HC Deb 12 June 1967 vol 748 cc233-43
Mr. Graham Page

I beg to move Amendment No. 192, in page 92, line 5, at the end to insert: 2. For the purposes of Case VIII of Schedule D the amount of any rent payable to the landlord in any year shall be reduced by the amount of the betterment levy charged on the capital value of the rent attributable to that year and the amount so attributable shall in the case of a lease for a term of not less than fifty years be one-fiftieth of the amount of the betterment levy charged on the capital value of the rent and in the case of a lease for a term of less than fifty years shall be the fraction of such amount corresponding to the number of years comprised in the term. The Schedule deals with betterment levy on leases, especially in connection with premiums. Under Case B of the Land Commission Act, 1967, the betterment levy is chargeable on the letting of property. That betterment levy is payable when the property is let; it is payable at that time upon the premium, if any, and upon the capitalised value of the rent; it is payable regardless of the fact that the money under the lease, so far as it is rent, has not yet been received by the levy payer, and payable regardless of the fact that it amounts to double taxation. The rent and the premium are subject to Income Tax. The premium and the capitalised value of the rent are subject to the betterment levy. They should both have been relieved to that extent of betterment levy.

I am sure that the disastrous effect of this policy upon all forms of leases and the whole system of leasehold tenure has not been generally recognised. Who in his right mind would let property when, for the privilege, he had to pay 40 per cent. of the capitalised value of the rent, plus the premium, plus Income Tax at the outset on the premium—subject to the one-fiftieth formula—and tax on the rent? I cannot imagine what he would have left. The Bill offers him, in this Schedule, the slight crumb of comfort that he can take the betterment levy into account against the premium, but why not also against the rent?

The Amendment seeks to allow the levy payer to take the betterment levy into account against the tax paid on the rent. He has to pay Income Tax on the premium and on the rent and betterment levy on the premium and capitalised value of the rent and it seems illogical that he should be entitled to a concession on the premium and none on the capitalised value of the rent. The Amendment seeks to grant him that latter concession.

Mr. James Allason (Hemel Hempstead)

I tried to approach this matter differently in our debates on the Land Commission Bill and argued that the right to receive rent should be valued but the value would differ according to the taxpayer's position. If someone pays no tax, the right to receive £100 a year for 20 years is substantial, but if he pays the highest rate of Surtax, that right is of different value. I wanted that taken into account, but we lost. We now have the opportunity of putting the matter right.

If the cost of the levy to the taxpayer is allowed in proportion over the years as a deduction from his assent, there will be some justice, but this is not offered by the Government. It is fair that it should be offered and I therefore hope that they will allow this as a deduction from the taxpayer's liability.

Mr. MacDermot

This proposal is quite unacceptable to the Government. If it were accepted, its repercussions would go far beyond the scope of the Amendment. For example, it would be extremely difficult to refuse similar allowances to a lessee who carried out material development in respect of which he paid betterment levy on leased premises which he used for his business. It could be argued that, because the development of the land would increase his profits, he should be allowed to spread the levy over the remainder of his lease, or 50 years if shorter, and get allowances accordingly in the assessment of his profits.

Equally, it would be difficult to distinguish between the trader who developed business premises on a long lease, such as one for 999 years, and the trader who developed premises of which he owned the freehold. The amount of the levy would he the same in both cases. It would then be argued that the freeholder had as strong a claim to allowances in respect of levy spread over the 50 years as the long leaseholder.

Third, there is the case of the freeholder who develops his property and pays levy with a view to letting the property at an enhanced rent. He also would have a claim to allowances in respect of the levy against rent spread over 50 years. We recognise that it would be harsh to charge Income Tax or Corporation Tax on the rents, and, at the same time, to charge levy on the capital value of the right to receive the rents, with no allowances in respect of levy for Income Tax purposes or in respect of tax for levy purposes.

10.30 p.m.

But the provisions of the Land Commission Act afford a solution to this problem, and it may be that hon. Members supporting the Amendment are not aware of the effect of these provisions. Levy, under Case B of the Land Commission Act, which applies to leases, is charged on the amount by which the consideration for the disposition exceeds the sum of the base value realised by the disposition and the amount of any expenditure on improvements or ancillary rights in so far as it has increased the development value realised by the disposition. Fortunately, for the present purpose we have only to consider the consideration for the disposition.

Among the factors which have to be taken into account in calculating the consideration for the disposition—it will be the only factor in many cases—is the capital value at the relevant date of the right to receive the rent. This has to be calculated by reference to the price which that right might reasonably be or have been expected to fetch on a sale in the open market at the time by reference to which the value falls to be calculated". That is paragraph 5 of Schedule 6 to the Land Commission Act. In effect, it means that an allowance for tax on the rents will be made in arriving at the amount on which levy is payable. Therefore, the proposal to give an allowance for levy against rents, besides being open to the objection which I have already raised in regard to repercussions, would be open to the further objection that, in conjunction with those provisions of the Land Commission Act, there would, in effect, be a double allowance.

The hon. Member for Hemel Hempstead (Mr. Allason) raised a separate point, that, in arriving at the capital value of the right to receive a rent, the market, and, in consequence, the valuation office, would not take account of the actual rate at which the lessor is liable to tax; it would merely make an allowance at an average rate which one might take as being about 8s. in the £. He argues that it is possible that, when the method of valuing rights to rents for levy purposes is considered, it may be said that, where the lessor is liable to Surtax, an additional allowance in respect of Surtax should be made in valuing the right to the rent.

It would be impossible for levy purposes to take account of the actual rate at which a particular lessor is liable to tax. Not only might that rate vary from year to year for the same person, but the lessor might at any time sell his interest in the property, and the rate at which the purchaser was liable to tax might be quite different from that to which the original lessor was liable.

I think that the solution to the problem is that, if a landlord proposing to grant a lease on terms which reflect a heavy development value is liable to Surtax and thinks that he would be hit by absence of any allowance in respect of Surtax, it would be open to him to grant the lease at a premium and a nominal rent instead of a rent alone. In that event, most of the levy would be deducted from the premium before calculation of the amount on which Income Tax and Surtax are payable.

For the reasons which I have already explained, I must advise the Committee to reject the Amendment.

Mr. Graham Page

The hon. and learned Gentleman has said that the Amendment might give a double allowance. After all the double taxation provisions we have had in the past couple of hours that would be so refreshing that I am almost tempted to take the Amendment to a Division.

But the point is technical. I am grateful to the hon. and learned Gentleman for his explanations and for drawing attention to the parts of the Land Commission Act which may give a solution. I would like the opportunity to study what the Financial Secretary said, as it is difficult to take it in as he says it. I do not blame him, for it is a technical subject. I am sure that the rest of the Committee would also like to read what he said before coming to a decision. I therefore beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Graham Page

I beg to move Amendment No. 204, in page 93, line 33, at the end to add: 3. For the purpose of subsection (1) of section fifty of the Finance Act 1940 (by virtue of which an allowance for a company's liabilities is to be made in valuing its assets for the purposes of section forty-six or section fifty-six of that Act) any liability of the company to corporation tax and betterment levy which the company would have incurred had all its assets been disposed of for their market value at the date of the death of the deceased shall be taken into account as if it were an actual but contingent liability at the date of the death; and the Commissioners shall make an allowance to reflect such liability in addition to allowances (if any) which may fall to he made under subsection (3) of section thirty of the Finance Act 1954 (which makes other amendments of, or affecting, section fifty-five of the Finance Act 1940). That looks a rather formidable set of words, but the point is fairly simple and one which I hope that the hon. and learned Gentleman will concede to us. It certainly has the merit of being fair.

There is relief against betterment levy on land which within the previous six years has suffered Estate Duty. That comes into the Land Commission Act in Sections 69, 70 and 71 and Schedules 7 and 8. It is, therefore, recognised that when land has suffered Estate Duty there should be an allowance against betterment levy or an allowance in the assessment of betterment levy for that amount paid in Estate Duty. I submit that that shows the intention of the creators of betterment levy that in ascertaining the net development value on which betterment levy is to be assessed one must deduct such sums as have already been paid away in some form of taxation.

My argument has always been that betterment levy should not be charged on any sum which has already borne tax, whether Income Tax. Capital Gains Tax, Corporation Tax, or Estate Duty. That would be fair, but I appreciate that the Government will not accept that argument. But surely they cannot refuse the bare minimum which is embodied in the Amendment? That is that there should be no tax upon a tax—that one should not tax the money which has been paid away in tax. That is so when the owner of land has died and his estate has suffered Estate Duty, and then the land is sold within the next six years; in such a case, the Estate Duty is deductible from the net development value on which betterment levy is chargeable on the disposal of the property.

But what if the deceased did not own the land but had shares in the company which owned it? In anticipation of betterment levy on disposal, that possible liability would be reflected in the value of those shares, and, therefore, Estate Duty would be paid on a reduced value, a value reduced by that reason. That is so if one values the shares on the normal market basis, whether they be quoted shares or shares which have a value by having changed hands privately over recent years.

But there are the occasions when Estate Duty must be calculated not on the market value of the shares in a company or the quoted value of those shares, but on the asset value of the company. If the deceased has a controlling interest in the company, then the shares have to be valued on an assets valuation under Section 55(1) of the Finance Act, 1940. That means that each asset is valued, including land held by the company, the liabilities are deducted, and the result is divided by the number of shares issued. I am sorry if I am spelling it out in an elementary way. I have to do so to get my own argument into my head.

That valuation does not take into account the taxes which may arise on the disposal of those assets. It is not permitted in an assets valuation to take into account such a tax as betterment levy on the sale of the land. I think that it should do so. Amendment No. 204 would allow it to be so taken into account, and this would do no more than put a deceased shareholder on the same footing as a deceased individual owner of land. There seems no reason why one should make the distinction between the two. The shareholder who controls a company which owns land is put on the same footing in the valuation of his estate as the individual owner of land. Therefore, he should be put on the same footing so far as the betterment levy is concerned, and the Estate Duty allowance of betterment levy given by the Land Commission Act should be allowed in such a case.

Mr. Allason

I have a constituency case which exactly fits this proposal. I am glad that the Joint Parliamentary Secretary to the Ministry of Housing and Local Government is present, because he knows the case. He has been very concerned about it and has racked his brains to find out how he could give the relief in this case which he agreed to be necessary. He has not succeeded in gettting the Government to put something in the Finance Bill, but I hope that he will nudge his hon. and learned Friend and get this Amendment passed, because I know that he is in full sympathy with it.

My constituent died before the coming into effect of the Land Commission Act. He owned approximately 35 per cent. of the shares of a family company having assets including a certain piece of land, which was valued by the district valuer for Estate Duty purposes at £22,000, and the reason for that was that it was expected that development of the land would take place. It was of little value except for development. Estate Duty was then paid at the rate of 50 per cent. on the deceased's assets in the land-35 per cent. of the £22,000. If the property is now developed, the levy will have to be paid by the company on the full value, which will be perhaps £20,000 out of that £22,000, at the rate of 40 per cent.

Had the deceased owned the whole of the land, he would under Schedule 7 of the Land Commission Act have received a rebate. To the extent that he has paid 50 per cent. Estate Duty, which is allowable, he would have paid only as much as he would have paid if he had first paid the levy and then was assessed for Estate Duty on the remaining value. To show roughly how it would work on £1,000, a 40 per cent. levy would be taken first, and then, on the remaining £600, 50 per cent. Estate Duty would be paid.

10.45 p.m.

So, in total, he would pay 40 per cent., plus 30 per cent.; 70 per cent. would be paid in combination of Estate Duty and levy on the development value of the land. This is the effect of Schedule 7 to the Land Commission Act; it does it the other way round, but it achieves that situation. The 50 per cent. has already been paid, and, therefore, it reduces the 40 per cent. levy to only 20 per cent. in order to achieve the final 70 per cent. which is paid in this case.

However, not so, because the land happens to be owned through a company there is no such rebate given at all, and so, that 50 per cent. having already been paid, another 40 per cent. will be taken, a total of 90 per cent. in this case. In this case, of course, it happens that the rate of Estate Duty is 50 per cent. Suppose the rate of Estate Duty is very much higher, then it is possible for an amount of 100 per cent. tax to be paid by the effect of dying and having to pay the levy afterwards. This, clearly, is quite improper.

Here we have a chance of putting it right. This is the opportunity now before the Committee. Therefore, I hope that the Government will accept this very reasonable proposal.

Mr. MarDermot

As the hon. Gentleman the Member for Crosby (Mr. Graham Page) explained, this Amendment relates to the case where shares and debentures are valued not on market value but by reference to the value of the assets of the company, and, broadly speaking, these are controlling shareholdings in unquoted companies.

The Amendment provides for a deduction in the Estate Duty valuation in such cases in respect of Corporation Tax and betterment levy to which the company would have been liable if all its assets had been disposed of at market value at the date of the death of the deceased. Existing law and Revenue practice is to give an allowance under Section 30(3) of the Finance Act, 1950, for contingent liability to Corporation Tax on unrealised gains. Of course, the company pays Corporation and not Capital Gains Tax on its capital gains.

Where the death occurred on or after 6th April, 1967, if the assets of the company included land with an unrealised development value, betterment levy presumptively payable on its realisation would be regarded as a contingent liability of the company for the purposes of Section 50(1) of the Finance Act, 1940. In both these cases allowance will normally be made in full for any Corporation Tax or levy which has been incurred by the time the case is considered by the Estate Duty Office, and in other cases the deduction will be properly discounted, that is, by reference to the probabilities in regard to future disposals of the assets and their probable timing, which would give rise to liability to tax or levy. Unless there is any reason to foresee disposals in the reasonably near future, the deduction would normally be small.

It may be that these provisions of the existing law, which, of course, has not yet been applied to a significant number of cases, will give the supporters of the Amendment substantially what they want. If the position is that they are assuming that no deduction would be given for contingent liability for betterment levy because of the exclusion from Section 50(1) of the 1940 Act of liabilities incurred otherwise than for the purposes of the business of the company wholly and exclusively I can only say that the view of the Revenue is that those words would not operate to exclude betterment levy. But if the purpose of the Amendment is to secure an allowance for the full amount of Corporation Tax and the betterment levy, which would be possible on the basis of a notional disposal on the date of the death, that would be unreasonable. The liability to Corporation Tax would be postponed indefinitely if the assets in question were not realised, and in these circumstances there seems little merit in giving an allowance for liability at the date of death.

The betterment levy is not payable until there is realisation of development value and, if that is deferred over a significant period, here again there is no justification for giving an allowance for the full notional liability at the date of death. There will be a deduction for contingent liability to betterment levy and, of course, for any liability to levy which has actually been incurred but not for the full amount of a notional disposal at the date of death.

If the general principle satisfies the hon. Member for Crosby, but he is concerned with whether the objective is made clear in the provision, I gladly undertake to look further at it. I cannot agree to accept the Amendment, or to go as far as appears to be suggested by allowing a deduction for the full amount on a notional disposal, but I will gladly also consider this provision in relation to the particular case to which the hon. Member for Hemel Hempstead (Mr. Allason) has referred.

Mr. Allason

The hon. and learned Gentleman has said that this will be all right after the 1st April, 1967, but he has not addressed himself to the situation in the case of those who died before that date, which is the case I cited. The whole of Part II of Schedule 7 of the Land Commission Act is dealing with cases where death has taken place before that date. Basically, satisfactory allowances are made where the asset is owned outright, but the case I quoted is wholly one where, because the property is owned through a company, that provision cannot take effect.

I urge on the hon. and learned Gentleman that this is a very real necessity. Will he please have a look at it in relation to the known case which his hon. Friend the Joint Parliamentary Secretary to the Ministry of Housing and Local Government, sitting beside him, can tell him about?

Mr. MacDermot

There are obviously complications about that case. The hon. Gentleman has been in correspondence with my hon. Friend the Joint Parliamentary Secretary to the Ministry of Housing and Local Government and I will gladly look into it, consider it with him and get in touch with the hon. Gentleman. If what he has asked is right, and it appears to call for an amending provision, I will consider whether we can meet the point on Report. But from his argument tonight I do not at the moment see the need for an Amendment.

Mr. Graham Page

The difficulty in the case put by my hon. Friend the Member for Hemel Hempstead (Mr. Allason) is that it stretches over the date 1st April, 1967. Part of it occurs before and part of it afterwards. To that extent perhaps an Amendment is necessary. Listening to the Financial Secretary, it appears that he has given me all I want, but I cannot be certain. I would like to read what he has said and compare it with my Amendment.

On the basis that I might approach him and ask for further explanations to assist me, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Schedule agreed to.

Clause 33 ordered to stand part of the Bill.