§ Mr. MacDermotI beg to move Amendment No. 174, in page 81, line 18, after the first 'tax', to insert 'capital gains tax'.
180 This Amendment corrects in favour of the taxpayer a drafting error in paragraph 10. As at present drafted it provides that a payment by a nonresident company of tax charged on a shareholder by virtue of Section 41(2) is not for the purpose of Income Tax or Corporation Tax to be regarded as a payment to that person. It was overlooked that this had the effect of converting it into a capital distribution made by the company and, as such, becoming generally chargeable to Capital Gains Tax in the hands of the individual, though not in the hands of corporate shareholders.
This was not the intention. The purpose of the Amendment is to correct the error and to ensure that Capital Gains Tax is also excluded.
§ Amendment agreed to.
§ Mr. John HallI beg to move Amendment No. 180, in page 81, line 20, at the end to insert:
§ Estate Duty
§ 11. In section 26 of the Finance Act 1965 subsections (1) and (2) shall be deleted and the following inserted:—
- '(1) In determining the amount of estate duty payable on a death allowance shall be made for any capital gains tax chargeable in consequence of the death and, in determining the value of the estate for the purposes of estate duty an allowance shall be made for any capital gains tax owed by the deceased.
- (2) In determining the amount of estate duty payable by reference to settled property passing on a death, whether it continues to be settled property or not, an allowance shall be made for any capital gains tax chargeable in consequence of the death in respect of the settled property, so far as that tax falls to be paid out of the property so passing or to be borne by any person to whom the property so passes for any beneficial interest in possession'.
§ This matter has not be debated since the first Capital Gains Tax debates in May, 1965. The Amendment would provide that the whole amount of tax paid would be allowed as relief against claim for Estate Duty. The debate on a similar Amendment in 1965 came towards the end of a series of Estate Duty Amendments. The arguments were directed towards the adverse effect of imposing what amounts to double taxation on an estate at death.
§
A telling contribution was made on that occasion by an hon. Member who said:
The Financial Secretary will he relieved to know that I propose to express strong
181
support for him. It is true that it will take the form of inviting the Government to drop the whole proposition of making Capital Gains Tax payable on death. But I think that, on reflection, they will come to the conclusion that there is a good deal to their advantage in the invitation, which they may well accept, to be big about this and not merely to content themselves with a useful Amendment, but to throw out the whole miserable idea of bringing Capital Gains Tax to bear on death.
§
The hon. Gentleman went on:
I have spoken to many persons of all shades of political opinion and all parties about death duties, and I have yet to meet anybody who does not regard the present level of duty on estates of all sizes, big and small, as being already at a rate so penal that they could not conceivably with equity be increased."—[OFFICIAL REPORT, 26th May, 1965; Vol. 713, c. 638.]
The hon. Member continued in that strain for several columns.
§ I am, of course, quoting from the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who is now the Joint Under-Secretary of State for Economic Affairs. I can well understand his being moved to the Treasury Bench, because his criticisms from the back benches were becoming so telling that some way had to be found of shutting him up, and this was as good a way as any. Of course, he was quite right: it is wrong to impose Capital Gains Tax on top of what he described as the "most ruthless, penal and progressive rates" of Estate Duty.
§ Various examples of the effect of the tax on small businesses were given in that debate. I do not want to repeat them all, but one illustrates its effect on top of Estate Duty. It was given in column 635–6 of the same date—that of a business started by a man with £1,000 and built up to a value of £20,000. The Financial Secretary will be aware of the example. As a result, on death, there was a capital gain of £19,000 and, after allowing for the £5,000, tax was payable on £14,000, and amounted to £4,200.
§ Therefore, the estate on which Estate Duty was calculated would be £15,800, or the original value less the tax paid, on which would be paid £1,580 in death duties, totalling £5,780, Capital Gains Tax and Estate Duty combined.
§ However, if a man inherited £20,000 in assets and did nothing about them so that they did not change in value, on his death, his executors would pay only £2,400 on his estate. Although both 182 amounts are exactly the same, the only difference is that the estate of the first man, who had worked hard and built up a business from small beginnings to £20,000, would suffer a charge of £5,780, and, that of the second man, who had merely lived on the interest of his assets, would bear only £2,400.
§ I have always understood, from debates on the subject over several years, that Capital Gains Tax was not imposed fundamentally to raise revenue—if it was, it has been very disappointing—but to give the impression at least that the Government were promoting social justice, and also to help to sell the conception of an incomes policy. If it was designed to remove a sense of injustice between a man living on taxed income and one living on the proceeds of capital appreciation, surely it was not designed to increase the tax on the dead, which does so much harm to their families and dependants, or deliberately to discourage savings, which, in its present form, it must do.
§ If the tax is to remain as it is, the only other way of reducing the impact on death is to reduce Estate Duty. If Estate Duty is to remain as it is, then surely, in equity, this Amendment should be accepted.
§ 7.45 p.m.
Mr. MadDermotI do not think that the hon. Member for Wycombe (Mr. John Hall) will be surprised if I say that I must advise the Committee to reject the Amendment. As he said, it is similar to one which we discussed in May, 1965. In his admirably brief and clear speech, the hon. Gentleman made clear the Amendment's purpose—to try to overcome the effect of death being an occasion of charge to Capital Gains Tax. That is what he dislikes. In a great many cases, the Amendment would eliminate liability for the tax altogether on death.
The cost of the Amendment ultimately, as Capital Gains Tax builds up to its full amount, could be substantial about £5 million. Normally, Capital Gains Tax charged on gains at death will be less than the Estate Duty on the whole value of the property. As the hon. Gentleman said, the first £5,000 is of course, exempt, so the allowance of the tax against the duty, which is what the Amendment proposes, would in effect cancel out the Capital Gains Tax charge.
183 This leads to the principle for making death an occasion of charge, to use the horrible legalistic language. The general principle is that we think that it is right to charge the tax when capital gains are realised and that gains are realised in general when the asset is transferred, whether voluntarily, as by sale or by gift, or involuntarily, as by death and inheritance.
If we were to make an exception in the case of death, we should undermine the tax in important respects and produce injustices. There would be an indefensibly different result in the case of heirs of people who had exactly similar properties, except that one of the deceased had switched his assets shortly before death and the other had not.
An example is that of two people owning property which originally cost £100,000 but then appreciated in value to £150,000. In one case, the owner sells the property and reinvests shortly before his death. In the other case, the owner does not. If the Amendment were accepted—I need not go into all the figures, and perhaps the Committee will take it from me—the result in the second case would be that the heirs to the net estate would inherit £7,500 more than would the heirs of the man who had reinvested his assets shortly before death, the reason being that, under the Amendment, liability to Capital Gains Tax in the second case would be set off against the Estate Duty whereas in the first case liability to Capital Gains Tax would have arisen shortly before the death and would not have been set off.
This shows the real danger of exempting death from being an occasion of charge to Capital Gains Tax. We have the experience of America to act as a warning in this respect. There is no liability to charge on death in America, and this is known among tax experts there, significantly, as the death gap. It enables large fortunes to be transmitted from generation to generation without any liability to Capital Gains Tax arising, which we at least on this side would regard as socially inequitable, and it also has a stultifying effect economically because it provides a great disincentive to reinvestment. In order to benefit from the death gap many wealthy people will 184 not, and do not, reinvest so as to avoid liability to capital gains tax.
On both general economic grounds and social grounds, therefore, and to preserve the purpose of the tax, we think it right, as we said at the outset, that death should be an occasion of charge, and we would think it wrong to undermine that principle by an Amendment of this kind.
§ Mr. Frederic HarrisWill the Financial Secretary deal with the specific case put to him by my hon. Friend the Member for Wycombe (Mr. John Hall)? Would he comment on that case, which seems an extraordinarily good one to support our argument?
§ Mr. MacDermotThe hon. Gentleman put an extreme case. It was to meet cases of that kind that we made several concessions in the 1965 Act, one being the £5,000 exemption on death, another being a provision for a similar exemption on retirement, another being a provision for deferment of liability in the case of transfer of assets, which was to help small businesses. Moreover, in the case of persons who are, relatively speaking, small businessmen—the kind of case we are considering—the taxpayer would in many circumstances have the benefit of the alternative basis of charge which we discussed a few minutes ago.
§ Mr. John HallThe hon. and learned Gentleman, in detailing the small concessions which were made as the result of the many Amendments and criticisms which we put in 1965, failed to answer the point put to him by my hon. Friend the Member for Croydon, North-West (Mr. Frederic Harris). The figures I gave still largely apply. I took account of the £5,000 concession in making my calculation.
The hon. and learned Gentleman said that the principle behind the Capital Gains Tax is that the gain should be charged when the assets are realised. So far as I know, there is no other case where an asset is realised and a chargeable gain results where the asset is subject also to another and crippling tax; yet this is what happens with assets on death when Estate Duty has to be paid in addition.
The hon. and learned Gentleman referred to the American experience and what is described, appropriately enough, 185 as the death gap. He pointed out that that experience seemed to indicate that there was a disincentive to reinvestment. I understand that the death gap has operated in American fiscal law for a very long time, and there has been no indication of a proposal to change it. If it really had ill effects on the American economy in so far as it discouraged reinvestment on a large scale, measures would have been taken to correct it.
This has not been done, and the reason is that the Americans appreciate that, whatever small effect there might be by way of disincentive, the overriding effect of double taxation is to produce considerable injustice and a great burden on death
§ on the heirs of an individual whose estate is subject to both Capital Gains Tax and Estate Duty. I speak subject to correction, but I understand that the rates of estate duty in America are a good deal lower than ours, so there is even less reason in this country for imposing both taxes on death.
§ The hon. and learned Gentleman's reply is no more satisfactory now than it was two years ago. I advise my right hon. and hon. Friends to divide the Committee.
§ Question put, That those words be there inserted:
§ The Committee divided: Ayes 121, Noes 186.
187Division No. 360.] | AYES | [7.57 p.m. |
Allason, James (Hemel Hempstead) | Harris, Reader (Heston) | Page, John (Harrow, W.) |
Bell, Ronald | Harrison, Col. Sir Harwood (Eye) | Pardoe, John |
Biffen, John | Hastings, Stephen | Pearson, Sir Frank (Clitheroe) |
Biggs-Davison, John | Heald, Rt. Hn. Sir Lionel | Percival, Ian |
Bossom, Sir Clive | Heseltine, Michael | Pike, Miss Mervyn |
Boyle, Rt. Hn. Sir Edward | Higgins, Terence L. | Pink, R. Bonner |
Braine, Bernard | Hiley, Joseph | Pym, Francis |
Brinton, Sir Tatton | Hill, J. E. B. | Rawlinson, Rt. Hn. Sir Peter |
Bromley-Davenport, Lt. -Col. Sir Walter | Holland, Philip | Ronton, Rt. Hn. Sir David |
Brown, Sir Edward (Bath) | Hooson, Emlyn | Ridley, Hn. Nicholas |
Bruce-Gardyne, J. | Hordern, Peter | Rippon, Rt. Hn. Geoffrey |
Buck, Antony (Colchester) | Hornby, Richard | Rodgers, Sir John (Sevenoaks) |
Carr, Rt. Hn. Robert | Howell, David (Guildford) | Russell, Sir Ronald |
Chichester-Clark, R. | Hunt, John | Sharpies, Richard |
Cooke, Robert | Iremonger, T. L. | Shaw, Michael (Sc'b'gh & Whitby) |
Craddock, Sir Beresford (Spelthorne) | Jenkin, Patrick (Woodford) | Sinclair, Sir George |
Cunningham, Sir Knox | Jopling, Michael | Smith, John |
Currie, G. B. H. | Kaberry, Sir Donald | Steel, David (Roxburgh) |
Dance, James | King, Evelyn (Dorset, S.) | Summers, Sir Spencer |
Davidson, James(Aberdeenshire, W.) | Kitson, Timothy | Taylor, Sir Charles (Eastbourne) |
Dean, Paul (Somerset, N.) | Knight, Mrs. Jill | Taylor, Edward M.(G'gow, Cathcart) |
Deedes, Rt. Hn. W. F. (Ashford) | Lancaster, Col. C. G. | Taylor, Frank (Moss Side) |
Doughty, Charles | Langford-Holt, Sir John | Temple, John M. |
Elliott, R.W.(N'c'tle-upon-Tyne,N.) | Loveys, W. H. | Thatcher, Mrs. Margaret |
Emery, Peter | Lubbock, Eric | Turton, Rt. Hn. R. H. |
Errington, Sir Eric | McAdden, Sir Stephen | van Straubenzee, W. R. |
Eyre, Reginald | MacArthur, Ian | Walker, Peter (Worcester) |
Fisher, Nigel | Macleod, Rt. Hn. Iain | Walker-Smith, Rt. Hn. Sir Derek |
Fletcher-Cooke, Charles | McMaster, Stanley | Wall, Patrick |
Fortescue, Tim | Marten, Neil | Ward, Dame Irene |
Gilmour, Ian (Norfolk, C.) | Maude, Angus | Weatherill, Bernard |
Glover, Sir Douglas | Mawby, Ray | Webster, David |
Glyn, Sir Richard | Maxwell-Hyslop, R. J. | Wells, John (Maidstone) |
Goodhart, Philip | Mills, Stratton (Belfast, N.) | Whitelaw, Rt. Hn. William |
Goodhew, Victor | More, Jasper | Wills, Sir Gerald (Bridgwater) |
Gower, Raymond | Murton, Oscar | Wilson, Geoffrey (Truro) |
Grieve, Percy | Mabarro, Sir Gerald | Wolrige-Gordon, Patrick |
Grimond, Rt. Hn. J. | Noble, Rt. Hn. Michael | |
Gurden, Harold | Nott, John | TELLERS FOR THE AYES: |
Hall, John (Wycombe) | Onslow, Cranley | Mr. Anthony Grant and |
Hall-Davis, A. G. F. | Osborne, Sir Cyril (Louth) | Mr. David Mitchell. |
Harris, Frederic (Croydon, N.W.) | Page, Graham (Crosby) | |
NOES | ||
Albu, Austen | Binns, John | Callaghan, Rt. Hn. James |
Allaun, Frank (Salford, E.) | Bishop, E. S. | Carmichael, Neil |
Allen, Scholefield | Blackburn, F. | Carter-Jones, Lewis |
Atkins, Ronald (Preston, N.) | Booth, Albert | Castle, Rt. Hn. Barbara |
Atkinson, Norman (Tottenham) | Boyden, James | Coe, Denis |
Bagier, Gordon A. T. | Braddock, Mrs. E. M. | Coleman, Donald |
Barnett, Joel | Bray, Dr. Jeremy | Concannon, J. D. |
Beaney, Alan | Brown, Bob (N'c'tle-upon-Tyne, W.) | Conlan, Bernard |
Bence, Cyril | Buchan, Norman | Craddock, George (Bradford, S.) |
Bidwell, Sydney | Buchanan, Richard (G'gow, Sp'burn) | Crawshaw, Richard |
Cronin, John | Irvine, A. J. (Edge Hill) | Pavitt, Laurence |
Dalyell, Tam | Jackson, Peter M. (High Peak) | Pearson, Arthur (Pontypridd) |
Davidson, Arthur (Accrington) | Johnson, James (K'ston-on-Hull, W.) | Peart, Rt. Hn. Fred |
Davies, Dr. Ernest (Stretford) | Jones, Dan (Burnley) | Pentland, Norman |
Davies, Harold (Leek) | Judd, Frank | Perry, George H. (Nottingham, S.) |
Delargy, Hugh | Kelley, Richard | Prentice, Rt. Hn. R. E. |
Dempsey, James | Kerr, Russell (Feltham) | Price, Christopher (Perry Barr) |
Dewar, Donald | Lee, John (Reading) | Price, Thomas (Westhoughton) |
Diamond, Rt. Hn. John | Lewis, Ron (Carlisle) | Pursey, Cmdr. Harry |
Dickens, James | Lomas, Kenneth | Randall, Harry |
Dobson, Ray | Luard, Evan | Roberts, Albert (Normanton) |
Doig, Peter | Lyon, Alexander W. (York) | Robinson, W. O. J. (Walth'stow, E.) |
Dunwoody, Dr. John (F'th & C'b'e) | McBride, Neil | Roebuck, Roy |
Ellis, John | McCann, John | Rogers, George (Kensington, N.) |
English, Michael | MacColl, James | Ross, Rt. Hn. William |
Ennals, David | MacDermot, Niall | Rowlands, E. (Cardiff, N.) |
Ensor, David | Macdonald, A. H. | Shaw, Arnold (Ilford, S.) |
Evans, Albert (Islington, S.W.) | Mackenzie, Gregor (Rutherglen) | Sheldon, Robert |
Evans, Ioan L. (Birm'h'm, Yardley) | Mackie, John | Silkin, Rt. Hn. John (Deptford) |
Faulds, Andrew | Maclennan, Robert | Silverman, Julius (Aston) |
Finch, Harold | McMillan, Tom (Glasgow, C.) | Silverman, Sydney (Nelson) |
Fletcher, Raymond (Ilkeston) | MacPherson, Malcolm | Slater, Joseph |
Fletcher, Ted (Darlington) | Mallalieu, E. L. (Brigs) | Small, William |
Foot, Sir Dingle (Ipswich) | Mallalieu, J.P.W.(Huddersfield, E.) | Spriggs, Leslie |
Ford, Ben | Manuel, Archie | Stewart, Rt. Hn. Michael |
Freeson, Reginald | Mapp, Charles | Swain, Thomas |
Galpern, Sir Myer | Marquand, David | Swingler, Stephen |
Gordon Walker, Rt. Hn. P.C. | Marsh, Rt. Hn. Richard | Symonds, J. B. |
Gregory, Arnold | Maxwell, Robert | Taverne, Dick |
Grey, Charles (Durham) | Millan, Bruce | Thomson, Rt. Hn. George |
Griffiths, David (Rother Valley) | Miller, Dr. M. S. | Thornton, Ernest |
Griffiths, Rt. Hn. James (Llanelly) | Mitchell, R. C. (S'th'pton, Test) | Tinn, James |
Hale, Leslie (Oldham, W.) | Moonman, Eric | Tomney, Frank |
Hamilton, James (Bothwell) | Morgan, Elystan (Cardiganshire) | Tuck, Rahpael |
Hamilton, William (Fife, W.) | Morris, Alfred (Wythenshawe) | Urwin, T. W. |
Hamling, William | Morris, Charles R. (Openshaw) | Wainwright, Edwin (Dearne Valley) |
Hannan, William | Morris, John (Aberavon) | Walker, Harold (Doncaster) |
Harper, Joseph | Moyle, Roland | Wallace, George |
Harrison, Walter (Wakefield) | Mulley, Rt. Hn. Frederick | Watkins, David (Consett) |
Hart, Mrs. Judith | Newens, Stan | Watkins, Tudor (Brecon & Radnor) |
Haseldine, Norman | Noel-Baker, Rt.Hn.Philip(Derby,S.) | Wellbeloved, James |
Hazell, Bert | Oakes, Gordon | Willey, Rt. Hn. Frederick |
Henig, Stanley | Ogden, Eric | Williams, Alan (Swansea, W.) |
Herbison, Rt. Hn. Margaret | O'Malley, Brian | Williams, Alan Lee (Hornchurch) |
Hooley, Frank | Oram, Albert E. | Williams, W. T. (Warrington) |
Houghton, Rt. Hn. Douglas | Orbach, Maurice | Wilson, William (Coventry, S.) |
Howarth, Harry (Wellingborough) | Orme, Stanley | Winnick, David |
Howarth, Robert (Bolton, E.) | Oswald, Thomas | Winterbottom, R. E. |
Hoy, James | Owen, Dr. David (Plymouth, S'tn) | Woof, Robert |
Huckfield, L. | Page, Derek (King's Lynn) | Yates, Victor |
Hughes, Rt. Hn. Cledwyn (Anglesey) | Paget, R. T. | |
Hughes, Hector (Aberdeen, N.) | Pannell, Rt. Hn. Charles | TELLERS FOR THE NOES: |
Hynd, John | Parker, John (Dagenham) | Mr. Harry Gourlay and |
Mr. Ernest Armstrong. |
§ 8.0 p.m.
§ Mr. John HallI beg to move Amendment No. 183, in page 81, line 20 at the end to insert:
§ Valuation of Assets
§ Paragraph 25(3) of Schedule 6 to the Finance Act 1965 shall cease to have effect and it is hereby declared that any election made in accordance with paragraph 25(1) of the said Schedule shall be revocable by the taxpayer at any time within two years of the disposal to which the election refers.
§ The form of the Amendment will be familiar to the Financial Secretary. After the Finance Act, 1965 came on to the Statute Book it became apparent that paragraph 25 of Schedule 6 had been worded as it had so that the taxpayer might be compelled to make an irrevocable election before he could become 188 aware of the factors on which his decision would have to be based.
§ Paragraphs 24 and 25 of the Schedule offer the taxpayer two alternative methods of calculating the capital gain made on the realisation of an asset acquired before 6th April, 1965. The nature of the calculations which must be made in these cases is such that it is very difficult for him to decide, before figures have been finally agreed with the Inland Revenue, which of the alternatives it is in his interests to elect. This becomes an irrevocable election, and it must be made before the taxpayer knows which is the best way of doing it.
§ It can well be that the decision he makes without the full knowledge of the facts can be against his interests. The 189 new sub-paragraph which we propose would give the taxpayer the genuine freedom of choice based on known facts to which he is properly entitled whenever the law gives a right of election. The right should not be clouded over to facilitate the administration of what is admittedly very complicated legislation.
§ I do not think that the Financial Secretary could, in justice, refuse an Amendment of this kind. We are not wedded to the wording, and if he states that he accepts the principle we would be prepared to withdraw the Amendment and accept any suitable alternative. I think that the principle is clear, namely, that as the law stands the taxpayer is put at a disadvantage in having to make an election in the way he now must before the figures have been finally agreed with the Inland Revenue.
§ Mr. MacDermotThe Amendment overlooks the purpose for which the time apportionment method of valuation was included in the 1965 Finance Act. What we were concerned with was the problem of valuation of assets which were held at Budget day, assets which had been acquired before Budget day. We saw that both for the Inland Revenue and for the taxpayers and their advisers it would have involved an appalling volume of valuation work if every one of those assets had to be the subject of a specific valuation at Budget day in order to get its Budget day value and thereby be able to calculate the gains since Budget day.
What we did was to provide in paragraph 24 of Schedule 6 for the time apportionment formula, so that one compared the time which had elapsed since the asset was acquired, or since 6th April, 1945, if it had been acquired before then, and assumed that the increase in the value had taken place steadily over that period. In the vast majority of cases this would work to the benefit of the taxpayer, but so that no taxpayer should feel a sense of injustice we gave taxpayers two years—from the date of disposal, not from Budget day—to elect if they wished instead to have a valuation as at Budget day, 1965. We did not take any similar right to the Revenue. In cases where this time apportionment formula would operate heavily against the Revenue there was no right for the Revenue to elect; it was bound by the time apportionment formula. We gave 190 the right to taxpayers in order to correct any sense of injustice on their part.
The Amendment suggests that the election should not be made irrevocable and that if the taxpayer, having made his election, were to find that after all the time apportionment formula would operate more to his benefit, he should be allowed to re-elect in favour of it. If we did that we should defeat the object of the time apportionment formula because the result would be that people would make an actual valuation to find out precisely which would be more to their favour, and the time of the Revenue would be taken up because it also would have to make a valuation and it would have to do all the negotiations.
There is, of course, a point of principle involved. If all that work is done and an actual valuation is made and agreed as at Budget day, then we have the actual correct figure from which to calculate properly and truly what has been the gain since Budget day. There would be no reason then to go back on that and say in a somewhat sporting spirit that because the taxpayer elected to have the true valuation made instead of taking what had turned out to be more to his advantage by way of the time apportionment formula, we should be jolly decent chaps and not levy the correct duty but instead levy an incorrect duty more in favour of the taxpayer.
For both reasons—that the Amendment will undermine the purpose, which is to save administrative work, and because, the true value having been found, there is no reason then to substitute for it an artificial one—I must advise the Committee to reject the Amendment.
§ Mr. John HallI do not understand why the Financial Secretary thinks that the Revenue authorities should not be jolly decent chaps. If alternatives are open to a taxpayer, and he is free to take one or the other, I should have thought that the Revenue, if not trying to get more money out of the taxpayer than it was entitled to, would be prepared to assist him.
In every other aspect of our taxation legislation, if one is in difficulty one discusses the matter with one's tax inspector and he gives one all the help that he can. Indeed, during our debates last year I pointed to the problems that 191 affect the average taxpayer in calculating his Capital Gains Tax and spoke of the number of people who were throwing their hands up in despair over the problems that they face. I was told by one of the Treasury Ministers that the individual's proper course was to go to his tax inspector and have a full discussion with him, when the inspector would do all he could to help and make sure that he did not pay any more tax than was justly required by the Inland Revenue.
The Amendment gives the taxpayer an option and it enables the Revenue to discuss the matter with the taxpayer and gives him information on which he can make a sound judgment and do it on the basis of giving himself a smaller liability to tax. Surely nobody could quarrel with that. I cannot see why the Financial Secretary should in this case wish to keep to the Inland Revenue a sort of hidden weapon. In some cases the taxpayer has almost to toss a coin to decide which alternative he should adopt.
I am very disappointed with the Financial Secretary's reply. This is almost a technical Amendment, and I should have thought that he would have been more forthcoming. No doubt the feeling of conciliation that he might have had earlier is beginning to wear off and now he is sticking strictly to his Treasury briefs. I am very sorry about that. I do not propose to advise the Committee to divide on the Amendment, but I hope that we shall be able to return to the subject on Report.
§ Amendment negatived.
§ 8.15 p.m.
§ Mr. John HallI beg to move Amendment 40, in page 81, line 31, at the end to add:
12.—(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 £500'.(2) This paragraph shall have effect for the years 1967–68 and later years of assessment.There is a certain similarity between the Amendments that we are moving to Schedule 13 and the Amendments that were moved last year. This Amendment is similar in form to one moved last year by my hon. Friend the Member for Harrow, Central (Mr. Grant). During 192 that debate he deployed three main arguments—the administrative burden, the effect of the tax on the share market and the fact that the tax was a disincentive to small savers, pointing out that the exemption of small gains was of particular value to that class of investor.I do not wish to cover that ground again—this afternoon I have been careful to avoid going over arguments deployed on previous occasions—but I remember that on that occasion the points so cogently argued by my hon. Friends were supported, with his usual eloquence, by the Joint Under-Secretary of State for Economic Affairs. I only wish the hon. Gentleman were here now; I have a feeling that I should get a more sympathetic reception from him than I shall from the Chief Secretary. The points are as valid now as they were then.
I shall confine my remarks to the problem of the administrative burden. I do not think that there is any doubt, whatever the Treasury Bench may say, that the Inland Revenue staff are feeling the strain. There was a revolt last year, although the Financial Secretary earlier on said that it could not be described as a revolt but was just a matter of a few hotheads, who almost jeopardised the negotiations for increased salaries, which in themselves had been brought about because of the burden of work involved in the Government's fiscal legislation. We had a number of bitter complaints from the Inland Revenue staff at their conference this year. I think it is true to say that the Chancellor of the Exchequer will find it impossible to introduce any more tax reforms for some time to come unless, as in the case of S.E.T. he turns other Ministries into collecting and administrative organisations.
I suppose that the fact that we are not likely to see any more tax reforms for some little time is something not to be deplored, and one can say that perhaps in this case "out of evil cometh good". Nevertheless, it means that the Inland Revenue is under such pressure that it could not accept any further burden. Various professional bodies of which the Chief Secretary is well aware have for some time been expressing increasing anxiety about the work imposed upon them by the complicated legislation of the Capital Gains Tax.
193 I have a letter from a chartered accountant in my constituency, who writes:
So-called simplification of the tax code has created an almost intolerable burden for my profession and certainly for me personally. The extra work involved requires more staff, who are very difficult to get. I am just recovering from a coronary induced, my doctor says, by overwork coupled with anxiety resulting from the difficulty of advising my clients about the effect of the incredibly complicated legislation with which we now have to cope. For heaven's sake do something to convince the Government of the crying need for a reform which will reduce the present load and save the many thousands of wasted man-hours spent not only in my profession, but in industry and the legal profession.That was a cry from the heart. I know the man slightly, and I know that he is very conscientious and has, as he says, been ill. This kind of experience has been shared by many thousands of professional men throughout the country. One of the purposes of our Amendment is to reduce the load on the Inland Revenue, on the professions, and on the individual taxpayers.Professor Wheatcroft suggested another reason why there should be a small annual exemption, namely, that the high cost to the taxpayers who make the small gains is an extremely unfair element in a tax designed for social justice. He makes the suggestion, which I commend for consideration, first, that there should be an annual exemption for gains, and that is what we are suggesting here; and secondly, as an alternative, annual exemption for disposal of a value which would be of some much larger amount.
I am not, and I am sure my hon. Friends are not, wedded to the wording of the Amendment. If the Chief Secretary can suggest ways and means by which small gains may be exempted iii some way or another, which would reduce the administrative burden on the Inland Revenue, and on the professions which have to do much of the work, and on the taxpayers, I am sure that we would be prepared to accept the suggestion on the understanding that it would be brought forward on Report.
I hope that the right hon. Gentleman will not just repeat the sort of arguments we have had on previous occasions. He has had now enough experience of the working of the tax to realise that what I say now, and what I forecast two years 194 ago, is, in fact, happening, that it is tying up a vast number of man-hours in the consideration of individual taxpayers' business, which involves many calculations being made and a great deal of time spent on them.
When it turns out to show that there is no gain, possibly, at all, or only a very little, surely it must be to the interests of the Inland Revenue and of the Government as a whole to reduce the burden, to simplify the administration, even if only to reduce the general cost of collecting this tax. From the point of view of saving wear and tear on the minds and tempers, and, indeed, the bodies, of many thousands of people, I hope that the Chief Secretary will find it in his heart to accept this Amendment or something like it.
§ Mr. Frederic HarrisI shall detain the Committee for only a few moments. I have listened to the whole of the debate this afternoon and this evening about the Capital Gains Tax without having made a speech at all. I strongly support the view which my hon. Friend the Member for Wycombe (Mr. John Hall) has been expressing. I start with the contention that the tax is a bad tax in itself in any case. It militates against investment; it costs endless difficulties and any amount of work. As my hon. Friend has said, the administrative effort is very considerable. The officials are very much overworked; one has only to see them in one's own local district to know that.
Complaints come in all the time about this kind of difficulty in the administration, which just cannot stand up to the pressure. That is why there is little doubt that we shall not see much in the way of additional taxation in the very near future—and that, to my mind is a good thing in any case.
My thinking on this matter is now what it has always been, in favour of simplification, to make the business much easier wherever we possibly can. I have put forward various suggestions on these lines from time to time. Here we have a simple proposal to eliminate anything up to £500. This is a very sound proposition. I cannot imagine that it means much in the way of loss of taxation which the Government presently obtain from capital gains, but the ease to the administration generally by such a move, and the saving of annoyance to the people 195 making small gains and worrying about the returns, would be considerable.
I therefore very strongly support the view which my hon. Friend has put forward, and I hope that the Chief Secretary will see his way clear to accept the Amendment.
§ The Chief Secretary to the Treasury (Mr. John Diamond)As the hon. Gentleman the Member for Wycombe (Mr. John Hall) said, this proposal and similar proposals are not being discussed for the first time, and the arguments, as he said, are as valid as they ever were. That is to say, this proposal would in the first place save practically no time; in the second place would mean loss of revenue; and in the third place would help the richest and give no help to the less wealthy section. It is for this reason that this proposal has been top-hatted by the Conservative Front Bench.
The hon. Gentleman spent most of his time dealing with the element of saving time, so perhaps I could deal with that first, by pointing out that this would save time only in those cases where there was a disposal of the whole of the asset and not a part of it. This is not at all the normal situation because where one disposes of part of the asset one has to keep records just the same in order to see what value shall be attached to the remaining part. It would save time only in those cases where it would be abundantly clear that the amount involved could not possibly reach £500, because if there were any possibility of reaching that figure the calculation would have to be made just the same.
Let me say straight away that we are just as anxious as is the hon. Gentleman that this tax be collected with the minimum trouble and the minimum of time for all concerned, including the professions, as well as the Revenue, and that it should be collected with the minimum of irritation. Therefore, we have not only before these matters were discussed last year and the year before and also since then, reviewed the whole of the circumstances, to see if it was possible to produce any means whereby, without great cost to the Revenue and without unfairness to the taxpayer, one could reduce the amount of work. The answer is, as 196 the hon. Gentleman has indicated, that it was not possible.
It is not the subject of this Amendment, but, subject to what you say, Sir Eric, I should like to deal very shortly indeed with the only alternative method which offers any possibility of a reduction. No time is saved by a limitation of the amount on disposal, to which the hon. Gentleman referred very shortly. If we have a limitation on a disposal this would be wholly arbitrary and unjust. I am quite sure that it would not meet with the support of the Chamber once the details were known. A disposal limitation of £500 might, in fact, hide a capital gain of £490; it might hide a capital gain of £1; it might involve a capital loss—and nothing is said about what is to happen about capital losses.
So I repeat that, although, in principle, I am with the hon. Gentleman in the sense of wanting to find, if possible, a time saving method, even if that were to have a slight effect on the collection of the tax, but would nevertheless be fair to all taxpayers, we have not been able to find one, and this proposal certainly does not help, other than very marginally; and it certainly cannot be justified as a reform on the grounds of the time it saves, and it has all the defects which we have referred to previously.
Perhaps I can go through these very shortly indeed once more. It helps the most prosperous because only the man who has £500 worth of capital gains which he could manipulate, and could so very easily manipulate, is to escape. He would get the full benefit. The man who has less capital gain on average net, who cannot take advantage and cannot assess an alternative basis of assessment is excluded from this proposal completely.
One has to bear in mind that the rate of tax on capital gains is substantially less than the rate of tax on income. One accepts this, but it still requires a lot of demonstrating that the tax on hard earned income should be heavier than the tax on gains which do not involve the element of hard work but are merely the result of passive gains on savings.
There is, furthermore, the fact that personal allowances are available to anybody who is being assessed under the alternative basis and that would mean that one could not possibly be in the 197 position of attempting to collect Capital Gains Tax from anyone whose personal allowances had not been allowed in full or who had a balance of personal allowances unrelieved. It is unjustifiable that one should attempt to adjust taxes in this way. But the main reason against the Amendment—a reason which the hon. Member himself put forward—is that it does not serve the purpose at all well or, at the most, only to a very minimal extent.
I shall not dwell on the aspect of loss, but if we accepted £500 in gains, the corollary would normally be £500 in losses. But, having regard to the fact that it is inequitable, that it would help the most prosperous and not help at all the less prosperous, and that it would fail to serve its essential purpose of saving a useful amount of time in administration, I cannot recommend the Amendment to the Committee.
§ 8.30 p.m.
§ Mr. John HallWe got the usual reply. As we have many things to do yet, I shall not take up the time of the Committee in dealing with what the right hon. Gentleman has said point by point. However, he referred to the difference between earnings and gains which have occurred without effort on the part of the individual. In many cases, Capital Gains Tax will be imposed not on any true gain in the value of the asset but arising entirely out of inflation.
Thus, if one wants to replace an asset and has to sell it to do so and pay Capital Gains Tax on what is a theoretical capital
§ gain on the original cost, one finds as a rule that one has to pay much more than one realises after the deduction of the tax—more than would otherwise have been the case.
§ I explained on the last Amendment that one of the worst things about the tax was its element of wealth tax. This applies in this case as in the other. The right hon. Gentleman did not touch on the point and I did not bring it up myself, but the Minority Report of the Royal Commission recommended that there should be an exemption up to £400. That recommendation had the full support of Dr. Kaldor at that time and it is a pity that it was one of the few recommendations of his that were not accepted.
§ The right hon. Gentleman made the point that this Amendment would only benefit the wealthy, but that would not be so. Many people make small gains. It is true that they have an alternative method of assessment but, even so, the exemption of this completely from Capital Gains Tax would help people not in the top Surtax bracket as well as those who are.
§ As the right hon. Gentleman is determined to do nothing to relieve the burden not only on the Inland Revenue, which apparently he is prepared to accept, but on many thousands outside who will still have to cope with this incredibly complicated legislation, I can only advise my hon. and right hon. Friends to divide.
§ Question put, That those words be there added:—
§ The Committee divided: Ayes 122; Noes 187.
201Division No. 361.] | AYES | [8.35 p.m. |
Allason, James (Hemel Hempstead) | Doughty, Charles | Heseltine, Michael |
Bell, Ronald | Elliott, R.W.(N'c'tle-upon-Tyne, N.) | Higgins, Terence L. |
Biffen, John | Emery, Peter | Hiley, Joseph |
Biggs-Davison, John | Errington, Sir Eric | Hill, J. E. B. |
Bossom, Sir Clive | Eyre, Reginald | Holland, Philip |
Boyle, Rt. Hn. Sir Edward | Fisher, Nigel | Hooson, Emlyn |
Braine, Bernard | Fletcher-Cooke, Charles | Hordern, Peter |
Brinton, Sir Tatton | Fortescue, Tim | Howell, David (Guildford) |
Bromley-Davenport,Lt.-Col.Sir Walter | Gilmour, Ian (Norfolk, C.) | Hunt, John |
Brown, Sir Edward (Bath) | Glover, Sir Douglas | Iremonger, T. L. |
Bruce-Gardyne, J. | Glyn, Sir Richard | Jenkin, Patrick (Woodlord) |
Goodhart, Philip | ||
Buck, Antony (Colchester) | Goodhew, Victor | Jopling, Michael |
Carr, Rt. Hn. Robert | Gower, Raymond | Kaberry, Sir Donald |
Chichester-Clark, R. | Grieve, Percy | King, Evelyn (Dorset, S.) |
Cooke, Robert | Grimond, Rt. Hn. J. | Kitson, Timothy |
Cooper-Key, Sir Neill | Gurden, Harold | Lancaster, Col. C. G. |
Craddock, Sir Beresford (Spelthorne) | Hall, John (Wycombe) | Langford-Holt, Sir John |
Cunningham, Sir Knox | Hall-Davis, A. G. F. | Loveys, W. H. |
Currie, G. B. H. | Harris, Frederic (Croydon, N.W.) | Lubbock, Eric |
Dance, James | Harris, Reader (Heston) | McAdden, Sir Stephen |
Davidson,James(Aberdeenshire, W.) | Harrison, Col. Sir Harwood (Eye) | MacArthur, Ian |
Dean, Paul (Somerset, N.) | Hastings, Stephen | Macleod, Rt. Hn. Iain |
Deedes, Rt. Hn. W. F. (Ashford) | Heald, Rt. Hn. Sir Lionel | McMaster, Stanley |
Marten, Nell | Pike, Miss Mervyn | Taylor, Frank (Moss Side) |
Maude, Angus | Pink, R. Bonner | Temple John M. |
Mawby, Ray | Price, David (Eastleigh) | Thatcher, Mrs. Margaret |
Maxwell-Hyslop, R. J. | Pym, Francis | Turton, Rt. Hn. R. H. |
Mills, Stratum (Belfast, N.) | Rawlinson, Rt. Hn. Sir Peter | van Straubenzee, W. R. |
Miscampbell, Norman | Renton, Rt. Hn. Sir David | Walker, Peter (Worcester) |
Mitchell, David (Basingstoke) | Ridley, Hn. Nicholas | Walker-Smith, Rt. Hn. Sir Derek |
More, Jasper | Rippon, Rt. Hn. Geoffrey | Wall, Patrick |
Murton, Oscar | Rodgers, Sir John (Sevenoaks) | Ward, Dame Irene |
Nabarro, Sir Gerald | Russell, Sir Ronald | Wells, John (Maidstone) |
Noble, Rt. Hn. Michael | Scott, Nicholas | Whitelaw, Rt. Hn. William |
Nott, John | Sharpies, Richard | Wills, Sir Gerald (Bridgwater) |
Onslow, Cranley | Shaw, Michael (Sc'b'gh & Whitby) | Wilson, Geoffrey (Truro) |
Osborne, Sir Cyril (Louth) | Sinclair, Sir George | Wolrige-Gordon, Patrick |
Page, Graham (Crosby) | Smith, John | |
Page, John (Harrow, W.) | Steel, David (Roxburgh) | TELLERS FOR THE AYES: |
Pardoe, John | Summers, Sir Spencer | Mr. Anthony Grant and |
Pearson, Sir Frank (Clitheroe) | Taylor, Sir Charles (Eastbourne) | Mr. Bernard Weatherill. |
Percival, Ian | Taylor, Edward M.(G'gow, Cathcart) | |
NOES | ||
Albu, Austen | Gordon Walker, Rt. Hn. P. C. | Morris, John (Aberavon) |
Allaun, Frank (Salford, E.) | Gourlay, Harry | Moyle, Roland |
Alldritt, Walter | Gregory, Arnold | Mulley, Rt. Hn. Frederick |
Allen, Scholefield | Grey, Charles (Durham) | Newens, Stan |
Armstrong, Ernest | Griffiths, David (Rother Valley) | Noel-Baker,Rt.Hn.Philip(Derby, S.) |
Atkins, Ronald (Preston, N.) | Griffiths, Rt. Hn. James (Llanelly) | Oakes, Gordon |
Atkinson, Norman (Tottenham) | Hale, Leslie (Oldham, W.) | Ogden, Eric |
Bagier, Gordon A. T. | Hamilton, James (Bothwell) | O'Malley, Brian |
Barnett, Joel | Hamling, William | Oram, Albert E. |
Beaney, Alan | Hannan, William | Orbach, Maurice |
Bence, Cyril | Hart, Mrs. Judith | Orme, Stanley |
Bldwell, Sydney | Haseldine, Norman | Oswald, Thomas |
Bishop, E. S. | Hazell, Bert | Owen, Dr. David (Plymouth, S'tn) |
Blackburn, F. | Henig, Stanley | Page, Derek (King's Lynn) |
Booth, Albert | Herbison, Rt. Hn. Margaret | Pannell, Rt. Hn. Charles |
Boyden, James | Hooley, Frank | Parker, John (Dagenham) |
Braddock, Mrs. E. M. | Houghton, Rt. Hn. Douglas | Pavitt, Laurence |
Bray, Dr. Jeremy | Howarth, Harry (Wellingborough) | Pearson, Arthur (Pontypridd) |
Brown, Bob (N'c'tle-upon-Tyne,W.) | Howarth, Robert (Bolton, E.) | Pentland, Norman |
Buchanan, Richard (G'gow, Sp'burn) | Hoy, James | Perry, George H. (Nottingham, S.) |
Huckfield, L. | Prentice, Rt. Hn. R. E. | |
Callaghan, Rt. Hn. James | Hughes, Rt. Hn. Cledwyn (Anglesey) | Price, Christopher (Perry Barr) |
Carmichael, Neil | Hughes, Hector (Aberdeen, N.) | Price, Thomas (Westhoughton) |
Carter-Jones, Lewis | Hynd, John | Pursey, Cmdr. Harry |
Castle, Rt. Hn. Barbara | Irvine, A. J. (Edge Hill) | Randall, Harry |
Coe, Denis | Jackson, Peter M. (High Peak) | Roberts, Albert (Normanton) |
Coleman, Donald | Johnson, James (K'ston-on-Hull, W.) | Robinson, W. O. J. (Walth'stow, E.) |
Concannon, J. D. | Jones, Dan (Burnley) | Roebuck, Roy |
Conlan, Bernard | Judd, Frank | Rogers, George (Kensington, N.) |
Craddock, George (Bradford, S.) | Kelley, Richard | Ross, Rt. Hn. William |
Crawshaw, Richard | Kerr, Russell (Feltham) | Rowlands, E. (Cardiff, N.) |
Cronin, John | Lee, John (Reading) | Shaw, Arnold (Ilford, S.) |
Crossman, Rt. Hn. Richard | Lewis, Ron (Carlisle) | Sheldon, Robert |
Dalyell, Tam | Lomas, Kenneth | Shore, Peter (Stepney) |
Davidson, Arthur (Accrington) | Luard, Evan | Silkin, Rt. Hn. John (Deptford) |
Davies, Dr. Ernest (Stretford) | Silverman, Julius (Aston) | |
Davies, Harold (Leek) | Lyon, Alexander W. (York) | Silverman, Sydney (Nelson) |
Delargy, Hugh | McBride, Neil | Slater, Joseph |
Dempsey, James | McCann, John | Small, William |
Dewar, Donald | MacColl, James | Spriggs, Leslie |
Diamond, Rt. Hn. John | MacDermot, Niall | Stewart, Rt. Hn. Michael |
Dickens, James | Macdonald, A. H. | Swain, Thomas |
Dobson, Ray | Mackenzie, Gregor (Rutherglen) | Swingler, Stephen |
Doig, Peter | Mackie, John | Symonds, J. B. |
Dunn, James A. | Maclennan, Robert | Taverne, Dick |
Dunwoody, Mrs. Gwyneth (Exeter) | McMillan, Tom (Glasgow, C.) | Thomson, Rt. Hn. George |
Dunwoody, Dr. John (F'th & C'b'e) | MacPherson, Malcolm | Thornton, Ernest |
Ellis, John | Mahon, Peter (Preston, S.) | Tinn, James |
English, Michael | Mallalieu, E. L. (Brigg) | Tomney, Frank |
Ennals, David | Mallalieu,J.P.W.(Huddersfield, E.) | Tuck, Raphael |
Ensor, David | Manuel, Archie | Urwin, T. W. |
Evans, Albert (Islington, S.W.) | Mapp, Charles | Wainwright, Edwin (Dearne Valley) |
Evans, Ioan L. (Birm'h'm, Yardley) | Marquand, David | Walker, Harold (Doncaster) |
Faulds, Andrew | Maxwell, Robert | Wallace, George |
Finch, Harold | Millan, Bruce | Watkins, David (Consett) |
Fletcher, Raymond (Ilkeston) | Miller, Dr. M. S. | Watkins, Tudor (Brecon & Radnor) |
Fletcher, Ted (Darlington) | Mitchell, R. c. (S'th'pton, Test) | Wellbeloved, James |
Foot, Sir Dingle (Ipswich) | Moonman, Eric | Willey, Rt. Hn. Frederick |
Ford, Ben | Morgan, Elystan (Cardiganshire) | Williams, Alan (Swansea, W.) |
Freeson, Reginald | Morris, Alfred (Wythenshawe) | Williams, Alan Lee (Hornchurch) |
Galpern, Sir Myer | Morris, Charles R. (Openshaw) | Williams, Mrs. Shirley (Hitchin) |
Williams, W. T. (Warrington) | Winterbottom, R. E. | TELLERS FOR THE NOES: |
Wilson, William (Coventry, S.) | Woof, Robert | Mr. Joseph Harper and |
Winnick, David | Yates, Victor | Mr. Walter Harrison. |
§ Question proposed, That the Schedule, as amended, be the Thirteenth Schedule to the Bill.
§ Mr. MacDermotThere is one point which I should like to make about paragraph 5. Under paragraph 18 of Schedule 7 to the 1965 Act, if a close company transfers an asset to a person at a price less than the full market value, the difference between the price and the market value is apportioned among the company's shareholders and regarded as replacing the acquisition of cost for Capital Gains Tax purposes. Where the disposition at less than market value is between two close companies which are members of a group it is obvious that there is no diminution in the shareholders' equity, looking at the group as a whole, and it follows that to apply paragraph 18 in these circumstances could produce inequitable results.
An Amendment to deal with this was tabled by the Opposition last year, but it was not called. At that time, the Government thought that it was unnecessary, or we would have proposed a similar Amendment ourselves. But it now appears that our view was misconceived and that paragraph 18 as the law stands is not overridden by Schedule 13, and so this paragraph is designed to amend the law in order to give the effect which we thought there would be.
The aim of the Amendment is to avoid penalising bona fide business arrangements, but we already hear of schemes being devised which, if put into effect, would take advantage of this relieving provision, or other provisions enacted for the convenience of groups of companies, in order to create artificial losses.
I wanted to make it clear that this would be blatant avoidance, and I take the opportunity to give a warning that if these provisions are abused, my right hon. Friend the Chancellor will not hesitate to introduce appropriate legislation, if need be with retrospective effect, to deal with it. We have not thought it right, in respect of these arrangements to alter our intention to proceed with this paragraph as it stands in the Schedule. We do so coupled with that warning.
§ 8.45 p.m.
§ Mr. John HallWe heard with interest the warning given by the Financial Secretary to would-be tax avoiders. It is also of interest for him to recall that this paragraph 5 follows an Amendment which we tried to move last year. Paragraph I also follows an Amendment which we moved last year. We are delighted that the Government have at last seen the error of their ways in these respects.
§ Question put and agreed to.
§ Schedule, as amended, agreed to.