. The confusion in the market in future will be great. I do not want to say any more about it now. It is a highly technical subject. In my view, the Chancellor has made a mistake here, and I hope that he will consider the matter again before Report.

Sir Alexander Spearman (Scarborough and Whitby)

My right hon. Friends have made an overwhelming case showing that, if there is a great diminution of switching, it will do great damage to Debt management. I gather that the Chancellor does not deny that, but he says that there will not be less switching. I ask him to take some expert advice on this. I assure him that there is less switching and there will be less.

Broadly speaking, there are two sorts of switching by life offices. One is called policy switching, when they switch from a long-dated stock to a short, or vice versa; and in this the advantages may be so great that it would be worth the cost of paying tax. But the vast bulk of switching is not policy switching at all. It is tactical switching to get a slight advantage.

As my right hon. Friend the Member for Flint, West (Mr. Birch) said, they hold gilt-edged stocks for this reason, because they can secure that extra result. The advantage of each switch is so small that it would become quite unfavouarble to have to pay Capital Gains Tax. It would cease to be worth while. Undoubtedly, there will be a great diminution of this switching.

What will the Chancellor gain by the insurance companies not having this advantage? His whole object is to restrict spending, but it will not have any effect on spending at all. It is always agreeable to get something for nothing, and paying something for something may be advisable. Here, however, the Chancellor is losing something and gaining nothing.

Mr. Heath

The Chancellor said that he would, naturally, consider anything said in this debate, but he added that he did not propose to make any change and wanted to make that absolutely clear. He is entitled to say that, and he indicated that he wished to obtain certainty.

But, of course, the right hon. Gentleman went on to create more uncertainty by adding that, if further measures were required in the gilt-edged market in order to strengthen it, he would take them. He would not take this sort of measure, but he failed to indicate what sort of measure he would take. It is this sort of statement by the right hon. Gentleman that produces further uncertainty in an already confused market. This fact has to be faced. We have had so much experience of it, from the preliminary statement about the Corporation and Capital Gains Taxes last November, continuing through the handling of our affairs, until now, tonight, we have this further statement that further action will be taken.

3.15 a.m.

I hope that the Chancellor will not return to the theme of his statement last Wednesday night, that he was adopting our proposals. As my right hon. Friend the Member for Flint, West (Mr. Birch) has made plain, there was no proposal on the Notice Paper that bore the least resemblance to the statement the Chancellor made in his speech last Wednesday night. In none of the speeches in this Committee last Wednesday night was there the slightest him of the sort of statement with which he came out. I do not think that in any of the speculation by the experts in the Press beforehand there was any suggestion that this course might be adopted. I therefore hope that the Chancellor, as he normally does, will take firmly and squarely on his own shoulders the responsibility for the conception of such a device and for putting it forward and for saying the Committee ought to carry it. We made our position plain on the last occasion by moving an Amendment to exempt the gilt-edged market from Capital Gains Tax.

So again, tonight, we want to make our position equally plain. We do not want the Chancellor and his hon. and right hon. Friends saying that it is our suggestion which they have adopted and, therefore, I urge my hon. and right hon. Friends to divide the Committee.

Question put, That those words be there inserted:—

The Committee divided: Ayes 166, Noes 177.

Division No. 156.] AYES [3.16 a.m.
Agnew, Commander Sir Peter Goodhart, Philip Monro, Hector
Alison, Michael (Barkston Ash) Goodhew, Victor Morrison, Charles (Devizes)
Allan, Robert (Paddington, S.) Gower, Raymond Mott-Radclyffe, Sir Charles
Allason, James (Hemel Hempstead) Grant, Anthony Munro-Lucas-Tooth, Sir Hugh
Amery, Rt. Hn. Julian Gresham Cooke, R. Murton, Oscar
Anstruther-Gray, Rt. Hn. Sir W. Grieve, Percy Noble, Rt. Hn. Michael
Atkins, Humphrey Griffiths, Peter (Smethwick) Nugent, Rt. Hn. Sir Richard
Baker, W. H. K. Gurden, Harold Osborn, John (Hallam)
Batsford, Brian Hall, John (Wycombe) Page, R. Graham (Crosby)
Beamish, Col. Sir Tufton Hall-Davis, A. G. F. Pearson, Sir Frank (Clitneroe)
Berry, Hn. Anthony Harrison, Brian (Maldon) Percival, Ian
Biffen, John Harvey, Sir Arthur Vere (Macclesf'd) Peyton, John
Biggs-Davison, John Harvey, John (Walthamstow, E.) Pickthorn, Rt. Hn. Sir Kenneth
Birch, Rt. Hn. Nigel Hastings, Stephen Pitt, Dame Edith
Blaker, Peter Hawkins, Paul Powell, Rt. Hn. J. Enoch
Bossom, Hn. Clive Heald, Rt. Hn. Sir Lionel Price, David (Eastleigh)
Box, Donald Heath, Rt. Hn. Edward Pym, Francis
Boyle, Rt. Hn. Sir Edward Higgins, Terence L. Quennell, Miss J. M.
Braine, Bernard Hill, J. E. B. (S. Norfolk) Ramsden, Rt. Hn. James
Brinton, Sir Tatton Hirst, Geoffrey Rawlinson, Rt. Hn. Sir Peter
Brown, Sir Edward (Bath) Hobton, Rt. Hn. Sir John Redmayne, Rt. Hn. Sir Martin
Bruce-Gardyne, J. Hogg, Rt. Hn. Quintin Ridsdale, Julian
Bryan, Paul Hordern, Peter Rodgers, Sir John (Sevenoaks)
Buxton, Ronald Hornby, Richard Roots, William
Campbell, Gordon Hunt, John (Bromley) Scott-Hopkins, James
Carlisle, Mark Irvine, Bryant Godman (Rye) Sharples, Richard
Carr, Rt. Hn. Robert Jenkin, Patrick (Woodford) Sinclair, Sir George
Clark, William (Nottingham, S.) Johnson Smith, G. (East Grinstead) Smith, Dudley (Br'ntf'd & Chiswick)
Cole, Norman Johnston, Russell (Inverness) Spearman, Sir Alexander
Cooke, Robert Kaberry, Sir Donald Stainton, Keith
Cooper-Key, Sir Neill Kilfedder, James A. Stodart, Anthony
Corfield, F. V. Kimball, Marcus Studholme, Sir Henry
Crosthwaite-Eyre, Col. Sir Oliver King, Evelyn (Dorset, S.) Taylor, Edward M. (G'gow,Cathcart)
Curran, Charles Kirk, Peter Taylor, Frank (Moss Side)
Dalkeith, Earl of Lambton, Viscount Teeling, Sir William
Davies, Dr. Wyndham (Perry Barr) Lancaster, Col. C. G. Temple, John M.
d'Avigdor-Goldsmid, Sir Henry Langford-Holt, Sir John Thomas, Sir Leslie (Canterbury)
Dean, Paul Legge-Bourke, Sir Harry Thomas, Rt. Hn. Peter (Conway)
Deedes, Rt. Hn. W. F. Lewis, Kenneth (Rutland) Thompson, Sir Richard (Croydon, S.)
Digby, Simon Wingfield Litchfield, Capt. John Tilney, John (Wavertree)
Doughty, Charles Longbottom, Charles Turton, Rt. Hn. R. H.
Elliot, Capt. Walter (Carshalton) Longden, Gilbert Tweedsmuir, Lady
Elliott, R. W.(N'c'tle-upon-Tyne,N.) Loveys, Walter H. van Straubenzee, W. R.
Eyre, Reginald Lubbock, Eric Walker, Peter (Worcester)
Farr, John Lucas, Sir Jocelyn Ward, Dame Irene
Fell, Anthony Mackie, George y. (C'ness & S'land) Weatherill, Bernard
Fletcher-Cooke, Charles (Darwen) McLaren, Martin Whitelaw, William
Fletcher-Cooke, Sir John (S'pton) Maclean, Sir Fltzroy Williams, Sir Rolf Dudley (Exeter)
Foster, Sir John Maginnis, John E. Wilson, Geoffrey (Truro)
Fraser,Rt.Hn.Hugh(St'fford & Stone) Maude, Angus Wise, A. R.
Fraser, Ian (Plymouth, Sutton) Mawby, Ray Wolrige-Gordon, Patrick
Gammans, Lady Maxwell-Hyslop, R. J. Wood, Rt. Hn. Richard
Gibson-Watt, David Meyer, Sir Anthony Wylie, N. R.
Gilmour, Ian (Norfolk, Central) Mills, Stratton (Belfast, N.) Younger, Hn. George
Gilmour, Sir John (East Fife) Miscampbell, Norman TELLERS FOR THE AYES:
Glover, Sir Douglas Mitchell, David Mr. MacArthur and
Mr. More.
Albu, Austen Blenkinsop, Arthur Castle, Rt. Hn. Barbara
Alldritt, Walter Boardman, H. Coleman, Donald
Allen, Scholefield (Crewe) Boyden, James Conlan, Bernard
Armstrong, Ernest Braddock, Mrs. E. M. Cousins, Rt. Hn. Frank
Atkinson, Norman Bradley, Tom Craddock, George (Bradford, S.)
Bagier, Gordon A. T. Brown, Rt. Hn. George (Belper) Cullen, Mrs. Alice
Baxter, William Brown, Hugh D. (Glasgow, Provan) Dalyell, Tam
Beaney, Alan Buchanan, Richard Davies, G. Etfed (Rhondda, E.)
Bence, Cyril Butler, Herbert (Hackney, C.) Davies, S. O. (Merthyr)
Bennett, J. (Glasgow, Bridgeton) Butler, Mrs. Joyce (Wood Green) Dempsey, James
Binns, John Callaghan, Rt. Hn. James Dodds, Norman
Bishop, E. S. Carmichael, Neil Doig, Peter
Blackburn, F. Carter-Jones, Lewis Donnelly, Desmond
Driberg, Tom Kenyon, Clifford Peart, Rt. Hn. Fred
Duffy, Dr. A. E. P. Kerr, Dr. David (W'worth, Central) Perry, Ernest G.
Dunn, James A. Lawson, George Popplewell, Ernest
Dunnett, Jack Ledger, Ron Prentice, R. E.
English, Michael Lever, Harold (Cheetham) Probert, Arthur
Ennals, David Lewis, Ron (Carlisle) Pursey, Cmdr. Harry
Evans, Albert (Islington, S.W.) Lomas, Kenneth Rees, Merlyn
Fernyhough, E. Loughlin, Charles Rhodes, Geoffrey
Fitch, Alan (Wigan) Mabon, Dr. J. Dickson Roberts, Albert (Normanton)
Fletcher, Sir Eric (Islington, E.) McCann, J. Robertson, John (Paisley)
Fletcher, Raymond (Iikeston) MacColl, James Robinson, Rt. Hn.K.(St. Pancras,N.)
Floud, Bernard MacDermot, Niall Rodgers, William (Stockton)
Foot, Sir Dingle (Ipswich) McGuire, Michael Ross, Rt. Hn. William
Foot, Michael (Ebbw Vale) Mclnnes, James Sheldon, Robert
Ford, Ben McKay, Mrs. Margaret Shore, Peter (Stepney)
Fraser, Rt. Hn. Tom (Hamilton) Mackenzie, Gregor (Rutherglen) Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
Freeson, Reginald Mackie, John (Enfield, E.) Silkin, John (Deptford)
Garrett, W. E. MacMillan, Malcolm Skeffington, Arthur
Garrow, A, MacPherson, Malcolm Slater, Mrs. Harriet (Stoke, N.)
Ginsburg, David Mahon, Peter (Preston, S.) Small, William
Gourlay, Harry Mahon, Simon (Bootle) Solomons, Henry
Greenwood Rt. Hn. Anthony Manuel, Archie Stewart, Rt. Hn. Michael
Gregory, Arnold Mapp, Charles Summerskill, Hn. Dr. Shirley
Grey, Charles Mason, Roy Swain, Thomas
Griffiths, Will (M'chester, Exchange) Millan, Bruce Thomas, Iorwerth (Rhondda, W.)
Hamilton, James (Bothwell) Miller, Dr. M. S. Thomson, George (Dundee, E.)
Harrison, Walter (Wakefield) Milne, Edward (Blyth) Tomney, Frank
Hazell, Bert Morris, Alfred (Wythenshawe) Urwin, T. W.
Herbison, Rt. Hn. Margaret Morris, Charles (Openshaw) Walden, Brian (All Saints)
Hobden, Dennis (Brighton, K'town) Mulley,Rt.Hn.Frederick(SheffieldPk) Wallace, George
Horner, John Murray, Albert Watkins, Tudor
Houghton, Rt. Hn. Douglas Neal, Harold Wells, William (Walsall, N.)
Howarth, Robert L. (Bolton, E.) Newens, Stan Whitlock, William
Howie, W. Noel-Baker, Francis (Swindon) Wilkins, W. A.
Hughes, Emrys (S. Ayrshire) Norwood, Christopher Willey, Rt. Hn. Frederick
Hunter, Adam (Dunfermline) Oakes, Gordon Williams, Alan (Swansea, W.)
Hynd, H. (Accrington) O'Malley, Brian Williams, Mrs. Shirley (Hitchin)
Irving, Sydney (Dartford) Oram, Albert E. (E. Ham, S.) Williams, W. T. (Warrington)
Jackson, Colin Orme, Stanley Willis, George (Edinburgh, E.)
Jay, Rt. Hn. Douglas Page, Derek (King's Lynn) Wilson, William (Coventry, S.)
Jeger,Mrs.Lena(H'b'n&St.P'cras,S.) Paget, R. T. Winterbottom, R. E.
Jenkins, Hugh (Putney) Palmer, Arthur Woof, Robert
Jenkins, Rt. Hn. Roy (Stechford) Pargiter, G. A. Wyatt, Woodrow
Johnson, Carol (Lewisham, S.) Park, Trevor (Derbyshire, S.E.) Zilliacus, K.
Johnson, James(K'ston-on-Hull,W.) Parker, John
Jones, J. Idwal (Wrexham) Parkin, B. T. TELLERS FOR THE NOES:
Jones, T. W. (Merioneth) Pearson, Arthur (Pontypridd) Mr. Ifor Davies and
Mr. Harper.

Amendment made: In page 148, line 32, leave out "being retained" and insert "retained being".—[The Solicitor-General.]

The Solicitor-General

I beg to move Amendment No. 169, in page 148, to leave out lines 41 to 43 and to insert: the two companies shall be treated as if any assets included in the transfer were acquired by the one company from the other company for a consideration of such amount as would secure that on the disposal by way of transfer neither a gain or a loss would accrue to the company making the disposal, and for the purposes of Part II of Schedule 6 to this Act the acquiring company shall be treated as if the respective acquisitions of the assets by the other company had been the acquiring company's acquisition of them: Provided that this sub-paragraph shall not apply in relation to an asset which, until the transfer formed part of trading stock of a trade carried on by the company making the disposal or in relation to an asset which is acquired as trading stock for the purposes of a trade carried on by the company acquiring the asset. Subsection (2) of paragraph 7 of the Schedule provides that where, under a scheme of reconstruction or amalgamation, one company takes over the whole or part of the business of a second company, the second company receiving no consideration for the transfer of the business—except by the other company taking over the whole or part of the liabilities of the business—any gain accruing to the transferring company on the disposal to the other company of any assets included in the transfer is not to be a chargeable gain.

In this matter the subsection as drafted follows the substance of the Finance Act, 1962, which provides miscellaneous rules appropriate to a short-term tax. But there has to be a difference in treatment according to whether one is dealing with a short-term tax or a long-term tax. In the case of a short-term tax it is unlikely that there will be such a reconstruction or amalgamation of two businesses twice within the space of the short-term tax time limit. But for the purpose of the long-term tax we submit that there should be no charge on the transferring company when it disposes of its assets, but that the company which takes over those assets should be treated as taking them over as if it had acquired them when they were in fact, acquired by the transferring company.

The consequence of this is, that when the acquiring company comes to sell those assets to some third party the gain made by both the first and second companies will at that time be brought into charge. That is what the first part of the Amendment does.

The Committee is obviously waiting eagerly for me to come to the proviso. Let me set the minds of hon. Members opposite at rest; it does not do more than provide—as is generally the case—for the distinction between capital transactions and stock-in-trade. That is the purpose of the proviso and I hope that without more ado the Committee will accept the Amendment.

Amendment agreed to.

3.30 a.m.

Mr. Michael Alison (Barkston Ash)

I beg to move Amendment No. 573, in page 149, line 6, at the end to insert: (2) Any gain accruing to a person disposing of his business other than by the transfer referred to in the foregoing paragraph, insofar as the total consideration for the disposal including the gain are forthwith invested in Government securities or saving certificates, shall be treated as though for the disposal here referred to neither a loss nor a gain occurred. I shall not detain the Committee very long at this hour of the morning, but I wish to raise a very important point of principle. I hasten to add, for the benefit of the Chancellor, that this is not a matter in which the principle of the Capital Gains Tax itself is at stake, but the principle of justice in its most basic and fundamental form—whether or not there should be one law for the rich and another for the poor. It seems to me that this principle is quite explicitly written into the Bill as it is at present drafted. The question at issue is simply described, and I hope that the Committee will forgive me if I refer to its main points, even if I oversimplify in the process.

The Committee will note that paragraph 8 of the Schedule provides that where a business is transferred to a company as a going concern in exchange for shares—this is the bull point; in exchange for shares—any gain accruing by this kind of disposal—I would draw the Committee's attention to the specific use of the word "disposal", which is of some significance—is not a chargeable gain so far as capital gains have been made. This is a concession of considerable scope and significance.

Let us imagine that a business has accrued over the years such capital gains as to have realised a capital gain which can be computed at £10,000. In so far as this capital gain and the principle sum to which it is attached is in exchange for shares in the company which took over the business, that £10,000-worth of capital gains remain inviolate, is not affected by the Capital Gains Tax, and maintains its virgin integrity as a capital gain.

If it is transferred for shares, the seller of the business has a completely unspoiled £10,000-worth of capital gains, but in shares and not in cash. Suppose that the business is not exchanged for shares but is sold for cash because nobody will offer the shares. That cash for which the business is sold attracts the 30 per cent. Capital Gains Tax and the person involved, so far from being left with the equivalent of £10,000-worth of shares, is left with £7,000 cash, which he may proceed to reinvest in the same shares that the taking over company may have offered for the business, but he has this 30 per cent. discount. The bite of this distinction goes hard and deep in the case of people who wish to retire and to dispose of their business in this way.

There will always be a large number of people, particularly small business people with small firms, who wish, at a certain time, to dispose of the business which they have built up over the years. Suppose that businessman A has built up his firm and accrued considerable capital gains on the original assets and has the good fortune to find a large company which will take over his small private undertaking in exchange for shares. The totality of his capital gains will be restored to him in the share equivalent, and he will therefore enjoy the full benefit of the estimated income, inviolate and unviolated by the Capital Gains Tax.

But poor businessman B, in precisely the same circumstances and who has built up his business with precisely the same integrity and hard work, is unfortunate enough not to find a company which will take him over and can effect his retirement only by selling for cash. He sells for £10,000, but gets only £7,000. He may reinvest in precisely the same shares, but he has only £7,000 with which to do it.

There seems to be no equity or logic to justify this discretion which is the sort of discrimination which will bite hard on people contemplating retirement. It means that one person in precisely similar circumstances to another and who has worked equally hard will suffer a disadvantage simply because he is unable to exchange his business for shares in the company which is taking him over.

Indeed, the discrimination goes deeper and is worse than I have so far described. It positively favours the large, prosperous businesses which are taken over. Neither I nor, I think, any of my hon. Friends has any quarrel with the principle that when a company is taken over in exchange for shares, there should be no Capital Gains Tax. These sort of takeovers help in preserving the continuity of management and it would certainly assist in the amalgamation of firms into large units which is undoubtedly beneficial to the economy and it would be to the advantage of the Chancellor if, as often as possible, there were cash take-overs.

When there is a cash take-over it is almost certain that some of the money will be spent thereby creating pressure of demand on the economy. When there is a share take-over no such pressure arises. It is desirable that we should encourage businesses to be taken over by shares, but this sort of transfer of a business to a larger company is to take place only where the business is of a considerable size. It is unlikely that any company which proposes to take over a business will be interested in producing little parcels of shares. Where a business is worth below, say, £25,000 the takeover is to be for cash. It is the firms that are taken over for about £250,000 which will get the advantage of the share exchange. The point is that the small man is affected.

If the "Co-op" takes over several small butchers' shops in towns and villages, shares will not be offered as there are no shares in this sense. The shops will be bought for cash and the seller will have to pay up to 30 per cent. capital gains tax. Lewis's, which has kiosks all over the country, may take over tobacconists, confectioners or newsagents and would not give shares because such parcels of shares would be too small. It would give cash and the seller who wanted to retire and live on an annuity would have to pay tax. C & A Modes is the kind of firm which has quoted shares but, nevertheless, in the process of taking over small individual businesses would not give shares because, again the parcels of shares would be too small, and so it would pay cash.

To come to the other end of the scale, where take-overs are made for exchanges of shares, I.C.I., proposing to take over Courtaulds, would exchange shares and the advantage in this respect would go to Courtaulds. This would be entirely to the advantage of Courtaulds, which would be able to live on the investment income from those shares unpenetrated by the Capital Gains Tax. Or Powell Duffryn, taking over a quarry, is the scale of operation where there would be a share exchange. The benefit is entirely in favour of the large firms which gets this postponed impact of the tax and allows the man who disposes of his business of retirement to live until the time of his death without suffering the imposition of the tax.

This is not only an inequitable and unjustified discrimination, but strikes at the very principle of what the Chancellor of the Exchequer has been trying to tell us in the Budget. This seems to be "To be who hath shall be given" and seems to discredit the whole basic approach of the Chancellor in justifying Capital Gains Tax on the basis of fairness among different categories of taxpayer and different types of citizen. This is entirely a 30 per cent. discriminating advantage in favour of the businessman who is big enough to receive shares at the moment of retirement and then to live on the investment income of those shares, unpenetrated by the Capital Gains Tax until the time of his death.

A simple Amendment would end the injustice and would extend the privilege of exchanging business assets for shares to every member of the community who has a business to dispose of. To make it as palatable as possible to the Chancellor, I have proposed that the shares he should be allowed to exchange the assets into are precisely those gilt-edged securities which now seem to be in some jeopardy as a result of other measures which the right hon. Gentleman has introduced. The small business man who would otherwise have to dispose of his assets for cash because no one would give shares for them would be saved Capital Gains Tax until death, when the tax would accrue in exactly the same way as it would under the Schedule as it stands for those who exchange for shares, but it would be by allowing the exchange into a specified category of shares without paying cash at the moment of transition.

The Solicitor-General

The hon. Member for Barkston Ash (Mr. Alison) has addressed the Committee with his usual ingenuity. There is one point on which his mind should already have been set at rest. He referred to the position of small businessmen on the verge of retirement. My hon. and learned Friend the Financial Secretary said earlier that he was particularly studying the position of such persons and it was on that understanding that an Opposition Amendment was withdrawn.

What the paragraph as it stands provides is that when a business is exchanged for shares the Capital Gains Tax charge on disposal of the business is to be deferred until there is disposal of the shares so acquired by the previous owner of the business. In other words, this is a provision in favour of the taxpayer. The hon. Gentleman had a good deal to say about the paragraph, but not so much to say about his Amendment. I hope to be able to satisfy the Committee that the Amendment would involve both anomaly and injustice.

Its purpose is to provide that if a person disposes of his business otherwise than for shares in the company acquiring the business, that is to say, if he sells the business outright, there should be no Capital Gains Tax on the gains realised on the disposal of the business to the extent that the proceeds of the disposal are invested in Government securities or National Savings Certificates. The special privilege is obtained only on that condition.

This is open to the strongest possible objection on principle. It can hardly be thought to be sufficient reason for exempting from the scope of a comprehensive tax gains which arise on disposal merely because the asset disposed of consists of a business, or merely because the consideration for the asset takes one particular form. If a privilege of this kind is to be granted, ought there not to be a similar exemption for people disposing of stocks and shares, or any other kind of asset, and then reinvesting the proceeds in Government securities?

The Amendment would create a wholly illogical distinction and one wonders whether the implied suggestion, that there is a need to support the gilt-edged market, justifies an exemption of this kind, especially when the securities to be taken into consideration on disposal are marketable. As the Amendment stands, there would not be the slightest impediment to a person disposing of a business and getting his gain tax free because he reinvested the money in Government securities, but selling them the week after and putting the money into some other form of investment.

I submit that this is an absurd proposal and I invite the Committee to reject it.

3.45 a.m.

Mr. Peter Walker

The Solicitor-General must be feeling tired. Certainly, he could not have listened to the cogent argument of my hon. Friend the Member for Barkston Ash (Mr. Alison). The argument propounded was perfectly clear. It is that if a person decides to give up his activities in conducting a business of which he is the proprietor and, in doing so, decides to sell it to one of the major companies, such as Great Universal Stores or Marks and Spencer, and, in place of his business, he retains shares in the major company, which relieves him of the activity of running a business and allows him to live on the income from the shares, by doing that the Government do not take away any tax at all until the final point of realisation at death or some other stage.

My hon. Friend has suggested that if it is fair for a person to sell his business to one of the large companies and have the income without being taxed at that stage, then it is just as fair that someone who immediately puts his money back into Government securities and lives on his income in that way should be able to do so without there being deduction of 30 per cent.

That is a good, cogent and sound argument. Compared with the enthusiasm and energy of the Solicitor-General in propounding his argument on the previous Amendment, the way in which

he turned down the Amendment which was so ably moved from this side, dealing with something of great importance, is very discouraging to the Committee. I would urge my hon. and right hon. Friends to support that Amendment in the Division Lobby.

Question put, That those words be there inserted:—

The Committee divided: Ayes 165, Noes 177.

Division No. 157.] AYES [3.47 a.m.
Agnew, Commander Sir Peter Gower, Raymond Morrison, Charles (Devizes)
Alison, Michael (Barkston Ash) Grant, Anthony Mott-Radclyffe, Sir Charles
Allan, Robert (Paddington, S.) Gresham Cooke, R. Munro-Lucas-Tooth, Sir Hugh
Allason, James (Hemel Hempstead) Grieve, Percy Murton, Oscar
Amery, Rt. Hn. Julian Griffiths, Peter (Smethwick) Noble, Rt. Hn. Michael
Anstruther-Cray, Rt. Hn. Sir W. Gurden, Harold Nugent, Rt. Hn. Sir Richard
Atkins, Humphrey Hall, John (Wycombe) Osborn, John (Hallam)
Baker, W. H. K. Hall-Davis, A. G. F. Page, R. Graham (Crosby)
Batsford, Brian Harrison, Brian (Maldon) Pearson, Sir Frank (Clitheroe)
Beamish, Col. Sir Tufton Harvey,Sir Arthur Vere (Macelesf'd) Percival, Ian
Berry, Hn. Anthony Harvey, John (Walthamstow, E.) Peyton, John
Biffen, John Hastings, Stephen Pickthorn, Rt. Hn. Sir Kenneth
Biggs-Davison, John Hawkins, Paul Pitt, Dame Edith
Birch, Rt. Hn. Nigel Heald, Rt. Hn. Sir Lionel Powell, Rt. Hn. J. Enoch
Blaker, Peter Heath, Rt. Hn. Edward Price, David (Eastleigh)
Bossom, Hn. Clive Higgins, Terence L. Pym, Francis
Box, Donald Hill, J. E. B. (S. Norfolk) Quennell, Miss J. M.
Boyle, Rt. Hn. Sir Edward Hirst, Geoffrey Ramsden, Rt. Hn. James
Braine, Bernard Hobson, Rt. Hn. Sir John Rawlinson, Rt. Hn. Sir Peter
Brinton, Sir Tatton Hogg, Rt. Hn. Quintin Redmayne, Rt. Hn. Sir Martin
Brown, Sir Edward (Bath) Hordern, Peter Ridsdale, Julian
Bruce-Gardyne, J. Hornby, Richard Rodgers, Sir John (Sevenoaks)
Bryan, Paul Hunt, John (Bromley) Roots, William
Buxton, Ronald Irvine, Bryant Godman (Rye) Scott-Hopkins, James
Campbell, Gordon Jenkin, Patrick (Woodford) Sharples, Richard
Carlisle, Mark Johnson Smith, G. (East Grinstead) Sinclair, Sir George
Carr, Rt. Hn. Robert Johnston, Russell (Inverness) Smith, Dudley (Br'ntf'd & Chiswick)
Clark, William (Nottingham, S.) Kaberry, sir Donald Spearman, Sir Alexander
Cole, Norman Kilfedder, James A. Stainton, Keith
Cooke, Robert Kimball, Marcus Stodart, Anthony
Cooper-Key, Sir Neill King, Evelyn (Dorset, S.) Studholme, Sir Henry
Corfield, F. V. Kirk, Peter Taylor, Edward M. (G'gow.Cathcart)
Crosthwaite-Eyre, Col. Sir Oliver Lambton, viscount Taylor, Frank (Moss Side)
Curran, Charles Lancaster, Col. C. G. Teeling, Sir William
Dalkeith, Earl of Langford-Holt, Sir John Temple, John M.
Davies, Dr. Wyndham (Perry Barr) Legge-Bourke, Sir Harry Thomas, Sir Leslie (Canterbury)
d'Avigdor-Goldsmid, Sir Henry Lewis, Kenneth (Rutland) Thomas, Rt. Hn. Peter (Conway)
Dean, Paul Litchfield, Capt. John Thompson, Sir Richard (Croydon,S.)
Deedes, Rt. Hn. W. F. Longbottom, Charles Tilney, John (Wavertree)
Digby, Simon Wingfield Longden, Gilbert Turton, Rt. Hn. R. H.
Elliot, Capt. Walter (Carshalton) Loveys, Walter H. Tweedsmuir, Lady
Eyre, Reginald Lubbock, Eric van Straubenzee, W. R.
Farr, John Lucas, Sir Jocelyn Walker, Peter (Worcester)
Fell, Anthony MacArthur, Ian Ward, Dame Irene
Fletcher-Cooke, Charles (Darwen) Mackie, George Y. (C'ness & S'land) Weatherill, Bernard
Fletcher-Cooke, Sir John (S'pton) Maclean, Sir Fitzroy Whitelaw, William
Foster, Sir John Maginnls, John E. Williams, Sir Rolf Dudley (Exeter)
Fraser,Rt.Hn.Hugh(St'fford & Stone) Maude, Angus Wilson, Geoffrey (Truro)
Fraser, Ian (Plymouth, Sutton) Mawby, Ray Wise, A. R.
Gammans, Lady Maxwell-Hyslop, R. J. Wolrige-Gordon, Patrick
Gibson-Watt, David Meyer, Sir Anthony Wood, Rt. Hn. Richard
Gilmour, Ian (Norfolk, Central) Mills, Stratton (Belfast, N.) Wylle, N. R.
Gilmour, Sir John (East Fife) Miscampbell, Norman Younger, Hn. George
Glover, Sir Douglas Mitchell, David
Goodhart, Philip Monro, Hector TELLERS FOR THE AYES:
Goodhew, Victor More, Jasper Mr. McLaren and
Mr. R. W. Elliott.
Albu, Austen Armstrong, Ernest Baxter, William
Alldritt, Walter Atkinson, Norman Beaney, Alan
Allen, Schcolefield (Crewe) Bagier, Gordon A. T. Bence, Cyril
Benn, Rt. Hn. Anthony Wedgwood Harper, Joseph O'Malley, Brian
Bennett, J. (Glasgow, Bridgeton) Harrison, Walter (Wakefield) Oram, Albert E, (E. Ham, S.)
Binns, John Hazell, Bert Orme, Stanley
Bishop, E. S. Herbison, Rt. Hn. Margaret Page, Derek (King's Lynn)
Blackburn, F. Hobden, Dennis (Brighton, K'town.) Paget, R. T.
Blenkinsop, Arthur Horner, John Palmer, Arthur
Boardman, H. Houghton, Rt. Hn. Douglas Pargiter, G. A.
Boyden, James Howarth, Robert L. (Bolton, E.) Park, Trevor (Derbyshire, S.E.)
Braddock, Mrs. E. M. Hughes, Emrys (S. Ayrshire) Parker, John
Bradley, Tom Hunter, Adam (Dunfermline) Parkin, B. T.
Brown, Rt. Hn. George (Belper) Hynd, H. (Accrington) Pearson, Arthur (Pontypridd)
Brown, Hugh D. (Glasgow, Provan) Irving, Sydney (Dartford) Peart, Rt. Hn. Fred
Buchanan, Richard Jackson, Colin Perry, Ernest G.
Butler, Herbert (Hackney, C.) Jay, Rt. Hn. Douglas Popplewell, Ernest
Butler, Mrs. Joyce (Wood Green) Jeger,Mrs.Lena(H'b'n&St.P'cras,S.) Prentice, R. E.
Callaghan, Rt. Hn. James Jenkins, Hugh (Putney) Probert, Arthur
Carmichael, Neil Jenkins, Rt. Hn. Roy (Stechford) Pursey, Cmdr. Harry
Carter-Jones, Lewis Johnson, Carol (Lewisham, S.) Rees, Merlyn
Castle, Rt. Hn. Barbara Johnson,James(K'ston-on-Hull,W.) Rhodes, Geoffrey
Coleman, Donald Jones, J. Idwal (Wrexham) Robertson, John (Paisley)
Conlan, Bernard Jones, T. W. (Merioneth) Robinson, Rt. Hn.K.(St. Pancras,N.)
Cousins, Rt. Hn. Frank Kenyon, Clifford Rodgers, William (Stockton)
Craddock, George (Bradford, S.) Kerr, Dr. David (W'worth, Central) Row, Rt. Hn. William
Cullen, Mrs. Alice Lawson, George Sheldon, Robert
Dalyell, Tam Ledger, Ron Shore, Peter (Stepney)
Davies, G. Elfed (Rhondda, E.) Lever, Harold (Cheetham) Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
Davies, Ifor (Cower) Lewis, Ron (Carlisle) Silkin, John (Deptford)
Davies, S. O. (Merthyr) Lomas, Kenneth Skeffington, Arthur
Dempsey, James Loughlin, Charles Slater, Mrs. Harriet (Stoke, N.)
Dodds, Norman Mabon, Dr. J, Dickson Small, William
Doig, Peter McCann, J. Solomons, Henry
Donnelly, Desmond MacColl, James Stewart, Rt. Hn. Michael
Driberg, Tom MacDermot, Niall Summerskill, Hn. Dr. Shirley
Duffy, Dr. A. E. P. McGuire, Michael Swain, Thomas
Dunn, James A. Mclnnes, James Thomas, Iorwerth, (Rhondda, W.)
Dunnett, Jack McKay, Mrs. Margaret Thomson, George (Dundee, E.)
English, Michael Mackenzie, Gregor (Rutherglen) Tomney, Frank
Ennals, David Mackie, John (Enfield, E.) Urwin, T. W.
Evans, Albert (Islington, S.w.) MacMillan, Malcolm Walden, Brian (All Saints)
Fernyhough, E. MacPherson, Malcolm Wallace, George
Fitch, Alan (Wigan) Mahon, Peter (Preston, S.) Watkins, Tudor
Fletcher, Sir Eric (Islington, E.) Mahon, Simon (Bootle) Wells, William (Walsall, N.)
Fletcher, Raymond (Ilkeston) Manuel, Archie Whitlock, William
Floud, Bernard Mapp, Charles Wilkins, W. A.
Foot, Sir Dingle (Ipswich) Mason, Roy Willey, Rt. Hn. Frederick
Foot, Michael (Ebbw Vale) Millan, Bruce Williams, Alan (Swansea, W.)
Ford, Ben Miller, Dr. M. S. Williams, Mrs. Shirley (Hitchin)
Fraser, Rt. Hn. Tom (Hamilton) Milne, Edward (Blyth) Williams, W. T. (Warrington)
Freeson, Reginald Morris, Alfred (Wythenshawe) Willis, George (Edinburgh, E.)
Garrett, W. E. Morris, Charles (Openshaw) Wilson, William (Coventry, S.)
Garrow, A. Mulley,Rt.Hn.Frederick(SheffieldPk) Winterbottom, R. E.
Ginsburg, David Murray, Albert Woof, Robert
Gourlay, Harry Neal, Harold Wyatt, Woodrow
Greenwood, Rt. Hn. Anthony Newens, Stan Zilliacus, K.
Gregory, Arnold Noel-Baker, Francis (Swindon)
Griffiths, Will (M'chester, Exchange) Norwood, Christopher TELLERS FOR THE NOES:
Hamilton, James (Bothwell) Oakes, Gordon Mr. Grey and Mr. Howie.
Mr. Peter Walker

I beg to move Amendment No. 399, in page 150, line 13, to leave out from the beginning to "neither" in line 17.

This is something of an exploratory Amendment to find out the reasons why the Government are still continuing to include capital redemption policies in the Capital Gains Tax. I would have thought that the agreement on the part of the Government to accept the various Amendments on Clause 27 would automatically have meant they would have wanted to exclude capital redemption policies from the Capital Gains Tax because these capital gains are already taxed within the life assurance company.

The money invested from the premium will have been subject to capital gains within the life assurance company. Most of the capital gain that takes place will be as a result of income from the premium and investment will have been taxed as a form of income to the life assurance companies.

The Solicitor-General

In our view there is a very clear distinction between an ordinary life policy and the kind of policy with which we are now concerned. We are dealing with a simple form of capital investment. Whatever may be said about insurance generally we submit it is right that capital redemption policies should be subject to Capital Gains Tax because a capital redemption policy is not a life assurance policy. It is simply a form of contract under which in return for one or more premiums the holder receives at a later date a larger total amount, in one sum or by instalments.

The increment is in substance capitalised interest. We submit this falls into a wholly different category from a life assurance policy and, therefore, we cannot accept the Amendment.

Mr. Peter Walker

Whilst not accepting that explanation in the sense that the capitalised income has been subject to taxation but a part of the income will be from capital appreciation of the life assurance companies investments, I think that there are very strong technical arguments why it is wrong that the Government should persist with them. As we can return to this on the Report stage of the Bill, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendments made: In page 150, line 13, leave out "insurer" and insert "insured".

Amendment No. 392, in line 21, leave out sub-paragraph (2) and insert: (2) Notwithstanding sub-paragraph (1) above, sums received under a policy of insurance of the risk of any kind of damage to. or the loss or depreciation of, assets are for the purposes of this Part of this Act, and in particular for the purposes of section 21(3) of this Act, sums derived from the assets.

Amendment No. 188, in line 22, at end insert: (3) In this paragraph "policy of insurance" does not include a policy of assurance on human life.

Amendment No. 189, in page 151, line 5, at end insert: (a) any allowance, annuity or capital sum payable out of any superannuation fund, or under any superannuation scheme, established solely or mainly for persons employed in a profession, trade, undertaking or employment, and their dependants.

Amendment No. 190, in line 6, after "granted", insert: otherwise than under a contract for a deferred annuity".—[The Solicitor-General.]

4.0 a.m.

The Deputy-Chairman

The next Amendment selected is No. 574, and with it we can discuss Amendment No. 575, in page 155, line 15, leave out sub-paragraph (2).

Mr. Peter Walker

I beg to move Amendment No. 574, in page 155, line 3, to leave out sub-paragraph (1).

I can only look on this sub-paragraph as a bad joke. Its effect is that if someone receives a gift then, as those who have been present during this Committee stage so far will recognise, there is a distinct tax on generosity; if one gives a chattel worth more than £1,000 or various other gifts that are not chattels, at the point of giving the gift the donor has to pay Capital Gains Tax.

We on this side consider that to be bad enough, but for the Government to introduce a provision that says that if the Inland Revenue is unsuccessful in getting Capital Gains Tax from the donor within 12 months it can put an assessment on the person who has been given the gift is a quite remarkable piece of Socialist legislation. It creates a position in which someone can accept a gift and then, without having any knowledge of what capital gain has taken place on the gift, some 12 months later can receive an assessment from the Inland Revenue because it has failed to collect tax from the correct source is against the whole spirit of our taxation system.

That provision is followed by subparagraph (2), which says—such is the generosity of our Socialist rulers—that if the Inland Revenue calls on the person who has received the gift to pay the donor's tax, that person has the right to take the donor to court and try to recover the amount from him. This is a remarkable piece of impudence. That because the Inland Revenue fails to collect taxation, the receiver of the gift should be put into court against the person who has given the gift, in order to recover the tax assessed on him. is something which I am sure the Committee will find completely unacceptable. I hope that on further consideration the Solicitor-General, who so far has not been in a very generous, genial or kind-hearted mood, will, in the interests of the subject, immediately accept the Amendment.

The Solicitor-General

The objections to the Amendment must. I think, have been apparent to the hon. Gentleman himself and must be clear to every member of the Committee. If we were to acept it we should open a very wide loophole indeed, because it would be open to any person who wished to evade the tax to dispose of his chargeable assets among his friends and relatives, leaving the tax on any gains on the gifts unpaid and then just take steps to put himself outside the jurisdiction. All he would have to do would be to go abroad.

If the Amendment were passed, it would be quite impossible for the Revenue to collect the tax. In other words, where one had an unscrupulous donor who wished to cheat the Revenue, the Amendment would provide him with a very easy means of doing so. In these circumstances, it is not unreasonable that after a lapse of time, if it is proved impossible to collect the tax from the donor for the sort of reason that I have suggested, it should be possible to look to the donee who has had the benefit of the gift.

This is not without precedent in our law. In Estate Duty law, which, after all, provides a perfectly respectable precedent which we have had for many years, it is the donee in general who pays the estate duty on a gift inter vivos which turns out to have been made within five years of the death of the donor and thus to be liable to Estate Duty. Therefore, one can in those circumstances look to the donee. There is nothing wrong in principle about doing so where it is the only way of collecting the tax. I do not really think that the Amendment can be seriously intended, and I certainly invite the Committee to reject it.

Sir D. Glover

I have very rarely heard in the House of Commons such utter nonsense as has been said by the Solicitor-General. I thought that my hon. Friend the Member for Worcester (Mr. Peter Walker) made a very cogent speech. [HON. MEMBERS: "Call Cross-bencher!"] If that is all that you can think of at four o'clock in the morning you are wasting the time of your electors who sent you here.

The Deputy-Chairman (Sir Samuel Storey)

Order. The hon. Gentleman must address his remarks to the Chair.

Sir D. Glover

The Solicitor-General thinks that there is at our ports—Dover, Heathrow, Gatwick, Southend, and so on—a queue of people waiting to emigrate after having given their grandsons, nephews or nieces a gift at Christmas. Is not the hon. and learned Gentleman appealing only to the most crassly stupid class consciousness of all his colleagues?

What is behind the Clause? The hon. and learned Gentleman knows that it is really not what he is trying to make out. It is nothing else but an attempt to carry with him the Left wing of his party. Does he really think that all the people who give gifts to their nephews, nieces, aunts and uncles will emigrate the day after they have given them? This is what he is saying in the Clause—that once they have done it they will opt out of the jurisdiction of the country, and, therefore, the people they have given the money to will have to pay the tax.

This really is a most stupid thing; the most stupid thing we have been told throughout the whole of our discussions so far on the Bill. What the hon. and learned Gentleman is saying is that the whole of the British public, with the exception of himself and his colleagues, is dishonest that anyone who makes a gift to one of his relatives will immediately go abroad. That is what he is saying, that all the people who do this thing will promptly opt out of their obligations, and the nephew, the niece, or the cousin who has had the gift will have to pay this tax.

Could any Government really be so Scroogy as to believe that? Does he really think that he would like it to go out of this Committee that the Labour Party believes that somebody who receives a gift, and something then happens to the person who made the gift so that that person does not pay the tax, should be hounded by the Inland Revenue?

Is that what the Government want to be drawn as a picture of the Labour Party—the party which is always talking about fair shares for all, and equality? Is that the party which is now enunciating the policy that because somebody who gives a gift and who is not able to be clobbered by the Inland Revenue, the recipient of that gift must be hounded in this way? If that is really the philosophy of right hon. and hon. Members opposite, then no wonder that they are so very unpopular in the country.

Sir John Foster (Northwich)

The unscrupulous man who wants to avoid this tax and is going abroad need only change all his assets and take them with him, so there is not any need to bother about the donee. Has the Solicitor-General thought of that? It may be, now he has realised it, that he will have to put a watch on all the air and sea ports.

Then, what about the person who gives away all his assets and then commits suicide? That is a very serious risk.

Mr. Lubbock

If the donor did that, then he would not only be subject to Capital Gains Tax, but the Estate Duty as well.

Sir J. Foster

But there would be no assets in the donor's estate. I think it was Talleyrand, at the Congress of Vienna, who said, "The Russian Ambassador is dead. I wonder what could have been his motive." The Government has provided a motive for the man who dies like that because he has got rid of all his assets. This really is absurd. The unscrupulous man who goes abroad can do much better than giving all his assets to a donee.

Sir A. V. Harvey

The learned Solicitor-General has put up no case at all. He must be very tired indeed if he can think of nothing better to offer the Committee than the belief that the donor would give away all his money and then beat it out of the country. It is a very curious argument for at least one reason. What will he live on when he gets out of the country with no money? That is

the most tired argument I have heard. We have listened to these arguments hour after hour on a badly conceived and badly presented Bill.

4.15 p.m.

Mr. Peter Mahon (Preston, South)

If a person who had amassed a fortune in this country went overseas and had to start working for a living, it would be a tremendous shame.

Sir A. V. Harvey

I do not wish to follow that point. I have not seen the hon. Member doing much work on the Finance Bill.

The Solicitor-General has given nothing away. The Government have gone for the small trader and have beaten hell out of everyone except those whom they ought to catch. The Solicitor-General should think about this matter again.

Mr. Heath

When I heard the Solicitor-General's reply I asked myself, "The Solicitor-General must be alive. What can his motive be?".

There is only one word to describe these two sub-paragraphs—monstrous. There is only one way in which to describe the Solicitor-General's comments—shocking. There is only one action to take—to divide immediately.

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

The Committee divided: Ayes 174, Noes 161.

Division No. 158.] AYES [4.17 a.m.
Albu, Austen Coleman, Donald Fraser, Rt. Hn. Tom (Hamilton)
Alldritt, Walter Conlan, Bernard Freeson, Reginald
Allen, Scholefield (Crewe) Cousins, Rt. Hn. Frank Garrett, W. E.
Armstrong, Ernest Craddock, George (Bradford, S.) Garrow, A.
Atkinson, Norman Cullen, Mrs. Alice Ginsburg, David
Bagier, Gordon A. T. Dalyell, Tam Gourlay, Harry
Baxter, William Davies, G. Eifed (Rhondda, E.) Greenwood, Rt. Hn. Anthony
Beaney, Alan Davies, Ifor (Gower) Gregory, Arnold
Bence, Cyril Davies, S. O. (Merthyr) Griffiths, Will (M'Chester, Exchange)
Benn, Rt. Hn. Anthony Wedgwood Dempsey, James Hamilton, James (Bothwell)
Bennett, J. (Glasgow, Bridgeton) Dodds, Norman Harper, Joseph
Binns, John Doig, Peter Harrison, Walter (Wakefield)
Bishop, E. S. Donnelly, Desmond Hazell, Bert
Blackburn, F. Driberg, Tom Herbison, Rt. Hn. Margaret
Blenkinsop, Arthur Duffy, Dr. A. E. P. Hobden, Dennis (Brighton, K'town)
Boardman, H. Dunn, James A. Horner, John
Boyden, James Dunnett, Jack Houghton, Rt. Hn. Douglas
Braddock, Mrs. E. M. English, Michael Howarth, Robert L. (Bolton, E.)
Bradley, Tom Ennals, David Howie, W.
Brown, Rt. Hn. George (Belper) Evans, Albert (Islington, S.W.) Hughes, Emrys (S. Ayrshire)
Brown, Hugh D. (Glasgow, Provan) Fernyhough, E. Hunter, Adam (Dunfermline)
Buchanan, Richard Fletcher, Sir Eric (Islington, E.) Hynd, H. (Accrington)
Butler, Herbert (Hackney, C.) Fletcher, Raymond (Ilkeston) Irving, Sydney (Dartford)
Butler, Mrs. Joyce (Wood Green) Floud, Bernard Jackson, Colin
Callaghan, Rt. Hn. James Foot, Sir Dingle (Ipswich) Jeger,Mrs Lena(H'b'n&St.P'cras,S.)
Carmichael, Neil Foot, Michael (Ebbw Vale) Jenkins, Hugh (Putney)
Carter-Jones, Lewis Ford, Ben Jenkins, Rt Hn. Roy (Stechford)
Johnson, Carol (Lewisham, S.) Mulley,Rt.Hn.Frederick(SheffieldPk) Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
Johnson, James(K'ston-on-Hull, W.) Murray, Albert Silkin, John (Deptford)
Jones, J. Idwal (Wrexham) Neal, Harold Skeffington, Arthur
Jones, T. W. (Merioneth) Newens, Stan Slater, Mrs. Harriet (Stoke, N.)
Kenyon, Clifford Noel-Baker, Francis (Swindon) Small, William
Kerr, Dr. David (W'worth, Central) Norwood, Christopher Solomons Henry
Ledger, Ron Oakes, Gordon Stewart, Rt. Hn. Michael
Lever, Harold (Cheetham) O'Malley, Brian Summerskill, Hn. Dr. Shirley
Lewis, Ron (Carlisle) Oram, Albert E. (E. Ham, S.) Swain, Thomas
Lomas, Kenneth Orme, Stanley Thomas, Iorwerth (Rhondda, W.)
Loughlin, Charles Page, Derek (King's Lynn) Thomson, George (Dundee, E.)
Mabon, Dr. J. Dickson Paget, R. T. Tomney, Frank
McCann, J. Palmer, Arthur Urwin, T. W.
MacColl, James Pargiter, G. A. Walden, Brian (All Saints)
MacDermot, Niall Park, Trevor (Derbyshire, S.E.) Wallace, George
McGuire, Michael Parker, John Watkins, Tudor
Mclnnes, James Parkin, B. T. Wells, William (Walsall, N.)
McKay, Mrs. Margaret Pearson, Arthur (Pontypridd) Whitlock, William
Mackenzie, Gregor (Ruthergien) Peart, Rt. Hn. Fred Wilkins, W. A.
Mackie, John (Enfield, E.) Perry, Ernest G. Willey, Rt. Hn. Frederick
MacMillan, Malcolm Popplewell, Ernest Williams, Alan (Swansea, W.)
MacPherson, Malcolm Prentice, R. E. Williams, Mrs. Shirley (Hitchin)
Mahon, Peter (Preston, S.) Probert, Arthur Williams, W. T. (Warrington)
Mahon, Simon (Bootle) Pursey, Cmdr. Harry Willis, George (Edinburgh, E.)
Manuel, Archie Rees, Merlyn Wilson, William (Coventry, S.)
Mapp, Charles Rhodes, Geoffrey Winterbottom, R. E.
Mason, Roy Robertson, John (Paisley) Woof, Robert
Millan, Bruce Robinson, Rt.Hn.K.(St. Pancras,N.) Wyatt, Woodrow
Miller, Dr. M. S. Rodgers, William (Stockton) Zilliacus, K.
Milne, Edward (Blyth) Ross, Rt. Hn. William
Morris, Alfred (Wythenshawe) Sheldon, Robert TELLERS FOR THE AYES:
Morris, Charles (Openshaw) Shore, Peter (Stepney) Mr. Fitch and Mr. Grey.
Agnew, Commander Sir Peter Gibson-Watt, David Maclean, Sir Fitzroy
Alison, Michael (Barkston Ash) Gilmour, Ian (Norfolk, Central) Maginnis, John E.
Allan, Robert (Paddington, S.) Gilmour, Sir John (East Fife) Maude, Angus
Allason, James (Hemel Hempstead) Glover, Sir Douglas Mawby, Ray
Amery, Rt. Hn. Julian Goodhart, Philip Maxwell-Hyslop, R. J.
Anstruther-Gray, Rt. Hn. Sir W. Goodhew, Victor Meyer, Sir Anthony
Atkins, Humphrey Gower, Raymond Mills, Stratton (Belfast, N.)
Baker, W. H. K. Grant, Anthony Miscampbell, Norman
Batsford, Brian Grieve, Percy Mitchell, David
Beamish, Col. Sir Tufton Griffiths, Peter (Smethwick) Monro, Hector
Berry, Hn. Anthony Gurden, Harold Morrison, Charles (Devizes)
Biffen, John Hall, John (Wycombe) Mott-Radclyffe, Sir Charles
Biggs-Davison, John Hall-Davis, A. G. F. Munro-Lucas-Tooth, Sir Hugh
Blaker, Peter Harrison, Brian (Maldon) Murton, Oscar
Bossom, Hn. Clive Harvey, Sir Arthur Vere (Macclesf'd) Noble, Rt. Hn. Michael
Box, Donald Harvey, John (Walthamstow, E.) Nugent, Rt. Hn. Sir Richard
Boyle, Rt. Hn. Sir Edward Hastings, Stephen Osborn, John (Hallam)
Braine, Bernard Hawkins, Paul Page, R. Graham (Crosby)
Brinton, Sir Tatton Heald, Rt. Hn. Sir Lionel Pearson, Sir Frank (Clitheroe)
Brown, Sir Edward (Bath) Heath, Rt. Hn. Edward Percival, Ian
Bruce-Gardyne, J. Higgins, Terence L. Peyton, John
Bryan, Paul Hill, J. E. B. (S. Norfolk) Pickthorn, Rt. Hn. Sir Kenneth
Buxton, Ronald Hirst, Geoffrey Pitt, Dame Edith
Campbell, Gordon Hobson, Rt. Hn. Sir John Powell, Rt. Hn. J. Enoch
Carlisle, Mark Hogg, Rt. Hn. Quintin Price, David (Eastleigh)
Carr, Rt. Hn. Robert Hordern, Peter Pym, Francis
Clark, William (Nottingham, S.) Hornby, Richard Quennell, Miss J. M.
Cole, Norman Hunt, John (Bromley) Ramsden, Rt. Hn. James
Cooke, Robert Irvine, Bryant Godman (Rye) Rawlinson, Rt. Hn. Sir Peter
Cooper-Key, Sir Neill Jenkin, Patrick (Woodford) Redmayne, Rt. Hn. Sir Martin
Corfield, F. V. Johnson Smith, G. (East Grinstead) Ridsdale, Julian
Crosthwaite-Eyre, Col. Sir Oliver Johnston, Russell (Inverness) Roots, William
Curran, Charles Kaberry, Sir Donald Scott-Hopkins, James
Dalkeith, Earl of Kilfedder, James A. Sharples, Richard
Davies, Dr. Wyndham (Perry Barr) Kimball, Marcus Sinclair, Sir George
d'Avigdor-Goldsmid, Sir Henry King, Evelyn (Dorset, S.) Smith, Dudley (Br'ntf'd & Chiswick)
Dean, Paul Kirk, Peter Spearman, Sir Alexander
Deedes, Rt. Hn. W. F. Lambton, Viscount Stainton, Keith
Digby, Simon Wingfield Lancaster, Col. C. G. Stodart, Anthony
Elliot, Capt. Walter (Carshalton) Langford-Holt, Sir John Studholme, Sir Henry
Elliott, R. W.(N'c'tle-upon-Tyne,N.) Legge-Bourke, Sir Harry Taylor, Edward M.(G'gow,Cathcart)
Eyre, Reginald Lewis, Kenneth (Rutland) Teeling, Sir William
Farr, John Litchfield, Capt. John Temple, John M.
Fell, Anthony Longbottom, Charles Thomas, Sir Leslie (Canterbury)
Fletcher-Cooke, Charles (Darwen) Longden, Gilbert Thomas, Rt. Hn. Peter (Conway)
Fletcher-Cooke, Sir John (S'pton) Loveys, Walter H. Thompson, Sir Richard (Croydon.S.)
Foster, Sir John Lubbock, Eric Tilney, John (Wavertree)
Fraser,Rt.Hn.Hugh(St'fford & Stone) Lucas, Sir Jocelyn Turton, Rt. Hon. R. H.
Fraser, Ian (Plymouth, Button) MacArthur, Ian Tweedsmuir, Lady
Gammans, Lady Mackie, George Y. (C'ness & S'land) van Straubenzee, W. R.
Walker, Peter (Worcester) Wilson, Geoffrey (Truro) Younger, Hn. George
Ward, Dame Irene Wise, A. R.
Weatherill, Bernard Wolrige-Gordon, Patrick TELLERS FOR THE NOES:
Whitelaw, William Wood, Rt. Hn. Richard Mr. McLaren and Mr. More.
Williams, Sir Rolf Dudley (Exeter) Wylie, N. R.

Further Amendment made: In page 155, line 13, after "amount", insert "of".—[The Solicitor-General.]

Schedule, as amended, agreed to.