Schedule 9.—(CAPITAL GAINS.)

HC Deb 22 June 1966 vol 730 cc789-858

Mr. Anthony Grant (Harrow, Central)

I beg to move Amendment No. 315, in page 97, line 41, at the end to insert:

Exemption of first £400

1. In section 20(4) of the Finance Act 1965 after the words "total amount of chargeable gains" there shall be inserted the words "in excess of £400".

The Temporary Chairman (Mr. Grant-Ferris)

It will be for the convenience of the Committee if we also take Amendment No. 279, in page 101, line 33, at end insert:

Exemption for small gains

8. In section 20(4) of the Finance Act 1965 there shall be made the following amendments:— In line 1 after the word "on", insert "the amount by which", and, in line 8, at end insert "exceeds £500". and new Clause 18.—(Capital gains tax relief.)

Mr. Grant

The purpose of this Amendment is to exempt the first £400 of capital gains from the Capital Gains Tax. It is coupled with the Amendment in the name of my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod), who puts the figure at £500, and the new Clause of my hon. Friend the Member for Shipley (Mr. Hirst) who, with rather uncharacteristic modesty and reticence, puts the figure at £250.

The purpose behind all of these is entirely the same in that they can be said to be an attempt to bring a little sanity into the fiscal maze created by the Capital Gains Tax. Briefly stated, there are three arguments to be advanced in favour of the Amendment. First, there is the administrative one. As was rightly forecast by my hon. Friend the Member for Wycombe (Mr. John Hall) last year, the tax has resulted in the absolute demoralisation of the staff of the Inland Revenue.

They have been so thoroughly demoralised that they have had to have a no doubt well-merited increase in pay in order to cope. But the Stock Exchange, the professional men, lawyers and accountants and, above all, investors, are affected by this tax. There are 2½ million investors trying to grapple with the obscure form and fantastic calculations involved in the tax, which has also dealt a body-blow, if not a death-blow, to the growth of the very valuable movement, the investors' club.

The Chancellor should not underestimate the amount of time and energy expended by useful, sensible people in this rather ridiculous exercise imposed by the tax. I pray in aid the minority report of the Royal Commission on the Taxation of Profits and Incomes which said that there should be an exemption limit when the annual gain is £400 or less to reduce the administrative costs involved. Those, as I said last year, were the words of none other than the redoubtable Dr. Kaldor himself. When I put them forward last year the Financial Secretary said that it was one of the rare occasions on which he found himself in disagreement with Dr. Kaldor. It was one of the rare occasions on which I found myself in agreement with him.

1.45 a.m.

In answer to this point last year the Financial Secretary said that there would be an administrative saving only if the £400 of net gains in a year were exempt but the net losses were to be carried forward against the first net gains liable to tax …".—[OFFICIAL REPORT, 25th May, 1965; Vol 713, c. 373]. My answer is, why not do just that? The revenue must be trifling compared with the great advantages to the community if this small concession is granted.

The second point in favour of the Amendment is that the market in shares is being stifled by the Capital Gains Tax. There is no question about that. Because of the tax, people will not realise their gains and therefore shares are in short supply and there is an artificially high price. To this can be attributed the market increase over the last year. It is vital in a free country to have a free buoyant share market. It may be that some hon. Members opposite would like the Stock Exchange to be abolished, but if they do they must explain what they would put in its place. They should bear in mind that thousands of millions of pounds are invested each year by pension funds, institutions and trade unions. As a result of the tax they are paying an artificially high price in the share market.

The third point in favour of the Amendment is that the Capital Gains Tax is a direct disincentive to savings, particularly by the small saver—and the spread of wealth by wider share ownership has a social as well as an economic purpose. It is fantastic that little investment clubs, of humble people engaged in useful occupations, are beginning to fold up because even the most minute capital gains are taxed in this way.[Laughter.] The humour of hon. Members opposite ought to be conveyed to those sensible people from, for example, Fords at Dagenham and Pressed Steel who get together and invest their small sums of money. It seems ludicrous that this is happening while my hon. Friend the Member for Basingstoke (Mr. David Mitchell)—who runs a splendid business —is advising his clients to invest in vintage port because this is a form of investment which does not attract tax on capital gains of under £1,000. What a ludicrous situation we have reached when it is regarded by a puritanical Government as being thoroughly bad to invest in shares in British industry but less bad, or even good, to lay down a case of vintage port.

Those are the arguments in favour of the Amendment. I do not need to be a crystal gazer to anticipate the answer. We know that the answer from the Financial Secretary will be the same as last year. We shall hear, as last year, that he suspects that there is a Surtax payer lurking behind the skirts of the small man and that he will smell somewhere a benefit to the wealthy.[Laughter.] Those words were used by the Financial Secretary. He sniffs out wealthy people, he seeks out the Surtax payer with rare glee like a hog snuffling a truffle. The exemption is not so much an advantage to the top Surtax payer— and in any event, what if it is? It does not matter two hoots to me that the hon. Member for Cheetham (Mr. Harold Lever) and my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) get richer—jolly good luck to them—provided that there is benefit and encouragement to savings among the broad mass of people in the community.

I hope that the dreary argument which we heard time and again last year and in this debate—this illogical, puritanical and thoroughly silly argument about Surtax payers—will not be heard again. It is my hope—forlorn it may be—that the Chancellor will match the fine words which he has uttered about the need for savings with some action. Even if he will not accept my Amendment there would be a dramatic effect upon savings and investment if he could offer some crumb of hope to the millions of frustrated, harassed and rather hopeless savers and new savers.

Mr. Harold Lever

I had thought that last year the Opposition exhausted their demagogic eloquences on behalf of the widows of one-legged hill farmers, and that this year we should have debates on a rather more serious level. I hope that my right hon. and hon. Friends will not be misled by the extravagance of the argument into supposing that the case is as bad as that presented by the hon. Member for Harrow, Central (Mr. Grant).

Although it is difficult to discern it, there is a good case for some concession. I add that I am not wedded to the terms of the Amendment, in case any hon. Member opposite has a spark of hope that I shall vote for it. But my right hon. Friend the Chancellor should consider making some reasonable exemption for small capital gains. As has been pointed out, this was recommended by the Royal Commission, and it might be very much for the convenience and gain of the Revenue if some such concession were made.

I therefore add my voice in support of the substance of the Amendment, namely, that some small exemption for small capital gains should be considered.

Mr. R. Gresham Cooke (Twickenham)

I support my hon. Friend the Member for Harrow, Central (Mr. Grant) on the Amendment. Income Tax concessions have been given over the years to help the small man, the wage-earner, through marriage allowances, personal allowances, earned income relief, children's allowances and so on. Some of these allowances have doubled and trebled over the past 15 to 16 years.

This has been done to ensure that the heavy weight of the tax does not fall on the small earner. The same argument must apply to capital gains. If we want to help the small saver, we must do it with concessions of this kind. Therefore, I hope that this year the Government will see sense over this and help their millions of supporters who are now putting their savings into unit trusts, investment clubs and so on. Quite apart from helping these small savers, this would gain the Government support. They are not very popular at the moment, and this would be a way in which they could regain some of the popularity that they have lost in the past few months.

Sir D. Glover

I agree with most of what the hon. Member for Manchester, Cheetham (Mr. Harold Lever) said. I do not want to put my argument on the basis of widows of men with one leg but on the basis that we removed from taxation by Income Tax those people who were earning such a small amount that it was not worth collecting. That removed millions of people from the lower bracket of Income Tax.

We did not do this entirely out of the milk of human kindness. We did it because it was not worth the cost of collection. If someone pays £2 tax a year, in view of all the paraphernalia of collection involved, it would be far better to raise the limit and excuse him from paying tax.

The same applies to capital gains. I do not know whether my case is supported by that of other hon. Members, but since the Finance Act, 1965, for the first time in my life, my accountants have not sent me a final tax assessment this year. Therefore, the Revenue has not received any tax from me because it has not been agreed. This is because we have been over-governed. This firm of accountants is so over-burdened with administrative detail that it has not been able to deal with my tax return. This is not just an isolated case; it applies to hundreds of thousands of people. The basis of the Government is over-government.

It may not be particularly desirable in the minds of many hon. Members opposite that somebody should make a capital gain and avoid paying the 30 per cent. tax laid down by the Chancellor of the Exchequer. If it is levied on £250, in view of the ramifications which the accountant and inspector of taxes have to go into before the claim is settled, it will be two or three years before the Revenue receives the money. The oncost to the economy will be more than the Treasury receives.

We are already desperately short of accountants. They are devoting their time to dealing with the very simple problem of Douglas Glover's tax return and some important companies' figures are getting further and further in arrear. This is not in the interests of the Treasury. The taxation system should be such that the Treasury has a reasonable expectation of getting speedily and accurately the taxes we have levied and without too much burdening of the administrative machine.

I hate to say this, because I said that I would not talk about widows, but there are many people like them who have had, say, £500 invested for years. They may decide to sell in order to eke out their income. On that there is a capital gain, and as the years go by the possi- bility is that there will be more capital gain. Perhaps it is £100. They have no accountant. They probably do not know the law. They will presumably, therefore, be criminals in the eyes of the law. Other people with slightly more money may have an accountant in a small way of business to deal with the matter.

A great many accountants even now do not understand the Finance Act, 1965. They are devoting almost as much time in computing the capital gain on a small amount as on a very large amount. The accountants are over-worked. Not only is the administrative machinery overburdened, but it will become less efficient and the Chancellor will probably receive less money than he would by making it more efficient by exempting very marginal sums from Capital Gains Tax. I agree with the figure of £250 in the proposal of my hon. Friend the Member for Shipley (Mr. Hirst). It would be wise for us to lay down a figure like that below which Capital Gains Tax was not payable. This would take two-thirds of the burden off the administrative machine, the Inland Revenue and the accountancy profession. The machine would be far more efficient, and that must be in the interests of the nation in the long run. I hope that the Government will approach the Amendment moved by my hon. Friend and the other Amendments we are discussing with it with some sympathetic understanding and tell us that some limit is proposed; perhaps £100 could be laid down as the figure below which people are not subject to Capital Gains Tax.

If something like that is not done, then the accountancy profession, the Inland Revenue staffs, and others concerned, will be so over-burdened that people will begin to break the law by implication. Quite a lot of small accountants are hagridden by this law and, if these Amendments are not accepted, then at least I hope that we shall hear that the Government will promise to provide some limit below which this tax will not be paid.

2.0 a.m.

Mr. Hirst

I am grateful to my hon. Friend the Member for Harrow, Central (Mr. Grant) for initiating this discussion. I see that he has had to leave the Chamber, but he has already done one turn tonight so far as taxpayers are concerned. I want to enforce one or two things which he particularly said, because in constituency conversations which have taken place I have found that people take an interest in the acquisition of industrial shares. I have always thought that to be a very good thing and better than some of the more orthodox forms of saving for the small investor.

But people investing in industry, and taking an interest in it, are doing more than helping themselves; they learn better to appreciate our whole system. There is no point in putting money into shares in these days of inflation unless one has a hope of getting a capital appreciation, Yet, if ordinary people do that, then they are now faced with all this awful form filling; and it is awful. They do not appreciate always the importance of keeping records. Let us say that something comes up in the way of a rights issue. How are these people to calculate which is the less; the capital gains or the capital losses? What happens is that they are worried stiff and think they may be sent to prison. They get into a flat spin and in the end will not touch the things with a barge-pole.

These people have been getting along very nicely; these ordinary, small investors, but now they hear a cry about capital gains, and they go back to keeping their money up the chimney or in a stocking.

Mr. Harold Lever

I am not unsympathetic to the hon. Gentleman's general argument, but could I ask him why the Opposition restricted the whole of its argument to the small investor when it has not restricted its Amendments to small investors?

Mr. Hirst

That is just one of the prejudices we are getting rather used to, which I personally discount 100 per cent. It does not mean a thing in my philosophy, and the hon. Gentleman will have to get used to that. I made it perfectly clear earlier in our debates that I do not accept that thesis even in the slightest degree. When wealthy people make capital gains the sums are pretty large, but I am sick to death of this business of trying to include this class. I wear it not at all. I am not impressed in the slightest by it. I do not mind the hon. Gentleman's interrupting me about it, if it gives him any pleasure. I appreciate that he is in general in support of the general theme of the Amendments, and I hope he will try to do something in this matter.

I am getting rather embarrassed, almost, by the sort of reputation for modesty which is creeping up on me because of the modest nature of my Amendments, and I gather that the proposal in my new Clause is more modest than anybody else's. I there suggest an exemption for £250. I am not trying to cast myself in any particular rôle or place myself in any particular niche by this means, but I do think there is something to be said for cutting down the appalling administrative expense which trying to catch such small sums for tax will involve. It is a bit more valuable than trying to deal with the prejudice which precludes exempting small sums of small people for fear that rich people will get away with those sums which, to so many of them, are utterly marginal.

That is the sort of argument which shows the attitude of mind of many right hon. and hon. Members opposite. The hon. Member for Manchester, Cheetham (Mr. Harold Lever) is much more sane and experienced in these matters than anybody else on those benches, and in consequence I accept what he says much more readily, because I appreciate the intelligence he brings to these matters. I only wish we could have more intelligence from the Government, and if we had had it we should not be sitting here still at 2 o'clock in the morning. I hope we shall get some reasonable answer on this, and not the sort of stuff we got earlier, which angered us, and has kept us here longer than we need have been.

Mr. Gower

As my name appears in support of both the new Clause by my hon. Friend the Member for Shipley (Mr. Hirst) and the Amendment moved by my hon. Friend the Member for Harrow, Central (Mr. Grant), I would like to express my support for the principle which underlies them both. If the Government cannot concede a concession of the size asked for by my hon. Friend the Member for Harrow, Central, I hope they will give consideration to the amount suggested by my hon. Friend the Member for Shipley.

But how well my hon. Friend the Member for Harrow, Central moved his Amendment, and how much pleasure we on this side took from his obvious enthusiasm for saving, particularly by a lot of small people, and for thrift and investment and investors' clubs. I think he was misguided, in that he seemed to think his enthusiasm was shared all over the Committee. For my part, I am not quite sure that it is shared on the benches opposite. I am not happy that there is the same enthusiasm for the spread of property ownership, particularly share ownership. I hope that I am wrong, but at least the hon. and learned Gentleman has the opportunity of proving me wrong tonight, and of showing there is on the benches opposite great enthusiasm for spreading among many small people share ownership and property ownership and saving and investment in industry. If there is this enthusiasm the hon. and learned Gentleman can demonstrate that tonight by at least accepting the principle of the modest concession at the bottom end of this scale.

Mr. Maurice Macmillan (Farnham)

I start by telling the hon. Member for Manchester, Cheetham (Mr. Harold Lever) that we are not particularly wedded to the terms of the Amendment but rather to the principle underlying it, which is to exempt small capital gains and small investors. The figure of £400 was put in because it follows the minority report of the Royal Commission, which seemed to us to set a reasonable standard. I do not underrate the administrative inconvenience of an Amendment of this nature; nor should we underrate the arguments about the restriction of the market and the forcing up of share prices, as mentioned by my hon. Friend the Member for Harrow, Central (Mr. Grant). But I want to talk about the effect on savings, and small savings in particular. Surely it is only just and equitable to treat a capital gain derived from the sale of shares as favourably as that derived from dealing in port or pictures, or any other commodity of that nature.

I want to refer once again to the massive disinterest displayed by all Governments in the subject of savings for small people outside the narrow field of lending to the Government themselves, in one way or another. There is almost a hostility to private enterprise on the part of the small saver. This provision is another example of the disincentive to saving that this narrow approach to the problem must bring.

The economic effect of savings is the same, regardless of the way in which they are made, in the sense that purchasing power is withdrawn and the need for raising taxes is lessened. It would be very unwise of any Government to underrate the growing force of the investment club movement, especially on the shop floor in the bigger factories and industrial establishments in Birmingham and other parts of the Midlands, where their growth has been spectacular.

People today are not as unsophisticated as they used to be; they are no longer content with the derisory reward they can get from the more conventional methods of small savings, in lending to the Government. Even a £400 capital gain could be eaten away in five years— whether the money is reinvested or spent —by the commission and, most of all, by the present rate of inflation. I plead with the Financial Secretary to consider not so much the convenience of the Treasury in dealing with its problems of raising money but the interest of the small saver and the nation, and to consider the Amendment with favour.

Mr. Evelyn King (Dorset, South)

There are two reputable arguments, and the function of the Committee is to balance one against the other. There is the argument, first used when the Capital Gains Tax was introduced, that this is a piece of social justice, that it is offensive to the community that a few people should make large profits at a moment when others are being asked to exercise restraint, and that the broader back must carry heavier taxation. All those arguments are put forward, and any Governments must have some regard to them.

But the point that I seek to make is that there must be a limit to these considerations. It cannot be in the interests of social justice to promote that climate of opinion which ensure that, in the end, the British economy is even slightly damaged. These are the two arguments that we must balance, and I do not suggest that it is easy to do so.

But I am alarmed—and I should think that every neutrally-minded person must be alarmed—by the sheer volume of intellectual ability that goes, on the one hand, into the collection of taxes and, on the other, into resisting that collection. However deep may be convictions of social justice, that point must creep in. In assessing the value of this Amendment and urging it upon the Financial Secretary, it is those calculations—the purely practical ones—which I hope will influence him in accepting the Amendment.

2.15 a.m.

I dread the time when almost every person who makes an Income Tax return will demand the services of an accountant to enable him to make his return. Already we are not far from that state of affairs. Considering the matter purely in financial terms, and taking a modest man with savings amounting to £2,000, from an investment of £2,000 a capital gain of £250 or more may well accrue, and immediately that happens professional help will be required in order that the tax return can be completed.

We have heard much of the brain drain, in the sense of the emigration of brains. Another kind of brain drain, which is every bit as harmful, is the drain of brains into useless and unproductive occupations. It is upon that point alone that I feel this Amendment ought to be considered. I wish that some of our social scientists, many of whom are doing less useful jobs, would direct themselves to an assessment of the volume of brain power doing jobs in this country which fulfil no useful function, which produce nothing and are engaged in an almost childish tug-of-war between those on the one hand who seek to collect taxes and those on the other hand who seek to resist the collection. That is the sort of study to which the Treasury ought most seriously to address itself. Because I believe those things, I believe this Amendment to be in the national interest.

Mr. John Smith (Cities of London and Westminster)

I congratulate my constituent, the hon. Member for Manchester, Cheetham (Mr. Harold Lever), on his practical approach. Before his colleagues and the Government turn down his and our suggestion, embodied in this Amendment, they ought to demonstrate to us that they know, by telling us, just how much the Government would lose in revenue by adopting an Amendment on these lines, and how much they would save in administration. If they turn down the Amendment without doing that, they will demonstrate that they are not concerned with good housekeeping, that they do it for doctrinaire reasons without regard to the shortage of skilled manpower and without regard to our finances.

Mr. MacDermot

The hon. Member for Harrow, Central (Mr. Grant), who moved the Amendment, forecast that the Committee would have to listen to a dreary repetition by myself of the arguments that I addressed to the Committee last year. I am afraid that that is inevitable. Hon. Members must not be surprised, if they repeat their arguments, when they get the same answers again.

I hope hon. Members will not mind my saying that in listening to this debate I have not detected any new arguments in favour of the Amendment. However, I do not want to give the impression that I have not enjoyed the debate. I have. We have heard some attractive speeches in support of the Amendment. My personal view is that there is only one argument in favour of the Amendment which really bears examination at all, and that is the argument which influenced the Minority Report of the Royal Commission—the allegation that this would result in a large administrative saving. I will come to this argument in a moment, and it seems to me that it merits very close consideration. The other arguments are not valid. It is common ground, certainly between the Front Benches, that there should be a Capital Gains Tax, though some of the speeches tonight from the back benches have been directed against the whole principle. At any rate, if we agree that there should be such a tax, it is because we agree that additions to people's wealth in the form of capital as well as of income should be subject to tax though at a lower rate.

Secondly, we should remember that about 3½ million of our 21 million taxpayers are likely to make capital gains because they have investment income and, therefore, assets on which they might make gains. We are asked to accept that these 3½ million people who make any addition to their income in capital gains, which it is agreed should be subject to tax, should nevertheless have the first £500 or £250 of these gains entirely tax-free. This is negating and gainsaying the whole accepted principle that capital gains should be taxed.

I do not want to be emotive, but we are facing a difficult situation at the moment because a certain class of industrial workers feel that they should have higher earnings. If they get those higher earnings, they will be taxed on them and some of them at the standard rate of 41½ per cent. We are being told that those 3½ million people who earn capital gains—I am sure that there are precious few seamen among them—should be given £10 a week addition to their income by way of tax-free capital gains. That is what the Amendment proposes.

All I want to do is reject the concept that, in principle, if one supports the idea of a Capital Gains Tax, it is right to say, "Let us not be hard on the small investor: let us give him the first £500 tax-free." It does not make sense——

Mr. Gresham Cooke

Surely Income Tax concessions are given tax-free on earned income allowance and so on? That is all tax-free.

Mr. MacDermot

Certainly: that is the right way to do it. If one wants to give relief to the small man, let it be by way of personal allowances which are available against the whole of his tax liability. But if we think that the poorer people need more support, the right way to help them is by improving allowances or raising the limits of the lower rate of tax, but not by selecting 3½ million people, most of whom are likely to be at the upper end of the scale——

Hon. Members

No.

Mr. MacDermot

Certainly the great majority of them are, including the people on the shop floor at Ford's. Of course they are the people who are earning large wages. Speaking personally, I entirely support everything which has been said by those who want to encourage wage earners of this kind to invest their money in industrial equities. I am in favour of their investing in investment clubs unit trusts or other saving schemes. This is one of the ways in which we shall achieve a greater and fairer distribution of wealth.

People should be encouraged to invest their savings in ways in which they can participate in the growing wealth of the country. This is one way in which they can——

Mr. Grant

I do not want the Financial Secretary to be obsessed by this view. Our case is simpler than that. It is that there should be some concession for the people at the lower end of the Capital Gains Tax scale. If the Financial Secretary, with all his skilled draftsmen, can undertake to produce on Report or at some other stage a formula which would give some sort of concession, while excluding the tycoon, I should be happy.

Mr. MacDermot

I give notice formally now that I do not propose to give way again until the end of what I have to say, because it only interrupts the thread of my argument if I am asked to deal with a point which I have every intention of coming to.

I was asked by the hon. Member for Cities of London and Westminster (Mr. John Smith) what the cost of this would be. No one can estimate what the cost would be. Amongst other things, it would depend on the extent to which wealthier people arranged their affairs so as to spread the realisation of their gains and have the benefit of the concession, whatever it be.

Again, that leads to one of the injustices of the Amendment. It would mean that people who were able to realise gains steadily over the years by adjustment of their portfolio could realise very considerable gains tax free, whereas other people who perhaps only had one capital asset which they were compelled to realise once in a lifetime through circumstances outside their control and realised a large capital gain would have to pay the full rate of Capital Gains Tax on it. When one examines it, the Amendment has not the justice and fairness that is attributed to it. The maximum relief would go to the wealthiest taxpayers.

I am sorry if the hon. Member for Harrow, Central considers the argument pedantic and silly. It is not. It is a simple fact which must be faced by those supporting the Amendment that it will not bring benefit to the small man. The greatest benefit will be brought to the man with large capital assets and a large potentiality for making capital gains. The way to help the small man is to increase his personal allowances.

If the small man is going to pay tax on this at all, which he may not do because of the altenative basis of adding it to his income level, he will not pay at more than half his marginal rate of tax. There are about 12 million taxpayers whose marginal rate of tax is at the 6s. 0d. level and who are not paying the standard rate of 8s. 3d. The rate which they would be paying for capital gains as a result of the working of the alternative basis of charge would be about half their marginal rate. There is already relief for the small man built into the system by the alternative basis of charge.

So much for those arguments, which I suggest do not bear examination. We come now to what I consider to be the serious argument, which is the administrative one. It is said that if we can make an exemption of this kind workable, we will save an enormous amount of work for the taxpayer, the accountancy profession and the Inland Revenue. That was the argument which appealed to those associated with the minority Report of the Royal Commission.

All that I can do is to repeat that we have again looked into the proposal very carefully. My right hon. Friend has had it investigated by the Inland Revenue again. I can only repeat what I said last year, that it is the view of the Inland Revenue that the concept of the amount of reduction in administrative work which an Amendment of this kind would achieve has been very considerably exaggerated.

Sir D. Glover

No.

Mr. MacDermot

The hon. Member for Ormskirk (Sir D. Glover) says "No", but apparently he does not wish to listen to the argument.

The reason for that is that it will be necessary still for people who make capital gains to calculate them to see whether they are within the limit or not. It is only in cases where it is self-evident that capital gains would be below whatever limit was chosen—and I suggest that, if we chose a limit at all, £500 would be too high—and where none of the gains accrued from a part disposal of the asset that there would be any reduction.

If a person holds a block of shares and he realises only part of that block holding, that is a part disposal of the asset. In their own interests it would be necessary to calculate what proportion of the cost of the asset had to be set against the proceeds of the part disposal to ensure that the right residue of cost was carried forward and set against a subsequent disposal. These are the sort of complications which are involved when one deals with the proposal that there would be a great administrative saving under this Amendment.

2.30 a.m.

We have heard many pleas about persons with a small holding of 500 shares and so on who do not know what to do when they sell their shares and realise on them. I hope that any hon. Member will tell such people that they should discuss the matter with their tax inspectors. As everyone in this Committee knows, they are most anxious to be helpful to taxpayers. No doubt many hon. Members have had the experience of receiving help from them. Do not let us exaggerate or put the case on a not very substantial basis.

There are very substantial objections in principle to this type of Amendment, but in spite of that, if it would really succeed in achieving a substantial diminution of administrative work and we were convinced of that we would be disposed to look at it again. At the moment we are not convinced of that argument.

Mr. Maurice Macmillan

Before he sits down, will the hon. and learned Gentleman answer one question? Are we to understand that by the earlier part of his speech he has entirely rejected the idea of giving incentive to saving through the fiscal system? Development bonds could be an equivalent of a tax-free capital gain.

Mr. MacDermot

The hon. Member is seeking to argue from this Amendment a case which he is continually pressing, that there should be a tax concession for various forms of savings by small savers in industrial equities. That is an entirely different question and raises much broader issues. Governments of all political complexions have agreed that there should be special exceptions for certain forms of national savings, but the issue which the hon. Member is opening is very much wider than that covered by this Amendment.

Mr. John Hall

The Committee will agree that the Financial Secretary has waxed most eloquent and indignant in replying to the debate, but he should reserve his energy a little because we have still a long way to go. So far as I could make out from what he said, he was telling the Committee that a Government should never reduce taxation because if it did we would be bound to help the rich rather than the less well-off. That seems a rather curious philosophy.

This debate has been a most interesting one. We have had extremely good contributions from my hon. Friends and a most interesting one from the hon. Member for Manchester, Cheetham (Mr. Harold Lever). It is true that in the course of his remarks he made a back swipe at the Opposition Amendment. One expects that, but he supported the principle of the Amendment.

The Financial Secretary has kept on talking about giving £10 a week to Surtax payers and about what the seamen are getting, but we are debating three Amendments dealing with sums ranging from £250 to £500. We are not wedded to a particular sum, but we concentrate on trying to help the small saver to overcome the appalling problem of the volume of administrative work which has to be carried out by various professional bodies. If the Financial Secretary is not prepared to listen to us, he will know that the Chancellor has had representations from professional bodies including the Institute of Chartered Accountants and the Association of Certified and Corporate Accountants. With all their experience in trying to work this system over the past year they have come to the conclusion that the amount of work involved, and which frequently means comparatively small capital gains, is out of all proportion to the revenue which will accrue to the Treasury and imposes a very severe and sometimes savage burden in professional costs on the client whose affairs have to be examined by his professional advisers. One might say that this could be covered if the professional fees were allowable, but they are not. The shareholders or the taxpayers have to pay them.

The Institute of Chartered Accountants expressed anxiety concerning the burden placed by the Inland Revenue on the taxpayers and their advisers and suggested a different approach. They suggested a general exemption on the first £5,000 on the proceeds of chargeable assets other than assets covered by Section 30 which are chattels.

The Association of Certified and Corporate Accountants in their memorandum to the Chancellor pointed out the incredible amount of work involved in dealing with so many cases that they have to investigate. I have no doubt that the Financial Secretary has seen many examples, and I have one here which is a computation worked out in respect of a shareholder holding ordinary shares in one quoted company. There are about 14 transactions dating back from before and after the relevant Budget date. They include rights issues, bonus issues and a legacy of some shares and so on. It is the sort of transaction one might expect to find over 10 years, particularly in a company with perhaps a strong family interest. The computation runs to six sheets of foolscap of close calculation. It was worked out by a specialist in tax law and, in order to be able to give the benefit of his researches to other professional men, chartered accountants and so on he gave a lecture. It took one hour and 20 minutes with the use of a blackboard to explain one case in the computation and in the end the actual capital gain was £317 over a period of some 10 years. This will be duplicated time and time again up and down the country. I suggest, even from the point of view of the minority report which talked about administrative costs, it is worthwhile looking at the principle again.

My hon. Friend the Member for Dorset South (Mr. Evelyn King) emphasised the appalling waste of high-grade talent in this country which is concentrated all the time on tax affairs. There is the appalling waste of high-grade talent in individuals who have to divert their attention from running their own businesses or professional affairs to their taxation affairs. This is most undesirable, and, if we are to find some way of avoiding it, especially in the light of the small amounts ultimately involved, the Government must devote the greatest possible effort to that end.

I shall not prolong the debate now. My hon. Friends have advanced extremely cogent and closely argued points in support of our case. The Amendment was moved extremely well and comprehensively by my hon. Friend the Member for Harrow, Central (Mr. Grant), and we are indebted to him for having given us the opportunity to have a debate.

I give the Financial Secretary one further opportunity. He has come here

with a brief which, in effect, tells him to say "No". He has said "No" eloquently and effectively, but I know that in his heart of hearts he is seized of this problem of the waste of time, talent and money in achieving what is a very small return for the Revenue in the end. If he will say that he is prepared to look again at the principle of this matter to see whether it is possible to find a way of exempting these small amounts, particularly from small savers, my hon. Friends will not wish to press the Amendment. If he cannot say that, I must advise my right hon. and hon. Friends to take it to a Division.

Question put, That those words be there inserted:—

The Committee divided: Ayes 79, Noes 153.

Division No. 53.]	AYES	[2.40 a.m.
Allason, James (Hemel Hempstead)	Hirst, Geoffrey	Pym, Francis
Baker, W. H. K.	Holland, Philip	Rossi, Hugh (Hornsey)
Batsford, Brian	Hordern, Peter	Scott, Nicholas
Biggs-Davison, John	Hornby, Richard	Sharples, Richard
Bossom, Sir Clive	Howell, David (Guildford)	Shaw, Michael (Sc'b'gh & Whitby)
Bryan, Paul	Hunt, John	Sinclair, Sir George
Buchanan-Smith, Alick (Angus, N&M)	Huntchison, Michael Clark	Smith, John
Buck, Antony (Colchester)	Jenkin, Patrick (Woodford)	Stodart, Anthony
Carlisle, Mark	Jopling, Michael	Summers, Sir Spencer
Clark, Henry	King, Evelyn (Dorset, S.)	Taylor, Frank (Moss Side)
Clegg, Walter	Kitson, Timothy	Thatcher, Mrs. Margaret
Cooke, Robert	Knight, Mrs. Jill	Tilney, John
Deedes, Rt. Hn. W. F. (Ashford)	Langford-Holt, Sir John	Turton, Rt. Hn. R. H.
Digby, Simon Wingfield	Macleod, Rt. Hn. Iain	van Straubenzee, W. R.
Eyre, Reginald	McMaster, Stanley	Vickers, Dame Joan
Farr, John	Macmillan, Maurice (Farnham)	Walker-Smith, Rt. Hn. Sir Derek
Fortescue, Tim	Maddan, Martin	Wall, Patrick
Giles, Rear-Adm. Morgan	Maginnis, John E.	Weatherill, Bernard
Gilmour, Sir John (Fife, E.)	Maxwell-Hyslop, R. J.	Webster, David
Glover, Sir Douglas	Mills, Peter (Torrington)	Whitelaw, William
Grant, Anthony	Mitchell, David (Basingstoke)	Wilson, Geoffrey (Truro)
Gresham Cooke, R.	Monro, Hector	Woodnutt, Mark
Grieve, Percy	More, Jasper	Worsley, Marcus
Hall, John (Wycombe)	Morrison, Charles (Devizes)
Hall-Davis, A. G. F.	Munro-Lucas-Tooth, Sir Hugh	TELLERS FOR THE AYES:
Heseltine, Michael	Page, Graham (Crosby)	Mr. R. W. Elliott and
Higgins, Terence L.	Percival, Ian	Mr. George Younger.
Hill, J. E. B.	Pink, R. Bonner
NOES
Allaun, Frank (Salford, E.)	Buchanan, Richard (G'gow, Sp'burn)	Edwards, Robert (Bilston)
Alldritt, Walter	Callaghan, Rt. Hn. James	Edwards, William (Merioneth)
Anderson, Donald	Cant, R. B.	English, Michael
Archer, Peter	Carmichael, Neil	Ennals, David
Armstrong, Ernest	Coleman, Donald	Evans, loan L. (Birm'h'm, Yardley)
Atkins, Ronald (Preston, N.)	Crawshaw, Richard	Faulds, Andrew
Baxter, William	Davidson, James (Aberdeenshire, W.)	Fletcher, Ted (Darlington)
Benn, Rt. Hn. Anthony Wedgwood	Davies, Harold (Leek)	Foot, Michael (Ebbw Vale)
Bennett, James (G'gow, Bridgeton)	Davies, Ifor (Gower)	Forrester, John
Binns, John	de Freitas, Sir Geoffrey	Fowler, Gerry
Blenkinsop, Arthur	Dell, Edmund	Fraser, Rt. Hn. Tom (Hamilton)
Booth, Albert	Dempsey, James	Freeson, Reginald
Boyden, James	Dewar, Donald	Gardner, A. J.
Bradley, Tom	Diamond, Rt. Hn. John	Garrett, W. E.
Brooks, Edwin	Dickens, James	Ginsburg, David
Brown, Rt. Hn. George (Belper)	Doig, Peter	Gray, Dr. Hugh (Yarmouth)
Brown, Hugh D. (G'gow, Provan)	Dunnett, Jack	Gregory, Arnold
Brown, Bob (N'c'tle-upon-Tyne, W)	Dunwoody, Mrs. Gwyneth (Exeter)	Grey, Charles (Durham)
Brown, R. W. (Shoreditch & F'bury)	Dunwoody, Dr. John (F'th & C'b'e)	Griffiths, Will (Exchange)
Buchan, Norman	Eadie, Alex	Hale, Leslie (Oldham, W.)
Hamilton, William (Fife, W.)	Lyon, Alexander W. (York)	Perry, George H. (Nottingham, S.)
Hazell, Bert	Lyons, Edward (Bradford, E.)	Price, Christopher (Perry Barr)
Heffer, Eric S.	McCann, John	Price, William (Rugby)
Henig, Stanley	McGuire, Michael	Rhodes, Geoffrey
Hobden, Dennis (Brighton, K'town)	MacDermot, Niall	Roberts, Gwilym (Bedfordshire, S.)
Hooley, Frank	Macdonald, A. H.	Rose, Paul
Hooson, Emlyn	Mackenzie, Alasdair (Ross&Crom'ty)	Rowlands, E. (Cardiff, N.)
Horner, John	Mackenzie, Gregor (Rutherglen)	Shaw, Arnold (Ilford, S.)
Howarth, Harry (Wellingborough)	Mackie, John	Shore, Peter (Stepney)
Howarth, Robert (Bolton, E.)	Mackintosh, John P.	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)
Howell, Denis (Small Heath)	Maclennan, Robert	Silkin, John (Deptford)
Hughes, Hector (Aberdeen, N.)	MacMillan, Malcolm (Western Isles)	Silkin, S. C. (Dulwich)
Hughes, Roy (Newport)	McMillan, Tom (Glasgow, C.)	Silverman, Julius (Aston)
Hunter, Adam	McNamara, J. Kevin	Steele, Thomas (Dunbartonshire, W.)
Jackson, Colin (B'h'se& Spenb'gh)	Mahon, Peter (Preston, S.)	Summerskill, Hn. Dr. Shirley
Jeger, George (Goole)	Mahon, Simon (Bootle)	Varley, Eric C.
Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)	Manuel, Archie	Wainwright, Edwin (Dearne Valley)
Jenkins, Hugh (Putney)	Mapp, Charles	Walden, Brian (All Saints)
Johnson, Carol (Lewisham, S.)	Miller, Dr. M. S.	Walker, Harold (Doncaster)
Johnston, Russell (Inverness)	Morgan, Elystan (Cardiganshire)	Watkins, David (Consett)
Jones, Dan (Burnley)	Newens, Stan	Wells, William (Walsall, N.)
Judd, Frank	Noel-Baker, Francis (Swindon)	Whitaker, Ben
Kerr, Mrs. Anne (R'ter& Chatham)	Oakes, Gordon	Whitlock, William
Kerr, Russell (Feltham)	Ogden, Eric	Williams, Alan (Swansea, W.)
Leadbitter, Ted	Oram, Albert E.	Williams, Alan Lee (Hornchurch)
Ledger, Ron	Orbach, Maurice	Williams, Mrs. Shirley (Hitchin)
Lee, Rt. Hn. Jennie (Cannock)	Orme, Stanley	Wilson, William (Coventry, S.)
Lever, Harold (Cheetham)	Oswald, Thomas	Winstanley, Dr. M. P.
Lever, L. M. (Ardwick)	Page, Derek (King's Lynn)	Woof, Robert
Lewis, Ron (Carlisle)	Park, Trevor
Lomas, Kenneth	Parkyn, Brian (Bedford)	TELLERS FOR THE NOES:
Lubbock, Eric	Pavitt, Laurence	Mr. George Lawson and Mr. Alan Fitch.

2.45 a.m.

The Deputy Chairman

In calling the next Amendment, No. 294, may I draw the attention of the Committee to a misprint, a printing error, in the first line of the text on the Order Paper. After "3.—(1)" the next word "In" should be omitted.

Mr. MacDermot

I beg to move in Amendment No. 294, page 98, line 50, at end insert:

Definition of investment trust

3.—(1) Section 37(3)(b) of the Finance Act 1965 (which allows an investment trust as defined in that section to have a holding representing more than the limit of fifteen per cent. of its investments imposed by subsection (2)(b) of that section if the holding was acquired on or after 6th April, 1965, and did not exceed that limit when it was acquired) shall also apply to a holding acquired before the said date and accordingly the words "acquired on or after that date" in the said subsection (3)(b) shall cease to have effect. (2) All such adjustments shall be made, whether by the discharge or repayment of tax otherwise, as are required to give effect to the provisions of this paragraph.

This is one of those moments of aberration when the hearts of the Treasury melt and we bring forward an Amendment which is designed to relieve and assist the taxpayer. The purpose of this Amendment is to provide a slight relaxation in the conditions which have to be met before the Board of Inland Revenue can approve an investment trust for the purposes of Section 37. The general rule is that none of the holdings in its portfolio—other than a holding in another investment trust—should represent more than 15 per cent. by value of the portfolio as a whole.

In order that a trust should not be penalised merely because one of the holdings in its portfolio increased in value at a rate faster than that of the rest of the portfolio, there were provisions last year that the 15 per cent. test was not to apply to a holding acquired after Budget day last year which, when it was acquired, represented not more than 15 per cent. by value of the investing company's investments, so long as no addition was made to the holding. So long as no addition was made to the holding and the holding was acquired before Budget day, the condition was relaxed by providing that a holding could amount to up to 25 per cent. by value, provided, again, that no addition was made to the holding.

We have had representations from one or two investment trusts who each had holdings which at Budget day represented more than 25 per cent. of the value, but in each case when the holding was acquired it represented less than 15 per cent. It was represented to us that it is illogical to take a stricter view of holdings acquired before Budget day than of holdings acquired after Budget day. That argument appealed to us, and so we have brought forward this Amendment to secure the result that they are put on the same footing and will not be penalised by these provisions.

Mr. John Hall

I agree that the provision under Section 37(3, b) was somewhat restricted. I am delighted to learn that the hon. and learned Gentleman has listened to the representations made to him. It is a little early to burst into tears of pure joy at this evidence of a sinner repented. Nevertheless, we welcome it and thank the hon. and learned Gentleman for it.

Amendment agreed to.

Mr. MacDermot

I beg to move Amendment No. 296, in page 99, line 46, at the end to insert:

Apportionment of cost of acquisition of new holding of shares, etc.

5.—(1) This paragraph shall apply to a new holding, as defined in sub-paragraph (1)(b) of paragraph 4 of Schedule 7 to the Finance Act 1965 (which, as extended by section 45(8) of that Act, provides for a new holding resulting from a reorganisation or reduction of the capital of a company or unit trust scheme being treated as the same as the original holding)—

1. (a) if it consists of more than one class of shares in or debentures of the company and one or more of those classes is of shares or debentures which, in the period of three months beginning with the date on which the reorganisation or reduction of capital took effect, or such longer period as the Board may by notice in writing allow, had quoted market values on a recognised stock exchange in the United Kingdom, or
2. (b) if it consists of more than one class of rights of unit holders and one or more of those classes is of rights the prices of which were published daily by the managers of the scheme in that period of three months (or longer if so allowed).

(2) Where for the purpose of computing the gain or loss accruing to a person from the acquisition and disposal of the whole or any part of any class of shares or securities or rights of unit holders forming part of a new holdings to which this paragraph applies it is necessary to apportion costs of acquisition between what is disposed of and what is retained, the cost of acquisition of the new holding shall first be apportioned between the entire classes of shares or debentures or rights of which it consists by reference to market value on the first day after the reorganisation or reduction of capital took effect on which market value or prices were quoted or published for the shares, debentures or rights as mentioned in sub-paragraph (1)(a) or (1)(b) above (with such adjustment of the market value of any class as may be required to offset any liability attaching thereto but forming part of the cost to be apportioned); and this sub-paragraph shall have effect notwithstanding sub-paragraph (5) of the said paragraph 4 (which requires apportionment by reference to market value at the date of disposal).

(3) The foregoing provisions of this paragraph shall have effect as if contained in the said paragraph 4, and paragraphs 5, 6 and 7 of the said Schedule 7 (which apply the said paragraph 4 subject to modifications) shall have effect accordingly.

(4) For the purposes of this paragraph the day on which a reorganisation of share capital involving the allotment of shares or debentures or unit holders' rights takes effect is the day following the day on which the right to renounce any allotment expires.

(5) This paragraph applies to a disposal of part of a new holding at any time after the end of the year 1965–66 and, if a person so elects by notice in writing given to the inspector not later than the end of the year 1966–67 as respects a new holding, it shall also apply to a disposal by that person of part of that new holding at any time in the year 1965–66; and such adjustments shall be made whether by way of discharge or repayment of tax or assessment to tax or otherwise as are required to give effect to the election.

The Deputy Chairman

There is a printing error in subsection (4) of the Amendment. The word following "debentures" should be not "all" but "or".

Mr. MacDermot

May we also, Mr. Irving, discuss Amendment No. 297, in page 102, line 22, at end insert:

Apportionment of cost of acquisition of new holding of shares, etc.

11.—(1) This paragraph shall apply to a new holding, as defined in sub-paragraph (1)(b) of paragraph 10 of Schedule 9 to the Finance Act 1962 (which, as extended by section 16(4) of that Act, provides for a new holding resulting from a reorganisation or reduction of the capital of a company or unit trust scheme being treated as the same as the original holding)—

1. (a) if it consists of more than one class of shares in or debentures of the company and one or more of those classes is of shares or debentures which, in the period of three months beginning with the date on which the reorganisation or reduction of capital took effect, or such longer period as the Board may by notice in writing allow, had quoted market values on a recognised stock exchange in the United Kingdom, or
2. (b) if it consists of more than one class of rights of unit holders and one or more of those classes is of rights the prices of which were published daily by the 815 managers of the scheme in that period of three months (or longer if so allowed).

(2) Where for the purpose of computing the gain or loss accruing to a person from the acquisition and disposal of the whole or any part of any class of shares or securities or rights of unit holders forming part of a new holding to which this paragraph applies it is necessary to apportion costs of acquisition between what is disposed of and what is retained, the cost of acquisition of the new holding shall first be apportioned between the entire classes of shares or debentures or rights of which it consists by reference to market value on the first day after the reorganisation or reduction of capital took effect on which market values or prices were quoted or published for the shares, debentures or rights as mentioned in sub-paragraph (1)(a) or (1)(b) above (with such adjustment of the market value of any class as may be required to offset any liability attaching thereto but forming part of the cost to be apportioned); and this sub-paragraph shall have effect notwithstanding sub-paragraph (5) of the said paragraph (10) (which requires apportionment by reference to market value at the date of disposal).

(3) The foregoing provisions of this paragraph shall have effect as if contained in the said paragraph 10 and paragraphs 11, 12 and 13 of the said Schedule 9 (which apply the said paragraph 10 subject to modifications) shall have effect accordingly.

(4) For the purposes of this paragraph the day on which a reorganisation of share capital involving the allotment of shares or debentures or unit holders' rights takes effect is the day following the day on which the rights to renounce any allotment expires.

(5) This paragraph applies to a disposal of part of a new holding at any time after the end of the year 1965–66 and, if a person so elects by notice in writing given to the inspector not later than the end of the year 1966–67 as respects a new holding, it shall also apply to a disposal by that person of part of that new holding at any time in the year 1965–66; and such adjustments shall be made whether by way of discharge or repayment of tax or assessment to tax or otherwise as are required to give effect to the election.

and two Opposition Amendments, Amendment No. 119, in page 101, line 33, at end insert:

Re-organisation of share capital, conversion of securities, &c.

8. Paragraph 4(5) of Schedule 7 to the Finance Act 1965 shall be omitted and the following inserted:— (5) Where the new holding comprises more than one security, the cost of acquisition of the original shares shall be apportioned between the constituent parts of the new holding by reference to market values on the first day of dealing after the re-organisation or reduction of capital (with such adjustment of the market value of any part of the new holding as may be required to offset any liability attaching thereto but forming part of the cost to be apportioned) and any corresponding apportionment for the purposes of sub-paragraph (4) above shall be made in like manner".

and Amendment No. 120, in page 102, line 22, at end insert:

Re-organisation of share capital, conversion of securities, &C.

11. Paragraph 10(5) of Schedule 9 to the Finance Act 1962 shall be omitted and the following inserted:— (5) Where the new holding comprises more than one security, the cost of acquisition of the original shares shall be apportioned between the constituent parts of the new holding by reference to market values on the first day of dealing after the re-organisation or reduction of capital (with such adjustment of the market value of any part of the new holding as may be required to offset any liability attaching thereto but forming part of the cost to be apportioned) and any corresponding apportionment for the purposes of sub-paragraph (4) above shall be made in like manner".

The Deputy Chairman

Yes, if that is for the convenience of the Committee.

Mr. MacDermot

These are Amendments to simplify the operation of the Capital Gains Tax by changing the basis on which the Capital Gains Tax cost on an original holding of shares is to be apportioned between the shares or securities comprised in the holding which results from a reorganisation of the capital. The matter is somewhat involved and complicated, and I will gladly explain it in full to the Committee if hon. Members wish. I gave a brief outline of it when we were considering the Ways and Means Resolution the other night. The Opposition have tabled two Amendments which were aimed to achieve the same purpose. I think that the Government Amendments achieve the object a little more fully.

Mr. John Hall

I do not think we wish to take advantage of the hon. and learned Gentleman's offer to explain this to us. I think that, even with his well known brevity and clarity of expression, it would take a little time. His Amendments take the place of the two that we tabled to deal with the point. We are grateful to the Chancellor for having been seized on the point and tabling two Amendments of his own. We will not debate which of the Amendments are the most comprehensive or most meet the point, but I think that it is done perfectly adequately.

I should like to ask a question about paragraph 5(1,a) of Amendment No. 296, which reads: on a recognised stock exchange in the United Kingdom". Paragraph 22 of Schedule 6 in the 1965 contained similar words, but the words "and elsewhere" were added, so that it read: on a recognised stock exchange in the United Kingdom and elsewhere". I do not know whether there is any significance in the omission of the words or whether it makes any difference. Perhaps the hon. and learned Gentleman would care to comment.

Mr. MacDermot

I am afraid that I have not had my attention drawn to the point, and I do not recall for the moment what the reason was why last year we added "and elsewhere" in the passage referred to by the hon. Gentleman. I will look into the point and let the hon. Gentleman know the result. If it appears that we ought to have added those words this year, then I will bring forward an appropriate Amendment at Report.

Amendment agreed to.

Mr. John Hall

I beg to move, Amendment No. 275, in page 100, line 39, at the end to insert: 7.—(1) In the event of the winding-up of a body corporate or the bankruptcy of an individual the capital gains tax payable in consequence of and during the course of the winding-up or the bankruptcy shall not exceed the amount (if any) by which the assets vested in the liquidator or the trustee in bankruptcy exceed the sums owing to the creditors of the bankrupt.

The Deputy Chairman

With this we can also discuss Amendment No. 276, in page 102, line 18, leave out subparagraph (4).

Mr. Hall

This Amendment is similar to one moved last year, since when we have had some experience of the operation of the Act. I would like to quote the words that I used on that occasion in dealing with this question of bankruptcy. I said: The present position on the winding-up of a body corporate or the bankruptcy of an individual is that should any assets realised during the disposal of a bankruptcy produce a capital gain the State will impose a Capital Gains Tax in the case of an individual in bankruptcy at 30 per cent. and in the case of a company or corporation at 40 per cent., even though the final proceeds of the liquidation may be insufficient to pay the creditors 20s. in the £."—[OFFICIAL REPORT, 27th May, 1965; Vol. 713, c. 947–8.] Unlike Income Tax or Corporation Tax, the liability to Capital Gains Tax does not arise every year. It cannot arise until the assets are realised. In the case of a liquidation of bankruptcy where the losses incurred may be very considerable and the chances of the creditors being paid 20s. in the £ rather slight, it seems to be rather extraordinary that the gains which are made on the realisation of the assets, which would not have been realised but for the bankruptcy, and which would normally go towards the payment of the creditors, including the preferential creditor, the Inland Revenue or preferential creditors, for Income Tax or Capital Gains Tax, should not be applied in full to meet those liabilities, but instead the State steps in and takes its Capital Gains Tax before the balance of the capital gain is available for the rest of the creditors.

Last year the Solicitor-General was kind enough to point out to me, and it had slipped my mind at the time, that the Finance Act, 1962, which covered the short-term Capital Gains Tax provided for this particular exemption. He rather spoiled this generous gesture by going on to argue at some length that, whereas exemption is justified in the case of short-term gains, it was apparently not justified in the case of the longer-term gains. He said: In the case of a short-term Capital Gains Tax one naturally looks more kindly at the involuntary disposition, because the liability to a short-term tax depends on the two transactions happening within a certain period of time. An acquisition takes place and then a disposal takes place within six months or three years, as under the 1962 Act, or within a period of 12 months, as we propose in the Bill. In such a case it would be a hardship on the other creditors"— I stress that— … to take it against tax when the disposal is an involuntary one, because the owner of the property has at that period of time become insolvent. If that is done, the bankrupt's liability is added to because of circumstances beyond his control and, indeed, beyond the creditors' control, and the amount which is available for the other creditors is reduced."—[OFFICIAL REPORT, 27th May, 1965; Vol. 713, c. 951.] It appears that hardship occurs to creditors and to the bankrupt where this takes place under twelve months, but if it is twelve months and a day, then no hardship arises. In the debate last year, I was privileged to have the support of the hon. Member for Heywood and Royton (Mr. Barnett), who as a practising accountant—and I hope that the Chief Secretary is listening—probably has more practical knowledge of these affairs than other people, and who seemed in this matter to adopt a rather more sensible approach to the problem than chartered accountants on the Front Bench opposite. I hope that the Amendment will this time command the sympathetic attention of the Financial Secretary and that we shall be more fortunate than we were last year in getting a favourable response to this Amendment. I am encouraged by the fact that we have just passed two Amendments, tabled by the Chancellor, which made concessions of the kind for which we have pressed in the past and about which representations have been made. Perhaps we may have a third to give us a hat trick.

3.0 a.m.

Mr. MacDermot

I am afraid that the Treasury's heart has returned to its normal condition on this Amendment. We discussed—and rejected—an Amendment of this character last year, and since then there has been an important change in the position as a result of the proposals contained in the Schedule.

The position last year was that the transfer of an asset to a trustee in bankruptcy or to a liquidator of a company was itself a disposal and was regarded as the occasion of a charge to Capital Gains Tax. If there were an increase in the value of the asset while it was in the hands of the trustee or liquidator and he subsequently disposed of it, there could be a charge to the long-term Capital Gains Tax but it was only that disposal that was exempt from short-term Capital Gains Tax liability.

It was represented to us with force that there was a possible injustice in that position in that where there was not a gain but a loss when the asset was in the hands of the trustee or liquidator, there was no other gain in respect of which that loss could be carried forward to get a set-off. As a result of our proposal we have introduced in the Schedule, the transfer to the trustee or liquidator is no longer a disposal. One will look through at the total gain or loss from the time that the debtor company originally acquired the asset to the time at which it was finally disposed of by the liquidator or trustee. If there were a gain before the liquidation or bankruptcy and a subsequent loss, the loss could be set off against the gain. That is an advantage.

In these circumstances—and it is in these circumstances that we must consider the proposal—the Opposition propose that where assets are realised the tax due on the chargeable gain should not be payable unless or in so far as there is a surplus of assets over liabilities in the bankruptcy or dispossession. But the Capital Gains Tax is a tax on disposal. It is a tax on gains realised at the time of disposal and the circumstances occasioning the disposal are not relevant to considering the liability to tax.

If we started making exceptions in this way, many other cases could be brought forward in which a person could say that he has had to realise assets in circumstances occasioning sympathy and therefore he should not have to pay the charge. If we were to consider that argument, then, speaking personally, I should not regard this case as being particularly meritorious. The case for the creditors, in my view, would be much less strong than the case which they sometimes mount against the position of the Crown as a preferred creditor in respect of liability to Income Tax and Corporation Tax. Here we are dealing with the net gain to the creditors when a capital asset of the debtor or liquidated company is being realised, and the net gain is that which results after it has been disposed of and the charges involved in that disposal have been paid, and among those are the Capital Gains Tax liability, if any, which results at the time of the disposal. To argue from the absurd, one does not say that at the moment when there is an auction sale of a bankrupt's assets the auctioneer should not be entitled to his fee because of one's sympathy for the creditors.

One must remember that it is the creditors who, by granting excessive credit to the debtor, enabled him to get into the position of being bankrupt. I do not see why we should cease to protect the interest of the general body of taxpayers by surrendering Capital Gains Tax, which it is otherwise right to levy at the time of disposal, because the occasion of the disposal is that creditors are realising an asset of a bankrupt. I may be expressing a personal view on this, but I urge upon the Committee that in view of the change which we have made now there is even less argument in favour of the Amendment than there was last year.

Mr. John Hall

I appreciate the action that has already been taken by the Treasury Bench in order to remove one injustice. This is an improvement, but to call it in aid as a reason for not removing another injustice is not entirely logical. The Financial Secretary says that we cannot grant exceptions to various rules and laws which are laid down in our fiscal legislation, but our laws are full of exceptions. This would not be a departure from previous practice.

In bankruptcy, the Crown ranks as preferential creditor for Income Tax or Corporation Tax. Now the Financial Secretary also wants to tax capital gains on assets that have to be forcibly realised on bankruptcy. It is bad enough to do that, but this would tax not only capital gains but also the capital that has been realised in order to pay back to the creditors some of the money which is owed to them.

I find the Financial Secretary's reply disappointing. I also find odd his philosophy in suggesting that it is the creditors who have made the person bankrupt. If one never did trade with an individual who might go bankrupt, the trade of this country would come to a grinding halt The reasons for which people go bankrupt are largely outside their control. There may be one or two traders and those providing services who may be severely affected by the Selective Employment Tax and may be forced into bankruptcy through Government action— nothing to do with the creditors having unwisely given them too much credit.

I did not expect anything more from the Financial Secretary. I felt certain that he had another brief with "No" written right across it. With his usual skill, he deployed all the arguments in favour of that brief; he did it very well. But he has not convinced anybody on this side of the Committee. This seemed to be an injustice when we raised it last time. The fact that something has been done to remedy one of the anomalies and injustices is welcome, but it does not alter the situation. I strongly recommend my hon. Friends to divide on the Amendment.

Question put, That those words be there inserted:—

The Committee divided: Ayes 76, Noes 150.

Division No. 54.]	AYES	[3.9 a.m.
Allason, James (Hemel Hempstead)	Holland, Philip	Rossi, Hugh (Hornsey)
Baker, W. H. K.	Hordern, Peter	Scott, Nicholas
Batsford, Brian	Hornby, Richard	Sharples, Richard
Biggs-Davison, John	Howell, David (Guildford)	Shaw, Michael (Sc'b'gh & Whitby)
Bossom, Sir Clive	Hunt, John	Sinclair, Sir George
Bryan, Paul	Hutchison, Michael Clark	Smith, John
Buchanan-Smith, Alick (Angus,N&M)	Jenkin, Patrick (Woodford)	Stodart, Anthony
Buck, Antony (Colchester)	Jopling, Michael	Summers, Sir Spencer
Carlisle, Mark	King, Evelyn (Dorset, S.)	Taylor, Frank (Moss Side)
Clark, Henry	Kitson, Timothy	Thatcher, Ms. Margaret
Clegg, Walter	Knight, Mrs. Jill	Tilney, John
Deedes, Rt. Hn. W. F. (Ashford)	Langford-Holt, Sir John	Turton, Rt. Hn. R. H.
Digby, Simon Wingfield	Macleod, Rt. Hn. Iain	Vickers, Dame Joan
Farr, John	McMaster, Stanley	Walker-Smith, Rt. Hn. Sir Derek
Fortescue, Tim	Macmillan, Maurice (Farnham)	Wall, Patrick
Giles, Rear-Adm. Morgan	Maddan, Martin	Weatherill, Bernard
Gilmour, Sir John (Fife, E.)	Maginnis, John E.	Webster, David
Glover, Sir Douglas	Maxwell-Hyslop, R. J.	Whitelaw, William
Grant, Anthony	Mills, Peter (Torrington)	Wilson, Geoffrey (Truro)
Gresham Cooke, R.	Mitchell, David (Basingstoke)	Woodnutt, Mark
Grieve, Percy	Monro, Hector	Worsley, Marcus
Hall, John (Wycombe)	More, Jasper	Younger, Hn. George
Hall-Davis, A. G. F.	Morrison, Charles (Devizes)
Heseltine, Michael	Munro-Lucas-Tooth, Sir Hugh	TELLERS FOR THE AYES:
Higgins, Terence L.	Percival, Ian	Mr R. W. Elliott and Mr. Reginald
Hill, J. E. B.	Pink, R. Bonner	Eyre.
Hirst, Geoffrey	Pym, Francis
NOES
Allaun, Frank (Salford, E.)	Gardner, A. J.	MacMillan, Malcolm (Western Isles)
Alldritt, Walter	Garrett, W, E,	McMillan, Tom (Glasgow, C.)
Anderson, Donald	Ginsburg, David	McNamara, J. Kevin
Archer, Peter	Gray, Dr. Hugh (Yarmouth)	Mahon, Peter (Preston, S.)
Armstrong, Ernest	Gregory, Arnold	Mahon, Simon (Bootle)
Atkins, Ronald (Preston, N.)	Griffiths, Will (Exchange)	Manuel, Archie
Baxter, William	Hale, Leslie (Oldham, W.)	Mapp, Charles
Benn, Rt. Hn. Anthony Wedgwood	Hamilton, William (Fife. W.)	Miller, Dr. M. S.
Bennett, James (G'gow, Brldgeton)	Hazell, Bert	Morgan, Elystan (Cardiganshire)
Binns, John	Heffer, Eric S.	Newens, Stan
Blenkinsop, Arthur	Henig, Stanley	Noel-Baker, Francis (Swindon)
Booth, Albert	Hobden, Dennis (Brighton, K'town)	Oakes, Gordon
Boyden, James	Hooley, Frank	Ogden, Eric
Bradley, Tom	Hooson, Emlyn	Orbach, Maurice
Brooks, Edwin	Homer, John	Orme, Stanley
Brown, Rt. Hn. George (Belper)	Howarth, Harry (Wellingborough)	Oswald, Thomas
Brown, Hugh D. (G'gow, Provan)	Howarth, Robert (Bolton, E.)	Page, Derek (King's Lynn)
Brown, Bob (N'c'tle-upon-Tyne, W)	Howell, Denis (Small Heath)	Park, Trevor
Brown, W. R. (Shoreditch & F'bury)	Hughes, Hector (Aberdeen, N.)	Parkyn, Brian (Bedford)
Buchan, Norman	Hughes, Roy (Newport)	Pavitt, Laurence
Buchanan, Richard (G'gow, Sp'burn)	Hunter, Adam	Perry, George H. (Nottingham, S.)
Callaghan, Rt. Hn. James	Jackson, Colin (B'h'se & Spenb'gh)	Price, William (Rugby)
Cant, R. B.	Jeger, George (Goole)	Rhodes, Geoffrey
Carmichael, Neil	Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)	Roberts, Gwilym (Bedfordshire, S.)
Coleman, Donald	Jenkins, Hugh (Putney)	Rose, Paul
Crawshaw, Richard	Johnson, Carol (Lewisham, S.)	Rowlands, E. (Cardiff, N.)
Davidson, James (Aberdeenshire, W.)	Johnston, Russell (Inverness)	Shaw, Arnold (Ilford S.)
Davies, Harold (Leek)	Jones, Dan (Burnley)	Shore, Peter (Stepney)
Davies, Ifor (Gower)	Judd, Frank	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)
de Freitas, Sir Geoffrey	Kerr Mrs. Anne (R'ter & Chatham)	Silkin, John (Deptford)
Dell, Edmund	Kerr, Russell (Feltham)	Silkin, S. C. (Dulwich)
Dempsey, James	Lawson, George	Silverman, Julius (Aston)
Dewar, Donald	Leadbitter, Ted	Steele, Thomas (Dunbartonshire, W.)
Diamond, Rt. Hn. John	Ledger, Ron	Summerskill, Hn. Dr. Shirley
Dickens, James	Lee, Rt. Hn. Jennie (Cannock)	Varley, Eric G.
Doig, Peter	Lever, Harold (Cheetham)	Wainwright, Edwin (Dearne Valley)
Dunnett, Jack	Lever, L. M. (Ardwick)	Walden, Brian (All Saints)
Dunwoody, Mrs. Gwyneth (Exeter)	Lewis, Ron (Carlisle)	Walker, Harold (Doncaster)
Dunwoody, Dr. John (F'th & C'b'e)	Lomas, Kenneth	Watkins, David (Consett)
Eadie, Alex	Lubbock, Eric	Wells, William (Walsall, N.)
Edwards, Robert (Bilston)	Lyon, Alexander W. (York)	Whitaker, Ben
Edwards, William (Merioneth)	Lyons, Edward (Bradford, E.)	Whitlock, William
English, Michael	McCann, John	Williams, Alan (Swansea, W.)
Ennals, David	MacDermot, Niall	Williams, Alan Lee (Hornchurch)
Evans, Ioan L. (Birm'h'm, Yardley)	Macdonald, A. H.	Wilson, William (Coventry, S.)
Faulds, Andrew	McGuire, Michael	Winstanley, Dr. M. P.
Fletcher, Ted (Darlington)	Mackenzie, Alasdair (Ross&Crom'ty)	Woof, Robert
Foot, Michael (Ebbw Vale)	Mackenzie, Gregor (Rutherglen)
Forrester, John	Mackie, John	TELLERS FOR THE NOES:
Fowler, Gerry	Mackintosh, John P.	Mr. Alan Fitch and Mr. Charles Grey.
Fraser, Rt. Hn. Tom (Hamilton)	Maclennan, Robert
Freeson, Reginald

Mr. Higgins

I beg to move, Amendment No. 72, in page 101, line 33, at the end to insert:

Policies of insurance

8. In paragraph 10(1) of Schedule 7 to the Finance Act 1965 the words from the beginning to "neither" exclusive in line 5 shall be omitted.

The object of this Amendment is to remove what seems to us to be a clear anomaly in the 1965 Finance Act. It covers capital redemption policies, which provide a capital sum assured at the end of a stated period of years in return for annual premiums; and the sum assured is the accumulation which the insurance company makes, plus the interest and other earnings, all of which have borne full taxation.

This is a policy which is a means of saving, carried out by somebody who pays premiums which it is the duty of the insurance company to invest. Under last year's Finance Act, these policies were made liable for tax on the excess of the sum assured over the premiums paid; that is, the capital amount which a person would receive at the end of the stated period. The supplementary charge on what is called a capital gain imposed an extra layer of taxation, which would not be charged if the person concerned had decided not to take out the policy, but had invested the same amount himself. We feel that this is a matter which should be rectified. We feel it is wrong that we should have in this sort of redemption policy an extra layer of taxation, compared with the situation which would have arisen had a corporate body or individual invested on his own account. Had the corporate body not taken out the policy but had itself invested it would have avoided the extra layer of taxation. For this reason we feel that the Amendment ought to be accepted by the Committee.

As I say, the policy could be taken out either by a corporate body or by an individual. The vast majority of these policies are in fact taken out by corporate bodies; something like 95 per cent. of them are taken out by corporate bodies. They take out these policies to cover loans which typically are made by the insurance company which is also granting the policies; in other words, a policy effectively covers the loan which the insurance company is making.

This form of redemption policy is not taken out to any great extent by individuals, nor is it taken out to any great extent by large companies, because a large company can undertake investment of its funds and cover its capital requirements and loans through its own operators and experts. It is, fundamentally, the small company which employs this kind of policy to cover loans which it receives from the insurance company. This is a useful means whereby it obtains capital which it probably could not otherwise achieve by way of a debenture issue.

It seems to us quite wrong that this extra layer of taxation should be imposed on this kind of policy, and the effect, we can see, is to eliminate this kind of policy in any new business. Since the passing of the Act the rate of taxation which is imposed on this kind of policy is so high that no one would willingly take out such a policy rather than carry out his own investment decisions. So really it is not so much a Capital Gains Tax as a capital punishment for this kind of policy. This means that a useful source of finance for small and medium sized businesses is effectively being stopped. I think the Chief Secretary would agree that most of the alternatives which would be open to a company in these circumstances would not in fact be very satisfactory alternatives either from the point of view of the firm or from the point of view of the Revenue. Therefore, on these grounds, we feel very strongly that the Amendment should have the support of the whole Committee.

There is a second point which I ought to make, and that is that already a very considerable amount of money has been raised on policies of this kind. Those policies cover loans which small and medium-sized businesses have acquired in the past. If we fail to amend the Finance Act, 1965, in the way which we suggest, it means that those who have policies already negotiated and loans already covered by them will find it necessary to renegotiate the whole operation. They will have to start from scratch and say, "Our policies, because of the Capital Gains Tax levy, are not going to cover the loans which we have in fact been granted, and as a result of this we have to come back to you and try to renegotiate the whole thing." This is likely to disrupt very severely the whole of this part of the capital market, and this is a part of the market which performs a useful function. On both those grounds we feel it is desirable that the 1965——

Mr. Harold Lever

Would not the force of the argument depend upon the nature of the investment which the insurance company made on behalf of the assuree or the company holding the policies to which the hon. Gentleman refers?

Mr. Higgins

No, I do not think so. The position is quite clear. Regardless of the type of investment which the insurance company makes, if one has a capital redemption policy, supposing the accumulation of the various things will already have borne full tax at the end of the period—let us say tax of £10,000——

Mr. Lever

Let us assume that the insurance company invested the premiums —and based its returns on those—in equity shares, and made a capital gain upon them, would not the effect of the Amendment be that, indirectly, that capital gain on those equities and the other investments would escape Capital Gains Tax?

Mr. Higgins

Not at all. I cannot accept that for a moment. I thought that I had covered that point in my opening remarks. We are comparing two systems. Under the redemption policy system, if the capital accumulation at the end of the period is £10,000 and the premium paid is £6,000, so that the accumulation after interest is £4,000. Corporation Tax will be chargeable on the gain even though the company had paid taxes of £1,600 in the earlier stages, so that at this stage the net benefit would be £2,400.

We have to contrast this with the situation under the system of direct investment, where, again, the total accumulation would be £10,000, the premiums paid £6,000, and the accumulation after interest, £4,000. As in the previous case, all the taxes for which the company was liable would have been paid, but in the second case Corporation Tax would not be chargeable on the amount.

This is a complicated point to make at this early hour of the morning, and perhaps I can put it again very simply for the benefit of the hon. Member for Cheetham, who is a great expert in these matters.

Mr. Callaghan

My hon. Friend will not understand it.

Mr. Higgins

I do not accept the Chancellor's assertion that the hon. Gentleman will not understand it. I am sure he will. My point is that in both cases all the taxes will have been paid, whether the company takes out a redemption policy or, on the other hand, invests individually. But in the first case an additional layer of taxation will be levied, with the result that under the 1965 Act this kind of policy is no longer a workable proposition. Unless we amend the provision as it stands at present this kind of policy will be completely killed, both for those who have already taken out such policies to cover loans and also those who wish to initiate further policies to cover other loans, which they need to finance their operations.

I can assure the hon. Member that the existing provisions of the Finance Act effectively make a capital redemption policy quite uneconomic for a firm wishing to take one out to cover a loan. For those reasons I believe that the Committee would be right to remove this anomaly which, if we consider the question in detail, we find to be a clear one and one which is not likely to work in the interests of the business community—because redemption policies performs a useful function—or in the interests of the Exchequer or the country, and I hope that the Committee will accept the Amendment.

3.30 a.m.

Mr. Diamond

As the hon. Member for Worthing (Mr. Higgins) has rightly said, it is early in the morning and it is not an occasion when a long speech would be appropriate. I have listened to what the hon. Member has said; we have received many representations and have been made fully aware of the real difficulties that exist in this connection.

I am more conscious of the difficulties than I am persuaded by the arguments of principle which the hon. Gentleman used. There are real difficulties. Nevertheless, we have debated this before and have received representations, and we have decided not to resist this Amendment. The words are appropriate to fulfil the purpose of the Amendment and, therefore, I would recommend to my hon. Friends that they do not vote against this Amendment.

Mr. John Hall

It would not be fitting to allow this unique occasion to go by without comment. I am sure the whole Committee is indebted to the Chief Secretary for having listened so carefully and for having signified the intention of the Government to accept the Amendment. We are indeed grateful to him for this. It removes an anomaly—furthermore, as far as I can understand, at no cost to the Treasury because there is no revenue to be obtained from it; so although it is a generous gesture, we note that it is at no cost to anyone.

I have said earlier on that it is a little early to burst into tears of joy at the sign of the sinners repenting. I am almost getting to that point now. One more concession by the Government would bring me to the point of tears.

Amendment agreed to.

Mr. John Hall

I beg to move Amendment No. 278, in page 101, line 33, at the end to insert:

Inflation relief

8. In Schedule 6 to the Finance Act 1965 there shall be added, as paragraph 8A, the following:— 8A. In any computation under this Schedule of the gain accruing on the disposal of an asset there shall be added to the expenditure attributable to that asset under paragraph 4 of this Schedule an amount equal to 3 per cent. of that expenditure as respects each year (and proportionately for any part of a year) during the relevant period of ownership".

The Temporary Chairman (Mr. Grant-Ferris)

With this Amendment it will be convenient to take Amendment No. 310, in line 33, at end insert:

Chargeable gains on assets held for three years or more

8. The chargeable gains on the disposal of an asset shall be computed as if any expenditure allowed as a deduction by Schedule 9 to the Finance Act 1965 which was incurred three years or more prior to the date of disposal were increased in direct proportion to any increase in the Board of Trade Index of Wholesale Prices between the date the expenditure was incurred and the date of disposal.

Mr. Hall

This Amendment which I am moving is also not unfamiliar. We advanced arguments about the effect of the Capital Gains Tax upon real capital during the debate which went on for such a long time during the Committee stage of the 1965 Finance Bill. As you say, Mr. Grant-Ferris, we are taking Amendment No. 310 with this Amendment, and I must confess that I am of the view that Amendment No. 310 is perhaps a little more realistic than the one that I am moving—more realistic against the background of the movement of the cost of living figures in the last 12 months or so.

I notice that in April, 1965, the retail prices index was 112, and that in April, 1966, it had risen to 116.8, a rise of 4.8 points or 4.3 per cent., which is in marked contrast to the movement of the cost of living which we had been led to expect if one listened to the election speeches during the last two elections.

Inflation is a very heady and attractive thing to live with. Indeed, I sometimes think that inflation is like that type of suicide which used to be popular amongst the noble Romans who used to sit themselves in a nice hot bath and cut their veins, and, with a sense of delicious and increasing languor, gradually bleed till life was extinct. Inflation is very much like that because the country bleeds to death very often without realising what is happening.

The effect of the Capital Gains Tax can be summed up by a quotation from Lord Shawcross in The Times of 7th April. Lord Shawcross is now Chairman of the Wider Share Ownership Council. The paper saw fit to point out that he was a former Labour Minister and that therefore his words were worth noting. He said: Of all the taxes the capital gains tax is perhaps the greatest fraud. They will tax a nominal inflationary rise in values although the real value of the investment or property has decreased in purchasing power owing to inflation which has resulted of Government policies. Perhaps that is why The Times mentioned that he was a former Labour Minister. Obviously he had experience of what happens under a Labour Government.

The article went on to say: There are two indictments here. One against the form and complexity of the tax itself;"— which we have mentioned— the other against its use in a period of inflation."' This is precisely the point now being made by the country's farmers—The Times article was about the farmers— that the effect of the tax in a period of inflationary price rises was tantamount to a capital levy on individual farms.

The article quoted Professor Merritt, in a wider context, as saying that most taxpayers had no real capital gains on assets subject to the tax and that many of them are in fact suffering definite losses. This is the point of the Amendment.

The main arguments about the effect of inflation and the fact that the Capital Gains Tax will tax the inflated value of the asset and thus become a capital tax were deployed last year and I will not repeat them, but one ought to examine some of the arguments against the proposals of that time. It was suggested, for example, that a tax system could not protect against the effect of inflation. The hon. Member for Heywood and Royton (Mr. Barnett) was against it in this respect. He said that inflation was an economic fact of life.

But we do take inflation into account in our system in the variation of allowances and from time to time in the variation of rates. The inflationary effect must be taken into account when considering tax reliefs. It was argued that income earners suffer the effects of inflation without being specially treated to protect them against it. But even that is not true. Many workers have written into their contracts of service an automatic cost of living increase clause, which raises their income with the cost of living.

Others who do not have that written-in protection manage to obtain protection by pressure.

There is no doubt that the majority of wage earners have managed to stay well ahead of the cost of living. I agree that some sections of the community, the professional and small fixed income groups, for example, have not been able to do this. I also agree that inflationary increases in income attract higher Income Tax and Surtax, but this has comparatively little effect on those whose earnings keep well ahead of the cost of living. It can have an effect on the higher income brackets, because in the higher Surtax realms, a person's real income may depreciate even though it appears to increase.

We have heard constantly in these debates and last year's that Capital Gains Tax is most likely to affect the Surtax payer, because he is most likely to have investment holdings or assets which are likely on realisation to attract the tax. If that is so, the Surtax payer has been hit twice. As he is pushed up into the higher Surtax brackets, he has a depreciated income, out of which he buys assets the value of which will be reduced when he realises them. I do not want to go through the arguments which we made about the effects of the tax.

The article in The Times goes on: If, for example, prices rose by a fifth over five years the monetary value of an investment originally costing £100 would have to rise to £120 to retain its value in real terms. The tax on this apparent monetary gain would take £6, leaving the owner with £114 of inflated currency—the equivalent of £95 in the original monetary terms. So there one has a real depreciation of capital, and one can quote many similar examples.

I am sorry that the hon. Member for Manchester, Cheetham (Mr. Harold Lever) is no longer in his place. He has been a constant attender in the last few hours. The hon. Gentleman took part in the debate on Report stage on 7th July, 1965, and he had this to say about a similar Amendment which we moved at that time. He introduced his comments by a very clever back-hander at the Opposition, saying: This talk about double tax is beside the point but under a cocoon of bad argument there is a real grievance. It is that tax is levied not on the real but on the paper profits. Here not only have the Opposition a case but they have an unanswerable case. The only trouble about the unanswerable case is that it is an utterly useless one to the House. It is unanswerable and it is unremediable at the same time."—[OFFICIAL REPORT, 7th July, 1965; Vol. 715, c. 1670.] I am not quite so pessimistic as the hon. Gentleman is about it being unremediable, but he is right in saying that it is an unanswerable case.

Let us look at the situation in other countries. As far as I am aware, all countries, without exception, either have had or still have a system which takes account of inflation. In 1920, originally, the United States of America had an abatement system. It continued for a number of years, though I agree that they have dropped it since. It was suggested that it was abandoned because it had a locking-in effect, as it was called, on market movements. I very much doubt whether that was so. Even if it was, our Amendment would not have that effect. I find it hard to believe that a tax which is as expensive and complicated to administer as the Capital Gains Tax and which in inflationary periods, without any argument, destroys real capital and thus must affect adversely the future earning capacity of individuals and the country as a whole, can be of any real value to the nation or any section of the population. On the contrary, I believe that the taxation of capital over the years must be harmful in the long-term interests of the nation, particularly in our present economic situation.

I have no great hopes that the Amendment will be the fourth in a row which we shall get out of the benches opposite, and that it will be another to add to the list of Amendments and improvements which have been made to the Capital Gains Tax legislation tonight. But I am sure that hon. Members on this side of the Committee and, obviously, hon. Members opposite appreciate that, as the system now exists, it is not only a tax on gains but a tax on capital. The arguments about it being impossible to make arrangements to offset the inflationary effect on the taxation system do not hold water. We have suggested the way in which it could be done, and we believe that it should be done.

Even at this late hour, I hope that the Committee will be prepared to support the Amendment.

3.45 a.m.

Mr. David Mitchell (Basingstoke)

Although it is a quarter to four in the morning, I feel that I must rise in view of the importance of Amendment No. 310 which you, Mr. Grant Ferris, have called to be discussed with the Amendment which has been moved. It is an Amendment which would prevent the citizen paying Capital Gains Tax on that part of a capital gain which arises purely from inflation. I hope the Government will recognise that there is a difference between taxing real capital gains and those capital gains which occur purely on paper.

Inflation is not new, but I ask the Government to consider where we would be today if over the last 40 years we had transferred from the individual to the Government 30 per cent. of the paper increase in wealth. There would be no need to nationalise major industries or the land for they would have been transferred by these means overwhelmingly to the Government in that period. The effect of a Capital Gains Tax in one year in view of inflation is very small, but over a decade it is very large. It then becomes a capital levy, not a capital gains tax.

If we are working with inflation at the rate of 5 per cent. a year a tax increase of 5 per cent. is very little in one year, but a tax increase of 50 per cent. in 10 years becomes very substantial. The average small saver is probably saving over 20 years. Then there is a 100 per cent. increase in the paper value of the asset due to inflation. It is that 100 per cent. increase which is liable to a tax of 30 per cent. and this becomes a capital levy, not a Capital Gains Tax. It will result, indeed there are already signs that it is beginning to result, in a drastic reduction in the amount of savings which people are prepared to make.

Investment has always been regarded as a hedge against inflation. To the extent that we are taxed on the increase, the less is the attraction for most people to save. Savings are essential to the nation, not only because of the capital which can then be used to push forward production, but also because savings are a voluntary withdrawal of consumptive power from the purchasing power of the country and they can create immeasurable advantages for the Chancellor at a time of inflation. I ask that this Amendment shall be given serious consideration. The disincentive to savers and those building up businesses is very considerable.

People do not work for love of the Chancellor of the Exchequer or even for love of the Financial Secretary to the Treasury. They work because there is an advantage to them. If during the years in which they are working to build up a business they see that at the end they will be robbed of 30 per cent., there is little incentive to them to put their backs into building up a business. The small man is building up a business for a good living now and to provide security for his wife and himself in their old age and an opportunity for his children to have a better chance in life than he had himself. Disincentive will be very serious for the economy, which needs incentive. In a memorable phrase, my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said that this would produce "stagflation". There are many signs that that is happening whether the person concerned is a grocer in Andover, a baker in Basingstoke, or a Hampshire farmer.

For a farmer with 400 acres at £250 per acre, it works out at £100,000, and over 30 years he will have to pay £30,000. That is not an uneconomic or an excessively sized unit, but where can a farmer find that sort of sum to pay back in 20 years? If he does not sell the farm but gives it to his son, he will still have to pay and that rate of money is not to be found in farming today

This situation will destroy the incentive to work. I therefore urge the Government to give most serious consideration to accepting the Amendment. The long-term damage which the situation can cause will do irreparable harm to the economy.

Mr. Percy Grieve (Solihull)

The absurdity of the situation is that we have a Capital Gains Tax at a flat rate of 30 per cent. without any regard for inflation at all, and it will be perfectly possible, with inflation proceeding at the rate it has proceeded over the last few years, for a man to have a real loss in terms of real money and then to sell his shares at a real loss and then have to pay 30 per cent. to the Treasury on what he obtains over and above the purchase price. This is not taxation of a capital gain it is a levy, whether the man has made a loss or not.

I will add nothing to what my hon. Friend the Member for Basingstoke (Mr. David Mitchell) said, nor will I take up the time of the Committee in urging the point further. If what the Government intend to do is to tax capital gains, then let them tax capital gains but not put a tax on wealth or on diminishing wealth.

Mr. MacDermot

The hon. Member for Wycombe (Mr. John Hall) will not be surprised to hear that I do not think that this Amendment is an occasion for the tears he promised us on our third occasion in yielding. Nor will he be surprised to hear me hazard the view that Amendment No. 310 is possibly a better Amendment than the one he moved, if one wanted to do something about inflation relief.

In the Amendment which he moved there are some curious illogicalities including one proposing to add what is supposed to be inflation relief at three per cent. to the incidental costs of the disposal which presumably are costs incurred at the end of the period when the inflation is supposed to have taken place. I do not quite follow the logic behind that particular provision.

I can deal with the matter briefly because we fully rehearsed the arguments for and against this proposal last year. I can see, when I look back at the reports of the debates on this subject last year, how I earned the reputation for brevity to which the hon. Member for Wycombe referred. Let me, with that brevity, seek to answer what the hon. Member called that unanswerable case and remind him what our arguments are. The main argument is that we do not in our tax system offer any hedges against inflation. If one were to seek to do so, I suggest it would be unwise to start with the equity investor who by and large has a better protection against inflation than anyone else.

The ordinary wage earner, including those with an automatic cost of living increase, will, as a result of that increase, if there is inflation, be paying effectively a higher rate of tax. He may go into a higher tax bracket but even if he does not, the tax he pays and the proportion of his income at his marginal rate will be increased and his effective rate will be increased, He has no relief against that.

The man who is a dealer in securities is, and always has been, taxed on the gains he makes, when he disposes those securities, as part of the profits of his trade or business. There has never been any relief for such an inflationary element which there may be in those gains and it has never been argued that there should be. The person who suffers and suffers most, surely, in any period of inflation is neither the wage earner nor the equity investor, but the investor who did not make any gain and the value of whose stock falls as a result. There is no provision in our fiscal system for compensating them for that loss or giving any rebate to them.

As I say, if we were to start building in a hedge against inflation, the equity investor is not the one to start with. But I think it would be unwise. As far as I know, there is only one country which has really tried building into its fiscal system hedges against inflation. I believe that it was attempted by Israel, and the result was merely to increase the inflationary pressure. The scheme was abandoned. Other attempts have been made in one form or another to try to counteract the inflation element in the Capital Gains Tax, in particular by various systems of time abatement. I refer hon. Members who are interested to what I said last year on the subject. The hon. Member for Wycombe reminded us that the Americans who had something built into their system found that it did not work and have abandoned it. They have no such system as is proposed in the Amendment.

The hon. and learned Member for Solihull (Mr. Grieve) said that we were imposing a 30 per cent. rate without regard to any element of inflation. That is precisely what we are not doing. We are imposing a 30 per cent. rate and an alternative basis of charge with regard to the element of inflation. As I said earlier, the possible inflation element in gains was one of the factors which we took into account in fixing the very low rates of tax upon capital gains compared with other taxes and the tax at different levels upon incomes.

As I have said several times today, of the 3½ million who are potential candidates for this tax, under 500,000 will pay at 30 per cent. and the other 3 million will pay at effectively 20½ per cent. or a substantially lower rate than that. This takes account, among other things, of the point that there may be an inflation element in the gains.

Mr. Higgins

We cannot accept the Financial Secretary's argument. We shall be very sorry to see the Government not accept this Amendment. Our hopes were somewhat raised by the acceptance of the previous Amendment, and we thought that it might become a habit. The real point here was made very cogently by my right hon. Friend the Leader of the Opposition last year. His words are to be found reported at column 1677 of HANSARD of 7th July, but, to paraphrase it, his argument was this. Supposing that Capital Gains Tax were charged on a piano and there was a situation of inflation so that the piano which originally cost £100 cost £150 at the end of the period, the taxpayer would then be charged to tax on the increase in the money value of the piano of £50 and lose 30 per cent. of that £50. But he would not then, after selling the piano and being charged to tax, be able later to replace it with a precisely similar piano.

In that way, my right hon. Friend illustrated the point that is not a tax in any sense on a capital gain but is a tax on the actual value of the asset or wealth. The hon. and learned Gentleman has not answered that point at all, and it was not answered last year either.

The Amendment is in very moderate terms. The increase in the cost of living index, which is as good an indication as we have of the rate of inflation, imperfect though it is, rose from 112 at 13th April, 1965, to 116 at 19th April, this year, an increase of 4 points, whereas our Amendment makes allowance only for an increase of 3 per cent. This a modest proposal, in the light of all the factors involved. It was clear from our debate on the regulator the other day that the Chancellor will take no deflationary measures of any significance before the autumn, and this means that wage claims are not likely to be more strongly resisted than hitherto. Any likely settlement of the seamen's strike, even if the Inquiry recommendations are carried out, will be somewhat in excess of the nominal norm, and certainly far in excess of the actual norm justified by the increase in productivity taking place. Therefore it is likely we shall see an even faster rate of inflation in the coming months, and this again will mean that people who happen to own taxable assets in this class will actually be losing in terms of their command over real resources. I do not think it can be denied that the revenue from this tax is greater if the rate of inflation is greater, and this surely is an unfortunate situation.

4.0 a.m.

The next point I think ought to be taken up, and the hon. Gentleman really did not take account of this, is that precisely the same amount of tax is charged if the increase in capital value takes place after one year as if it takes place over 20 years. If a particular asset increases in value from £100 to £200 in one year, the same amount is charged as if it had increased from £100 to £200 over 20 years. In the second case it is much more likely that the actual change in the value of money will have been greater, but the actual rate of tax will be precisely the same in both cases.

The hon. Gentleman was quite right in saying that last year his reply was very brief. It was not only brief, it was also inadequate because it failed completely to cover the point I have just made, which illustrates that the arguments of the Government are based on fallacies. The hon. Gentleman repeated the statemnt which he made last year that we were being asked to build in a hedge against inflation. I put it to him that we are not building in a hedge against inflation, but what we are saying is that if a particular asset does appreciate in money terms and not in real terms this is no reason for taxing the person who owns that particular asset.

The essential argument of the hon. Gentleman is that whatever happens, no one can be allowed to escape the effect of inflation. He might argue that that was a good idea, but if he does he has also to argue that if there is any inflationary wage claim that also should be taxed away. He is not arguing this, and therefore I suggest his argument that we cannot allow anyone to have a hedge against inflation is not relevant. We had a debate on gold coins the other day, and now we are not even being allowed to import gold coins to award to winners of the World Cup.

I believe the answer to this is to be found in the Report of the Royal Commission on Taxation where the Report was largely written by Mr. Kaldor, and it seems to me it is right that we should distinguish between Mr. Kaldor and Mr. Balogh. I have a high opinion for Mr. Kaldor and his reputation as an economist. But in the Royal Commission on Taxation, it seemed to me that Mr. Kaldor himself went very badly off track and entered into arguments which were not really valid.

I do not want to go over in great detail the arguments which we had last year, but I would make one final point. The hon. Gentleman in replying just now said that allowance had been made for the effect of inflation in the rate which was determined for Capital Gains Tax. I did earlier ask him in an intervention on what assumed rate of inflation the rate had been adjusted, and he declined to answer that.

There was no specific answer on that point, but if he is really arguing that this inflation problem is covered in the rate, then surely the whole of his argument

that one should not allow a hedge against inflation falls to the ground. He is really putting it surreptitiously into the rate and some allowance has been made for inflation, rather than making it explicitly in the way in which we are proposing in the Amendment. It surely is far more desirable that it should be made explicitly, that an actual allowance should be made of the kind that we have suggested, rather than that it should be made implicitly with no clear statement of the arithmetic or the actual rate assumed in the lines put forward in the Bill.

For all these reasons, we completely oppose the provisions put forward by the hon. and learned Gentleman. He has completely failed to answer the fundamental and numerous points that we have made. We hope that by next year we shall finally have convinced him of the validity of our arguments. I call on my hon. Friends to vote in favour of the Amendment.

Question put, That those words be there inserted:—

The Committee divided: Ayes 80, Noes 141.

Division No. 55.]	AYES	[4.6 a.m.
Allason, James (Hemel Hempstead)	Hirst, Geoffrey	Pink, R. Bonner
Baker, W. H. K.	Holland, Philip	Pym, Francis
Batsford, Brian	Hordem, Peter	Rossi, Hugh (Hernsey)
Biggs-Davison, John	Hornby, Richard	Scott, Nicholas
Bossom, Sir Clive	Howell, David (Guildford)	Sharples, Richard
Bryan, Paul	Hunt, John	Shaw, Michael (Sc'b'gh & Whitby)
Buchanan-Smith, Alick (Angus, N &M)	Hutchison, Michael Clark	Sinclair, Sir George
Buck, Antony (Colchester)	Jenkin, Patrick (Woodford)	Smith, John
Carlisle, Mark	Johnston, Russell (Inverness)	Stodart, Anthony
Clark, Henry	Jopling, Michael	Summers, Sir Spencer
Clegg, Walter	King, Evelyn (Dorset, S.)	Taylor, Frank (Moss Side)
Davidson, James (Aberdeenshire, W.)	Kitson, Timothy	Thatcher, Mrs. Margaret
Deetles, Rt. Hn. W. F. (Ashford)	Knight, Mrs. Jill	Tilney, John
Digby, Simon Wingfield	Lubbock, Eric	Turton, Rt. Hn. R. H.
Elliott, R. W. (N'c'tle. upon-Tyne, N.)	Mackenzie, Alasdair (Ross&Crom'ty)	Vickers, Dame Joan
Farr, John	Macleod, Rt. Hn. Iain	Walker-Smith, Rt. Hn. Sir Derek
Fortescue, Tim	McMaster, Stanley	Wall, Patrick
Giles, Rear-Adm, Morgan	Macmillan, Maurice (Farnham)	Weatherill, Bernard
Gilmour, Sir John (Fife, E.)	Maddan, Martin	Webster, David
Glover, Sir Douglas	Maginnis, John E.	Whitelaw, William
Grant, Anthony	Maxwell-Hyslop, R. J.	Wilson, Geoffrey (Truro)
Gresham Cooke, R.	Mills, Peter (Torrington)	Winstanley, Dr. M. P.
Grieve, Percy	Mitchell, David (Basingstoke)	Woodnutt, Mark
Hall, John (Wycombe)	Monro, Hector	Worsley, Marcus
Hall-Davis, A. G. F.	More, Jasper
Heseltine, Michael	Morrison, Charles (Devizes)	TELLERS FOR THE AYES:
Higgins, Terence L.	Munro-Lucas-Tooth, Sir Hugh	Mr. Younger and Mr. Eyre.
Hill, J. E. B.	Percival, Ian
NOES
Allaun, Frank (Salford, E.)	Bennett, James (G'gow, Bridgeton)	Brown, Hugh D. (G'gow, Provan)
Alldritt, Walter	Binns, John	Brown, Bob (N'c'tle-upon-Tyne, W.)
Anderson, Donald	Blenkinsop, Arthur	Brown, R. W. (Shoreditch & F'bury)
Archer, Peter	Booth, Albert	Buchan, Norman
Armstrong, Ernest	Boyden, James	Buchanan, Richard (G'gow, Sp'burn)
Atkins, Ronald (Preston, N.)	Bradley, Tom	Callaghan, Rt. Hn. James
Baxter, William	Brooks, Edwin	Cant, R. B.
Benn, Rt. Hn. Anthony Wedgwood	Brown, Rt. Hn. George (Belper)	Carmichael, Neil
Coleman, Donald	Hooley, Frank	Miller, Dr. M. S.
Crawshaw, Richard	Horner, John	Morgan, Elystan (Cardiganshire)
Davies, Ifor (Cower)	Howarth, Harry (Wellingborough)	Newene, Stan
de Freitas, Sir Geoffrey	Howarth, Robert (Bolton, E.)	Noel-Baker, Francis (Swindon)
Dell, Edmund	Howell, Denis, (Small Heath)	Ogden, Eric
Dempsey, James	Hughes, Hector (Aberdeen, N.)	Orbach, Maurice
Dewar, Donald	Hughes, Roy (Newport)	Orme, Stanley
Diamond, Rt. Hn. John	Hunter, Adam	Oswald, Thomas
Dickens, James	Jackson, Colin (B'h'se & Spenb'gh)	Page, Derek (King's Lynn)
Doig, Peter	Jeger, George (Goole)	Park, Trevor
Dunnett, Jack	Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)	Parkyn, Brian (Bedford)
Dunwoody, Mrs. Gwyneth (Exeter)	Jenkins, Hugh (Putney)	Pavitt, Laurence
Dunwoody, Dr. John (F'th & C'b'e)	Johnson, Carol (Lewisham, S.)	Perry, George H. (Nottingham, S.)
Eadie, Alex	Jones, Dan (Burnley)	Price, William (Rugby)
Edwards, Robert (Bilston)	Judd, Frank	Rhodes, Geoffrey
Edwards, William (Merioneth)	Kerr, Mrs. Anne (R'ter & Chatham)	Roberts, Gwilym (Bedfordshire, S.)
English, Michael	Kerr, Russell (Feltham)	Rose, Paul
Ennals, David	Leadbitter, Ted	Rowlands, E. (Cardiff, N.)
Evans, Ioan L. (Birm'h'm, Yardley)	Ledger, Ron.	Shaw, Arnold (Ilford, S.)
Faulds, Andrew	Lee, Rt. Hn. Jennie (Cannock)	Shore, Peter (Stepney)
Fitch, Alan (Wigan)	Lever, L. M. (Ardwick)	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)
Fletcher, Ted (Darlington)	Lewie, Ron (Carlisle)	Silkin, John (Deptford)
Foot, Michael (Ebbw Vale)	Lomas, Kenneth	Silkin, S. C. (Dulwich)
Forrester, John	Lyon, Alexander W. (York)	Silverman, Julius (Aston)
Fowler, Gerry	Lyons, Edward (Bradford, E.)	Steele, Thomas (Dunbartonshire, W.)
Fraser, Rt. Hn. Tom (Hamilton)	McCann, John	Summerskill, Hn. Dr. Shirley
Freeson, Reginald	MacDermot, Niall	Varley, Eric G.
Gardner, A. J.	Macdonald, A. H.	Wainwright, Edwin (Dearne Valley)
Garrett, W. E.	McGuire, Michael	Walden, Brian (All Saints)
Ginsburg, David	Mackenzie, Gregor (Rutherglen)	Walker, Harold (Doncaster)
Gray, Dr. Hugh (Yarmouth)	Mackie, John	Watkins, David (Consett)
Gregory, Arnold	Mackintosh, John P.	Wells, William (Walsall, N.)
Grey, Charles (Durham)	Maclennan, Robert	Whitaker, Ben
Griffiths, Will (Exchange)	MacMillan, Malcolm (Western Isles)	Williams, Alan (Swansea, W.)
Hale, Leslie (Oldham, W.)	McMillan, Tom (Glasgow, C.)	Williams, Alan Lee (Hornchurch)
Hamilton, William (Fife, W.)	McNamara, J. Kevin	Wilson, William (Coventry, S.)
Hazell, Bert	Mahon, Peter (Preston, 8.)	Woof, Robert
Heffer, Eric S.	Mahon, Simon (Bootle)
Henig, Stanley	Manuel, Archie	TELLERS FOR THE NOES:
Hobden, Dennis (Brighton, K'town)	Mapp, Charles	Mr. Lawson and Mr. Whitlock.

4.15 a.m.

Mr. Nigel Birch (Flint, West)

I beg to move, Amendment No. 281, in page 101, line 33, at the end to insert:

Exemption for Government Securities

8. In section 27 of the Finance Act 1965 there shall be added the following subsection:— (4A) United Kingdom Government securities shall not be chargeable assets".

The Temporary Chairman

It would also be convenient to discuss at the same time Amendment No. 288, page 102, line 22, at the end to add:

Exemption for Government Securities

11. In section 17 of the Finance Act 1965 there shall be added the following subsection:— (5A) There shall be exemption from tax chargeable under Case VII for any gain accruing to a person from his acquisition and disposal of United Kingdom Government securities, and a loss so accruing shall not be an allowable loss".

Mr. Birch

The effect of these Amendments would be to take Government securities right out of the operation of the Capital Gains Tax. I moved a similar Amendment on the Finance Bill last year although at a rather earlier hour.

Before I moved the Amendment quite considerable propaganda was carried out in the papers and elsewhere by myself and others against the application of the Capital Gains Tax to Government securities. The reasons were that we held that it was fraudulent to impose the tax because many Government securities had been sold at a heavy discount and no one would have paid the price in fact paid had he had the slightest idea that the capital appreciation would be subject to tax. We also objected to it because we held, rightly, that the market in Government securities was a sick and ailing market and that it was essential to the health of our economy that that market should not be further damaged but should be revived.

This preliminary propaganda had some effect on the Chancellor because after I had moved that Amendment he made some rather strange proposals of his own. It was a typical Kaldorian pantomime. The third act of this pantomime was a mixture of tragedy and farce which surprised nobody except our very dear Chancellor. What was done was that some securities were taken out of the tax altogether, some were left in altogether, and some were partially subject to tax and partially not. This so startled everybody that the market in Government securities had to be suspended the next day and it caused some most extraordinary anomalies. For example, Transport 3 per cent. stock 1968–73 is completely exempt from the tax and Electricity stock 3 per cent. 1968–73, on exactly the same terms, is wholly subject to tax. I give the Chancellor some credit. I could not accept that what he did was all that was necessary, but he did at any rate aspire to the status of a demi-vierge.

I come back from that point now to talk about the health of the gilt-edged market. The market has been sinking steadily, and largely this is the result of Government policy. The effect of Corporation Tax has been to cause a flood of debenture issues directly competing with the gilt-edged market. It started shortly after the Finance Bill last year and it is going on at an ever-increasing pace. Gilt-edged securities are not franked investment income and therefore to many institutional investors they are most unattractive under Corporation Tax.

Thirdly, the inflation continues relentlessly and will continue while we have, in effect, only 100,000 unemployed—mostly changing jobs—with vacancies four or five times as high. When he was talking about capital gains, the the Financial Secretary said that the capital gains took account of inflation. But inflation works exactly the opposite way round on gilt-edged securities. Ordinary shares may go up as a result, goods may go up, but not gilt-edged securities. If the Amendment is accepted it will not be a cure but it will be a palliative. What could it cost? Probably less than nothing. Gilt-edged securities are mostly at the lowest point they have ever reached. There are not many capital gains on them. There are some capital gains on redeemable securities reaching the date of redemption but some of those securities are not subject to tax any way. In addition, as the gilt-edged market has fallen since the last Finance Bill, it is open to people to sell gilt-edged securities and claim a tax loss.

I cannot think that the tax will bring in very much. On the other hand, if it were taken off it would bring certain advantages. I have cited two stocks which are in identical terms, one of which is subject to Capital Gains Tax and the other not. The difference in yield is three-quarters of one per cent.—a very big difference. I do not say that taking off the Capital Gains Tax would produce anything like as large an effect as that throughout the market. Of course it would not, because there is a certain scarcity value in stocks which are free of tax, but it would produce some effect

It is desperately necessary that we should do something to help the market in gilt-edged securities. It is sinking, and this not only makes it difficult for the Government to manage the market and difficult and expensive for them to fund. It also costs local authorities more to get finance in the market and elsewhere, and it has a direct effect on rates of debentures, which are costs on industry, and the unfortunate holders of house mortgages. Anything that can be done to help the gilt-edged market is in the national interest. It could be done not only without loss to the Revenue but possibly with an actual gain, and certainly with a gain in justice.

Mr. Diamond

We had this very same debate last year. The greater part of the challenge is on the basis of good faith, and my right hon. Friend met that challenge completely by relieving from Capital Gains Tax those gilt-edged securities that had been issued at a discount, where it could possibly have been said that the expectation was, and the bargain was, that the difference was an element in the price, and that therefore it was clear that there was no deduction to be made in any form of taxation.

Having made that point, I can see no argument, and the right hon. Gentleman has not produced a single argument, for saying that we should single out a particular source of gain and that one shall not pay Capital Gains Tax on that source but shall pay on other sources. Moreover, there is no reason to suppose that there is anything to distinguish that kind of source from similar sources. There would be immediate pressure to extend the distinction to Commonwealth securities, to local authority securities and loans, and, indeed, to all fixed interest securities.

No argument was produced last year, and none has been produced this year, as to why one should remove a particular category from the general body of gains that are taxable. Once one does that, one loses faith, and my right hon. Friend is not prepared to do that, and he is not prepared to accept the Amendment.

Mr. Birch

The Chief Secretary says that he has not heard a good argument for the Amendment. He cannot have been listening. If the Government go on

like this with the gilt-edged market, they will find it slithering steadily down, resulting in damage to the country and to the economy and great unfairness to gilt-edged holders. I strongly advise my right hon. and hon. Friends to go into the Lobby in favour of the Amendment.

Question put, That those words be there inserted: —

The Committee divided: Ayes 81, Noes 140.

Division No. 56.]	AYES	[4.24 p.m.
Allason, James (Hemel Hempstead)	Hill, J. E. B.	Percival, Ian
Baker, W. H. K.	Hirst, Geoffrey	Pink, R. Bonner
Batsford, Brian	Holland, Philip	Pym, Francis
Biggs-Davison, John	Hordem, Peter	Rossi, Hugh (Hornsey)
Birch, Fit. Hn. Nigel	Hornby, Richard	Scott, Nicholas
Bossom, Sir Clive	Howell, David (Guildford)	Sharples, Richard
Bryan, Paul	Hunt, John	Shaw, Michael (Sc'b'gh & Whitby)
Buchanan-Smith, Aliick (Angus, N&M)	Hutchison, Michael Clark	Sinclair, Sir George
Buck, Antony (Colchester)	Jenkln, Patrick (Woodford)	Smith, John
Carlisle, Mark	Johnston, Russell (Inverness)	Stodart, Anthony
Clark, Henry	Jopling, Michael	Summers, Sir Spencer
Clegg, Walter	King, Evelyn (Dorset. S.)	Taylor, Frank (Moss Side)
Davidson, James (Aberdeenshire, W.)	Kitson, Timothy	Thatcher, Mrs. Margaret
Deedes, (Rt. Hn. W. F. (Ashford)	Knight, Mrs. Jill	Tilney, John
Digby, Simon Wingfield	Lubbock, Eric	Turton, Rt. Hn. R. H.
Elliott, R. W. (N'c'tle-upon-Tyne, N.)	Mackenzie, Alasdair (Ross&Crom'ty)	Vickers, Dame Joan
Farr, John	Macleod, Rt. Hn. Iain	Walker-Smith, Rt. Hn. Sir Derek
Fortescue, Tim	McMaster, Stanley	Wall, Patrick
Giles, Rear-Adm. Morgan	Macmillan, Maurice (Farnham)	Weatherill, Bernard
Gilmour, Sir John (Fite, E.)	Maddan, Martin	Webster, David
Glover, Sir Douglas	Maginnis, John E.	Whitelaw, William
Grant, Anthony	Maxwell-Hyslop, R. J.	Wilson, Geoffrey (Truro)
Gresham Cooke, Ft.	Mills, Peter (Torrington)	Winstanley, Dr. M. P.
Grieve, Percy	Mitchell, David (Basingstoke)	Woodnutt, Mark
Hall, John (Wycombe)	Monro, Hector	Worsley, Marcus
Hall-Davis, A. G. F.	More, Jasper
Heseltine, Michael	Morrison, Charles (Devizes)	TELLERS FOR THE AYES:
Higgins, Terence L.	Munro-Lucas-Tooth, Sir Hugh	Mr. Younger and Mr. Eyre.
NOES
Allaun, Frank (Salford, E.)	Diamond, Rt. Hn. John	Hobden, Dennis (Brighton, K'town)
Alldritt, Walter	Dickens, James	Hooley, Frank
Anderson, Donald	Doig, Peter	Horner, John
Archer, Peter	Dunnett, Jack	Howarth, Harry (Wellingborough)
Armstrong, Ernest	Dunwoody, Mrs. Gwyneth (Exeter)	Howarth, Robert (Bolton, E.)
Atkins, Ronald (Preston, N.)	Dunwoody, Dr. John (F'th & C'b'e)	Howell, Denis (Small Heath)
Baxter, Wiliam	Eadie, Alex	Hughes, Roy (Newport)
Benn, Rt. Hn. Anthony Wedgwood	Edwards, Robert (Bilston)	Hunter, Adam
Bennett, James (G'gow, Bridgeton)	Edwards, William (Merioneth)	Jackson, Colin (B'h'se Spenb'gh)
Binns, John	English, Michael	Jeger, George (Goole)
Blenkinsop, Arthur	Ennals, David	Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)
Booth, Albert	Evans, loan L. (Birm'h'm, Yardley)	Jenkins, Hugh (Putney)
Boyden, James	Faulds, Andrew	Johnson, Carol (Lewisham, S.)
Bradley, Tom	Fitch, Alan (Wigan)	Jones, Dan (Burnley)
Brooks, Edwin	Fletcher, Ted (Darlington)	Judd, Frank
Brown, Rt. Hn. George (Belper)	Foot, Michael (Ebbw Vale)	Kerr, Mrs. Anne (R'ter & Chatham)
Brown, Hugh D. (G'gow, Provan)	Forrester, John	Kerr, Russell (Feltham)
Brown, Bob (N'c'tle-upon-Tyne, W.)	Fowler, Gerry	Leadbitter, Ted
Brown, R. W. (Shoreditch & F'bury)	Fraser, Rt. Hn. Tom (Hamilton)	Ledger, Ron
Buchan, Norman	Freeson, Reginald	Lee, Rt. Hn. Jennie (Cannock)
Buchanan, Richard (G'gow, Sp'burn)	Gardner, A. J.	Lever, L. M. (Ardwick)
Callaghan, Rt. Hn. James	Garrett, W. E.	Lewis, Ron (Carlisle)
Cant, R. B.	Ginsburg, David	Lomas, Kenneth
Carmichael, Neil	Gray, Dr. Hugh (Yarmouth)	Lyon, Alexander W. (York)
Coleman, Donald	Gregory, Arnold	Lyons, Edward (Bradford, E.)
Crawshaw, Richard	Griffiths, Will (Exchange)	McCann, John
Davies, Ifor (Gower)	Hale, Leslie (Oldham, W.)	MacDermot, Niall
de Freitas, Sir Geoffrey	Hamilton, William (Fife, W.)	Macdonald, A. H.
Dell, Edmund	Hazell, Bert	McCuire, Michael
Dempsey, James	Heffer, Eric S.	Mackenzie, Gregor (Rutherglen)
Dewar, Donald	Henig, Stanley	Mackie, John
Mackintosh, John P.	Page, Derek (King's Lynn)	Summerskill, Hn. Dr. Shirley
Maclennan, Robert	Park, Trevor	Varley, Eric C.
MacMillan, Malcolm (Western Isles)	Parkyn, Brian (Bedford)	Wainwright, Edwin (Dearne Valley)
McMillan, Tom (Glasgow, C.)	Pavitt, Laurence	Walden, Brian (All Saints)
McNamara, J. Kevin	Perry, George H. (Nottingham, S.)	Walker, Harold (Doncaster)
Mahon, Peter (Preston, S.)	Price, William (Rugby)	Watkins, David (Consett)
Mahon, Simon (Bootle)	Rhodes, Geoffrey	Wells, William (Walsall, N.)
Manuel, Archie	Roberts, Gwilym (Bedfordshire, S.)	Whitaker, Ben
Mapp, Charles	Rose, Paul	Whitlock, William
Miller, Dr. M. S.	Rowlands, E. (Cardiff, N.)	Williams, Alan (Swansea, W.)
Morgan, Elystan (Cardiganshire)	Shaw, Arnold (Ilford, S.)	Williams, Alan Lee (Hornchurch)
Newens, Stan	Shore, Peter (Stepney)	Wilson, William (Coventry, S.)
Noel-Baker, Francis (Swindon)	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)	Woof, Robert
Ogden, Eric	Silkin, John (Deptford)
Orbach, Maurice	Silkin, S. C. (Dulwich)	TELLERS FOR THE NOES:
Orme, Stanley	Silverman, Julius (Aston)	Mr. Lawson and Mr. Grey.
Oswald, Thomas	Steele, Thomas (Dunbartonshire, W.)

4.30 a.m.

Mr. Higgins

I beg to move, Amendment No. 283, in page 101, line 33, at the end to insert: (8) In section 35 of the Finance Act 1965 the following new subsections shall be inserted after subsection (2):— (2A) A charity holding shares in a unit trust or in an investment trust approved by the Board for the purposes of sections 37 and 67 of this Act shall be entitled to be repaid the amount of the tax charged on the unit trust or investment trust (as the case may be) in any accounting period which):—

1. (a) has been deducted in computing the total net gains of the trust in that period; and
2. (b) is attributable to the amount of the total net gains apportioned under section 67 of this Act to the shareholding of the charity".

(9) In section 36 of the Finance Act 1965 the following new subsection shall be inserted after subsection (2):— (3) Where a fund being either such a fund as is referred to in subsection (1) of this section or a fund the income of which is exempt from tax under any of the enactments mentioned in subsection (2) thereof holds shares in a unit trust or in an investment trust approved by the Board for the purposes of sections 37 and 67 of this Act the provisions of subsection (2A) of section 35 of this Act shall apply to that shareholding as they apply to the shareholding of a charity in a unit trust or in such an investment trust: Provided that if part only of such a fund as is referred to in the said subsection (1) has been approved the entitlement to repayment shall be restricted to such proportion of the amount of the tax as corresponds to the proportion of the chargeable gain that would be exempt under subsection (1) of this section". No doubt at this hour of the morning the Committee is ready to accept Amendments, and it may therefore be superfluous for me to say anything about this Amendment; but perhaps I should explain that the Finance Act of last year exempted charities and approved superannuation funds from liability for Capital Gains Tax. This Amendment is designed to correct an anomaly, because at present the exempt bodies cannot recover the Capital Gains Tax paid on their behalf by unit trust companies in which they hold shares. Only the shareholders are permitted to set any net gain against the sale of holdings in a particular investment trust company, and the exempt body of the kind we cover in this Amendment is not able to be in the position where it could set off its liability, and any grant is, to that extent, valueless to it.

The larger charities and pension funds may be able to make suitable arrangements by investing direct, but the smaller funds may be able to obtain the necessary spread of risk only through investment trusts, and consequently become subject to Capital Gains Tax. It has been suggested that they should get round this by setting up their own investment trusts, but they would not be able to provide adequate management and so on, and it would be difficult for them to get the spread they would get in a normal investment trust.

Secondly, this would provide no solution for those charities and superannution funds which are already investing in investment trusts, and if they were to withdraw in the way suggested last year it would mean very serious disruption of the whole market.

Therefore we feel it is necessary to remove this anomaly, and I very much hope that hon. and right hon. Gentlemen will feel able to support us in correcting this anomaly, as they felt able so to do two Amendments ago.

Sir D. Glover rose ——

Hon. Members

Oh.

Sir D. Glover

I do not want to detain the Committee. Owing to the clarity of my hon. Friend's remarks I do not propose to intervene in this debate.

Mr. MacDennot

I say "Hear, hear", and I should also just like to say "No", but perhaps as the subject deals with charities I should say a few sentences, just to explain why it is we cannot accept this Amendment. As the hon. Gentleman has pointed out in the few sentences he gave us, by Section 38 of last year's Act there is a provision designed to give a special relief to charities and to superannuation funds which are exempt or partly exempt from tax, and they are able to combine to set up a special trust in order to take advantage of their tax exempt status and get all the advantages of professional management and operate their own trust without having to pay Capital Gains Tax. There is no reason why any other charities which wish to avail themselves of this should not either combine together to set up a unit trust of their own or to join one of the existing trusts to which this exemption applies.

But what we are being asked to do is to go beyond this and to give a power to reclaim tax where trustees of charities are investing through ordinary unit or investment trusts. All I need say is that if we were to do this we should be driving a very serious wedge into the whole principle of the separation of cor-

porate and personal taxation, which was the basic change in last year's Finance Act. It would lead to many pressures by other individual shareholders, who might be liable to Capital Gains Tax, to be refunded, and to shareholders entitled to an alternative basis of charge to claim partial refund. It would in the end lead to pressures and attacks on the whole application of this principle of the separation of corporate and personal taxation.

So we can only advise the Committee that we have made very reasonable provision already to favour charities and superannuation funds, and we cannot carry it further.

Mr. Higgins

We feel that the time lag between the Government's decision to impose S.E.T. on charities and their decision to give relief to charities, and the time lag between now and Report, are similar, and we hope they will consider this matter further before then, but in the absence of any assurance by the hon. and learned Gentleman I must call on my hon. Friends to vote in favour of the Amendment.

Question put, That those words be there inserted:—

The Committee divided: Ayes 79, Noes 140.

Division No. 57.]	AYES	[4.38 a.m.
Allason, James (Hemel Hempstead)	Hill, J. E. B.	Munro-Lucas-Tooth, Sir Hugh
Baker, W. H. K.	Hirst, Geoffrey	Percival, Ian
Batsford, Brian	Holland, Philip	Pink, R, Bonner
Biggs-Davison, John	Hordern, Peter	Rossi, Hugh (Hornsey)
Bossom, Sir Clive	Homby, Richard	Scott, Nicholas
Bryan, Paul	Howell, David (Guildford)	Sharples, Richard
Buchanan-Smith, Alick (Angus, N&M)	Hunt, John	Shaw, Michael (Sc'b'gh & Whitby)
Buck, Antony (Colchester)	Hutchison, Michael Clark	Sinclair, Sir George
Carlisle, Mark	Jenkin, Patrick (Woodford)	Smith, John
Clark, Henry	Johnston, Russell (Inverness)	Stodart, Anthony
Clegg, Walter	Jopling, Michael	Summers, Sir Spencer
Davidson, James(Aberdeenshire, W.)	King, Evelyn (Dorset, S.)	Taylor, Frank (Moss Side)
Deedes, Rt. Hn. W. F. (Ashtord)	Kitson, Timothy	Thatcher, Mrs. Margaret
Digby, Simon Wingfield	Knight, Mrs. Jill	Tilney, John
Eyre, Reginald	Lubbock, Eric	Turton, Rt. Hn. R. H.
Farr, John	Mackenzie, Alasdair (Ross&Crom'ty)	Vickers, Dame Joan
Fortescue, Tim	Macleod, Rt. Hn. Iain	Walker-Smith, Rt. Hn. Sir Derek
Giles, Rear-Adm. Morgan	McMaster, Stanley	Wall, Patrick
Gilmour, Sir John (Fife, E.)	Macmillan, Maurice (Farnham)	Weatherill, Bernard
Glover, Sir Douglas	Maddan, Martin	Webster, David
Grant, Anthony	Maginnis, John E.	Whitelaw, William
Gresham Cooke, R.	Maxwell-Hyslop, R. J.	Wilson, Geoffrey (Truro)
Grieve, Percy	Mills, Peter (Torrington)	Woodnutt, Mark
Hall, John (Wycombe)	Mitchell, David (Basingstoke)	Worsley, Marcus
Hall-Davis, A. G. F.	Monro, Hector	Younger, Hn. George
Heseltine, Michael	More, Jasper
Higgins, Terence L.	Morrison, Charles (Devizes)	TELLERS FOR THE AYES:
	Mr. Pym and Mr. R. W. Elliott.
NOES
Allaun, Frank (Salford, E.)	Fraser, Rt. Hn. Tom (Hamilton)	MacMillan, Malcolm (Western Isles)
Alldritt, Walter	Freeson, Reginald	McMillan, Tom (Glasgow, C.)
Anderson, Donald	Gardner, A. J.	McNamara, J. Kevin
Archer, Peter	Garrett, W. E.	Mahon, Peter (Preston, S.)
Armstrong, Ernest	Ginsburg, David	Mahon, Simon (Bootle)
Atkins, Ronald (Preston, N.)	Gray, Dr. Hugh (Yarmouth)	Manuel, Archie
Baxter, William	Gregory, Arnold	Mapp, Charles
Bonn, Rt. Hn. Anthony Wedgwood	Grey, Charles (Durham)	Miller, Dr. M. S.
Bennett, James (G'gow, Bridgeton)	Griffiths, Will (Exchange)	Morgan, Elystan (Cardiganshire)
Binnis, John	Hale, Leslie (Oldham, W.)	Newens, Stan
Blenkinsop, Arthur	Hamilton, William (Fife, W.)	Noel-Baker, Francis (Swindon)
Booth, Albert	Hazell, Bert	Ogden, Eric
Boyden, James	Heffer, Eric S.	Orbach, Maurice
Bradley, Tom	Henig, Stanley	Orme, Stanley
Brooks, Edwin	Hobden, Dennis (Brighton, K'town)	Oswald, Thomas
Brown, Rt. Hn. George (Belper)	Hooley, Frank	Page, Derek (King's Lynn)
Brown, Hugh D. (G'gow, Provan)	Horner, John	Park, Trevor
Brown, Bob (N'c'tle-upon-Tyne, W.)	Howarth, Harry (Wellingborough)	Parkyn, Brian (Bedford)
Brown, R. W. (Shoreditch & F'bury)	Howarth, Robert (Bolton, E.)	Pavitt, Laurence
Buchan, Norman	Howell, Denis (Small Heath)	Perry, George H. (Nottingham, S.)
Buchanan, Richard (G'gow, Sp'burn)	Hughes, Roy (Newport)	Price, William (Rugby)
Callaghan, Rt. Hn. James	Hunter, Adam	Rhodes, Geoffrey
Cant, R. B.	Jackson, Colin (B'h'se & Spenb'gh)	Roberts, Gwilym (Bedfordshire, S.)
Carmichael, Neil	Jeger, George (Goole)	Rose, Paul
Coleman, Donald	Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)	Rowlands, E. (Cardiff, N.)
Crawshaw, Richard	Jenkins, Hugh (Putney)	Shaw, Arnold (Ilford, S.)
Davies, Ifor (Gower)	Johnson, Carol (Lewisham, S.)	Shore, Peter (Stepney)
de Freitas, Sir Geoffrey	Jones, Dan (Burnley)	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)
Dell, Edmund	Judd, Frank	Silkin, John (Deptford)
Dempsey, James	Kerr, Mrs. Anne (R'ter & Chatham)	Silkin, S. C. (Dulwich)
Dewar, Donald	Kerr, Russell (Feltham)	Silverman, Julius (Aston)
Diamond, Rt. Hn. John	Lawson, George	Steele, Thomas (Dunbartonshire, W.)
Dickens, James	Leadbitter, Ted	Summerskill, Dr. Shirley
Doig, Peter	Ledger, Ron	Varley, Eric G.
Dunnett, Jack	Lee, Rt. Hn. Jennie (Cannock)	Wainwright, Edwin (Dearne Valley)
Dunwoody, Mrs. Gwyneth (Exeter)	Lever, L. M. (Ardwick)	Walden, Brian (All Saints)
Dunwoody, Dr. John (F'th & C'b'e)	Lewis, Ron (Carlisle)	Walker, Harold (Doncaster)
Eadie, Alex	Lomas, Kenneth	Watkins, David (Consett)
Edwards, Robert (Bilston)	Lyon, Alexander W. (York)	Wells, William (Walsall, N.)
Edwards, William (Merioneth)	Lyons, Edward (Bradford, E.)	Whitaker, Ben
English, Michael	McCann, John	Williams, Alan (Swansea, W.)
Ennals, David	MacDermot, Niall	Williams, Alan Lee (Hornchurch)
Evans, Ioan L. (Birm'h'm, Yardley)	Macdonald, A. H.	Wilson, William (Coventry, S.)
Faulds, Andrew	McGuire, Michael	Woof, Robert
Fletcher, Ted (Darlington)	Mackenzie, Gregor (Rutherglen)
Foot, Michael (Ebbw Vale)	Mackie, John	TELLERS FOR THE NOES:
Forrester, John	Mackintosh, John P.	Mr. Fitch and Mr. Whitlock.
Fowler, Gerry	Maclennan, Robert

4.45 a.m.

Mr. Higgins

I beg to move, Amendment No. 284, in page 101, line 33, at the end, to insert: (8) In paragraph 22 of Schedule 6 to the Finance Act 1965 the following new sub-paragraph shall be inserted after sub-paragraph (5):— (5A) For the purpose of computing under sub-paragraph (4) the amount of a gain or a loss in relation to the disposal of shares or securities held on 6th April 1965 the cost of acquisition may, subject to the approval of the Board, be computed by reference to the average cost (computed in accordance with the provisions of Part I of this Schedule) of acquiring all the shares or securities of the particular class in respect of which the approval has been given. We were constantly told in the debates on the Finance Bill last year that the object of the Bill was to simplify taxation, and I think the extent to which this has been valid is clearly indicated by the number of people whom it has been necessary for the Inland Revenue and other Government Departments to take on as a result.

This Amendment is designed to simplify the computation of the amount of capital gains when the calculations are complicated because there are a number of transactions in a particular class of share which has perhaps been held for a number of years. I understand that at the moment the Inland Revenue is bound to interpret the provisions of the 1965 Act in such a way that it applies the principle of "first in, first out" when calculating the value of particular shares for capital gains purposes. This is something which is written into the Act and which is mandatory. One is bound to consider the principle of "first in, first out" on the disposal of the shares and securities as of 6th April, 1965.

In this Amendment we are trying to provide an option which will simplify the actual computation of capital gains in complicated share cases so that the shareholder can make reference to the calculations by taking the average cost of those shares rather than working it out item by item. But in order to prevent any advantage being taken of this provision, we make the provision that the option shall only be exercised if the approval of the Board of Inland Revenue is obtained.

It seems to us that if this is so, there is no reason why such a simplifying Amendment, which is designed to save the time of the Revenue and all the individual firms concerned with these capital gains, should not be accepted because it is, as I say, designed to simplify the calculation. I hope therefore, that the right hon. Gentleman will feel able to accept the principle of the Amendment for the reasons that I have given.

Mr. MacDermot

I am afraid that I cannot advise the Committee to accept the Amendment. It is urged on the grounds that it would achieve simplification, but I doubt whether that is so. If an election of this kind were given it would mean that a large number of accountants who are advising their clients would feel it incumbent upon them to work out the claims on the basis of both alternatives in order to advise them whether they should seek to exercise their election and apply for the aproval of the board. This would entail a great deal of wasted labour.

As far as we know, this proposal has been urged by the Investment Trusts Association only because it is alleged that certain investment trusts have holdings dating back quite a long time and they have not readily or at all the evidence of the actual purchase price of the shares. I accept what they say but do not feel that the problem can be very great. If one analyses it, one sees that if the shares and holdings have been held for a substantial period before Budget Day, it is unlikely that any real problem will arise if it is a question of the taxpayer seeking to restrict a gain to show that the purchase price was greater than the Budget Day value. This would be a rare occurrence if the security has been held for a substantial period before Budget Day.

If it is a question of the Revenue being concerned with restricting the loss on a disposal, if the purchase price is obviously below the disposal price, which in most cases it will be, there will be no loss for the purposes of the calculation. I agree that, theoretically there may be a "no man's land" period during which, if people have not the evidence of their actual purchase price, there might be some difficulty, but this is the sort of matter which on a reasonable basis can be the subject of negotiation with the Revenue. We are not satisfied that a case has been made out for an Amendment of this kind and we could entertain nothing as wide as this.

Amendment negatived.

Mr. John Hall

I beg to move Amendment No. 298, in page 101, line 38, at the end to insert: In computing under Schedule 6 to the Finance Act 1965 the gain accruing on a disposal of assets deemed to be made by an individual on his death, costs reasonably incurred by the personal representatives of the deceased in making any valuation or apportionment required or used for the computation under that Schedule, including in particular the expenses of ascertaining market value, where required by Part III of the said Finance Act 1965, shall be allowable as a deduction in the computation. The point is very simple. As I understand it the cost normally allowable as a deduction for Capital Gains Tax purposes under Schedule 6, 4(1, c) and 4 (2, b) of the 1965 Act are not allowable in the circumstances we refer to because they are not incurred by the person making the disposal, the person who actually died.

This is a sensible probing Amendment, because we may not fully have understood the effect. It seems that, under the circumstances outlined in the Amendment, this would be so, that the cost which is allowable under the original Act would not be allowable in the case of a person who has died.

Mr. MacDermot

The hon. Member for Wycombe (Mr. John Hall) entertained us earlier by reminding the Committee of the circumstances of the decline of the Roman Empire and also said that he would be moved to tears if he succeeded yet again in our discussions. I would only remind him of the words of another Roman and say that if he has tears he should prepare to shed them now. The point that he is making and to which he has drawn our attention is a valid one. Owing to the technical wording of the drafting, this allowance, which clearly should be made, is not available on the disposal of assets at the time of death.

If the hon. Gentleman will be good enough to withdraw his Amendment, we will agree to draft one which will go a little further and a little wider than his own. There are certain other expenses concerned with the transfer of assets to personal representatives in these circumstances which we think ought to be covered as well.

Mr. John Hall

Mr. Irving, you will forgive me this sign of weakness, but I appreciate very much having got this additional concession. During the debates on Amendments to the proposed Capital Gains Tax legislation we have not done too badly.

I am glad that the Financial Secretary has seen the validity of the point, and, on the undertaking that he will introduce a suitable Amendment on Report, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendment made: In page 102, line 22, at end insert:

Apportionment of cost of acquisition of new holding of shares, etc.

11.—(1) This paragraph shall apply to a new holding, as defined in sub-paragraph (1)(b) of paragraph 10 of Schedule 9 to the Finance Act 1962 (which, as extended by section 16(4) of that Act, provides for a new holding resulting from a reorganisation or reduction of the capital of a company or unit trust scheme being treated as the same as the original holding)—

1. (a) if it consists of more than one class of shares in or debentures of the company and one or more of those classes is of shares or debentures which, in the period of three months beginning with the date on which the reorganisation or reduction of capital took effect, or such longer period as the Board may by notice in writing allow, had quoted market values on a recognised stock exchange in the United Kingdom, or
2. (b) if it consists of more than one class of rights of unit holders and one or more of those classes is of rights the prices of which were published daily by the managers of the scheme in that period of three months (or longer if so allowed).

(2) Where for the purpose of computing the gain or loss accruing to a person from the acquisition and disposal of the whole or any part of any class of shares or securities or rights of unit holders forming part of a new holding to which this paragraph applies it is necessary to apportion costs of acquisition between what is disposed of and what is retained, the cost of acquisition of the new holding shall first be apportioned between the entire classes of shares or debentures or rights of which it consists by reference to market value on the first day after the reorganisation or reduction of capital took effect on which market values or prices were quoted or published for the shares, debentures or rights as mentioned in sub-paragraph (1)(a) or (1)(b) above (with such adjustment of the market value of any class as may be required to offset any liability attaching thereto but forming part of the cost to be apportioned); and this sub-paragraph shall have effect notwithstanding sub-paragraph (5) of the said paragraph (10) (which requires apportionment by reference to market value at the date of disposal).

(3) The foregoing provisions of this paragraph shall have effect as if contained in the said paragraph 10 and paragraphs 11, 12 and 13 of the said Schedule 9 (which apply the said paragraph 10 subject to modifications) shall have effect accordingly.

(4) For the purposes of this paragraph the day on which a reorganisation of share capital involving the allotment of shares or debentures or unit holders' rights takes effect is the day following the day on which the rights to renounce any allotment expires.

(5) This paragraph applies to a disposal of part of a new holding at any time after the end of the year 1965–66 and, if a person so elects by notice in writing given to the inspector not later than the end of the year 1966–67 as respects a new holding, it shall also apply to a disposal by that person of part of that new holding at any time in the year 1965–66; and such adjustments shall be made whether by way of discharge or repayment of tax or assessment to tax or otherwise as are required to give effect to the election.—[Mr. MacDermot.]

Question proposed, That the Schedule, as amended, be the Ninth Schedule to the Bill.

Mr. John Hall

I have one point on paragraph 7, which deals with insolvents' assets. It seems that a trustee has to calculate the tax payable on any gains on realisation, either at 30 per cent. or a lower figure, depending on the debtor's income. From time to time in bankruptcies the trustee loses touch with the bankrupt, and it is very difficult to be quite certain of the debtor's income at the point of time when the asset is realised and the liability to Capital Gains Tax arises. It is suggested as a method of dealing with this that the debtor's income for the preceding year before the bankruptcy or the year following the bankruptcy be taken as the guiding factor in arriving at the liability for Capital Gains Tax. It may be that I have not fully understood the implications of this, but I think that that is the effect of it.

Mr. MacDermot

I hope that I can assist the hon. Gentleman on the point. He was good enough to give me prior notice that he was going to raise it. May I make it clear that I am assured that even if the trustee were to lose touch with the debtor, which would in itself be a rare circumstance, the Revenue thinks that in virtually all cases it would not lose touch. It has ways of tracing people and it thinks that it would be able to provide the necessary information.

If one follows the hon. Gentleman's point through and assumes a case where it did lose touch, what would happen would be that an assessment would have to be raised by the Revenue on the trustee in the name of the debtor, on the best information available. In those circumstances, the assessment would not be any higher and might be lower than whatever the income was in the preceding year.

Mr. John Hall

With that assurance from the hon. and learned Gentleman, I beg to ask leave to withdraw the Amendment.

Question put and agreed to.

The Chancellor of the Exchequer (Mr. James Callaghan)

I beg to move, That the Chairman do report Progress and ask leave to sit again Whilst some of us would like to get on, the fact that the hon. Member for Wycombe (Mr. John Hall) has just withdrawn an Amendment that he did not move shows clearly that we should not get very much further. In fairness to hon. Members opposite, I think that we ought to adjourn now.

We have made very good progress. If there is a moral to be drawn from it— and I am sure that the right hon. Member for Enfield, West (Mr. Iain Macleod), who has sat throughout the whole of the debates like Patience on the monument, will have drawn it—it is that lengthy speeches are not always the most persuasive in producing the right answer. There are all sorts of morals that might be drawn about the obtuseness of the Government Front Bench and the rest of it, but one thing which has been proved is that, when we are up against the pressure of time, we make good progress.

However, this is not the time to moralise, and I ask you to report Progress and ask leave to sit again.

Question put and agreed to.

Committee report Progress; to sit again this day.