CAPITAL GAINS

HC Deb 17 July 1969 vol 787 cc1025-38

Mr. Diamond

I beg to move Amendment No. 130, in page 151, line 3, leave out 'by a person other than a company'. It may be convenient to discuss with it Government Amendments Nos. 131 and 132.

The purpose of the Amendments is to make a small extension to the scope of paragraph 10 of the Schedule, under which the proceeds of small part disposals of land are allowed to be deducted from the original acquisition cost, so that the charge to tax of any gain is postponed until the remaining land is disposed of. The effect of the Amendments is to apply the paragraph to disposals of land by companies.

Originally, disposals of land by companies were excluded from its operation, for the simple reason that a company goes on for ever and one might never collect the tax in those circumstances. But, on reconsideration, we think that the amounts involved could be very small. There could be a saving in work. There have been suggestions that we should reconsider the provision. We have done so and have tabled the Amendment, which I hope will be acceptable to the House.

Amendment agreed to.

Further Amendments made: No. 131, in page 151, line 4, after 'where', insert (a)'.

No. 132, in page 151, line 6, at end add: `and (b) the transfer is not one which, by virtue of paragraph 20 of Schedule 7 to the Finance Act 1965 (transfers between husband and wife) or paragraph 2 of Schedule 13 to that Act (transfers within groups of companies), is treated as giving rise to neither a gain nor a loss'.—[Mr. Diamond.]

Mr. Diamond

I beg to move Amendment No. 133, in page 152, line 26, at beginning insert: Unless the person receiving the compensation makes an election under section 33(3) of the Finance Act 1967. With permission, I would like also to refer to Government Amendment No. 134. The two Amendments correct a minor drafting defect in paragraph 11.

Amendment agreed to.

Further Amendment made: No. 134, in page 152, line 27, after 'shall', insert 'in the case of land in Great Britain'.—[Mr. Diamond.]

Mr. John Hall

I beg to move Amendment No. 116, in page 152, line 32, it beginning insert: (1) In subsection (1) of section 35 of the Finance Act, 1965, the following words shall be inserted before the word 'Subject' in line 1, namely 'A gain shall not be a chargeable gain if accruing to a person on the disposal of assets held by him in favour of a charity and'. The Amendment arises from a plea made by the Chairman of The Wilberforce Home for Multiple Handicapped Blind. It started with a letter he wrote to The Times on 21st January, which was followed up by letters to various right hon. and hon. Members on both sides who I think have from time to time taken up this point with the Chancellor. The point he made must command sympathy. He suggested that it was wrong in principle, and a deterrent to would-be donors, that the donor of assets to a charity should be sujected to a tax on a notional gain when he gifted the assets to that charity, when no gain had been realised and might never be realised even by the charity, though if it were realised by the charity it would be exempted by Section 35 of the 1965 Act.

The layman might be excused for thinking that the wording of Section 35 meant that all gifts to charities were free of capital gains tax, but refers only to the disposal of those assets in the hands of the charity after it receives them. It appears to be clear that anyone who passes over assets to a charity might incur liability for capital gains tax and have to meet that liability, unless, as has been suggested in one exchange of correspondence, the donor either sells the assets and then gives the net proceeds to the charity, after paying the capital gains tax, or keeps back a certain part of the assets to meet what he expects would be the liability. Either way, of course, the charity will receive less than by a straight donation without a deduction of that kind.

The arguments deployed in favour of the present state of affairs are, first, that the gains have accrued while the assets were in the hands of the donor and therefore should be chargeable to him before he passes them over to the charity. It must be borne in mind that the donor himself has no intention of making any money out of this but wants to give a complete asset to the charity as it stands without taking any advantage of any sale or capital gain which may have accrued in the meantime. The way this operates, it seems that the State is determined that it will have its share of a gift given to a charity if legally possible. This seems an undesirable and mean attitude on the part of the Treasury.

The second argument, I understand, is that it would be inequitable to change the law in this respect because it would create a difference between those who sell their assets and give the net proceedings to charity and those who give the whole asset to the charity, which, under this Amendment, would be free of tax.

We had considerable debate on this matter during the proceedings on the 1965 Act, when we discussed the effects of the fiscal proposals on charities, and we have had a recent debate on the effect of a certain fiscal action on spastics. This is an opportunity for the Government to be generous. This is a case where the donor makes no profit. He wants to give an asset to charity with no gain to himself whatever. If he is able to give it without the imposition of a capital gains tax, then the charity itself will get more than if he keeps back a part with which to pay the liability or sells the asset and hands over the proceedings net.

I do not believe that the Government should try to deny a charity this particular advantage. We know that charities are in a special position and, indeed, our legislation contains a number of examples where they are put in a specially privileged position. We should stretch Section 35 to the point where we give charities the advantage of gaining from the donor an asset free of the burden of capital gains tax, which would have to be paid before it received the proceedings.

I hope that the Amendment commends itself to the right hon. Gentleman. He was kind enough to receive my last Amendment with some sympathy. I hope that he will take the same attitude now. If he cannot accept the Amendment, I hope that he will at least give further consideration to this matter during the coming year and introduce an appropriate Amendment in next year's Finance Bill.

Mr. R. H. Turton (Thirsk and Malton)

I hope that the Chief Secretary will give further consideration to this matter. It is a gap in the charity law which most hon. Members are aware of. It is hitting not only the Wilbeforce Home for the Multi-Handicapped Blind, but many other charities as well. Someone is willing to give a donation to a charity, but finds that he can be liable for tax, dependent on the cost of the purchase of the security many years ago or the 1965 value. That deters charitable people from trying to help the charities.

The House should look at the whole question of the position of charities with greater sympathy than it does. I believe that charities such as the Wilberforce Home and many of the charities for the deaf are helping the country and other taxpayers over obligations that we all have to the handicapped. It would be an excellent gesture if the Government either accepted the Amendment or proposed further consideration, before the next Finance Bill, of how the problem for the charities can be overcome.

I am convinced that the cost to the Exchequer of making this concession would be negligible. At present, it is difficult to get securities given to charities because of what I regard as a loophole in the law. If the Government were to make this concession in this or the next Finance Bill, they would not lose any revenue, because they would encourage more people to give securities to charities. I hope that for once the Chief Secretary will be generous and that, if he cannot be generous on this occasion, he will consider a future change in the law in this respect.

Mr. Diamond

I am grateful to the hon. Member for Wycombe (Mr. John Hall) for making it clear that charities are exempt from capital gains tax on all capital gains accruing to a charity; that is to say, when a charity has an asset which increases in value and is then realised and would otherwise be liable for capital gains tax, no capital gains tax is charged. What we are not considering is whether a charity is subject to capital gains tax; it is not. What we are considering is whether an individual is subject to capital gains tax on a gain; he is, but only when it is realised.

Capital gains tax becomes due when the gain is realised. Therefore, if an individual has an asset which is gaining, there is a liability to capital gains tax accruing the whole time the individual is holding that increasing asset, but he does not have to pay it until the gain is realised. If that individual before realising the asset decides to give it to a charity, it is suggested that two things should be given to the charity—the asset and the debt which the individual owes, but which has not yet matured. It is suggested that the debt to the State should be handed to the charity.

That is not an argument which I can accept. Nor did we find it an argument which we could accept when this matter was fully considered when capital gains tax was introduced and when it was decided that it should follow the ordinary rule of estate duty, which it does, and be treated in exactly the same way.

While we do not charge capital gains tax or estate duty on charities, individuals and estates pay capital gains tax and estate duty no matter to whom the asset in question is given or disposed of under a will. For those reasons, it is not possible to accept the Amendment. I have demonstrated my full sympathy for charities by reminding the House that charities are wholly exempt from capital gains tax and estate duty.

10.0 p.m.

Mr. John Hall

Before the right hon. Gentleman sits down, would he make clear whether his resistence to this Amendment is dictated by the thought that this might provide, in some way not clear to me, a loophole for evasion, or is the reason really that he wants the State to take the full share of what he regards as a legal liability to tax and therefore deny that advantage to the charity, to whom it would otherwise have passed?

Mr. Diamond

There is no question of tax avoidance. The hon. Gentleman is putting to me that the recipient should receive two gifts because it is a charity; it should receive a gift from the donor of the assets and a further gift from the Exchequer on the capital gains tax which has accrued to the Exchequer but has not been paid, because the liability to pay has not matured. I say that that is an argument which does not appeal to me. There is no real reason why the Exchequer should be required to make a present to the charity just before an individual wants to make a present to it.

Let the individual make the present to the charity. Very often an individual does, usually by cash. That cash is what remains to the donor after he has paid all of his taxes, income tax, surtax if any, and capital gains tax, if any. Out of that net taxed disposable income in 99 cases out of 100 he makes a gift to the charity. Once the charity receives the gift, if it earns a capital gain on that gift it is free of capital gains tax. I am saying that we should not distinguish between the man who makes a cash gift out of his taxed income and a man who makes a gift in kind by transferring an asset which has accrued liability to capital gains tax. I am sure that I have made the position clear. It is no lack of generosity; it is just following the sensible process of our tax system.

Mr. Tom Boardman (Leicester, South-West)

I had not intended to intervene, but the reply of the Chief Secretary omits the type of circumstance which I am sure my hon. Friend had in mind, not the case of a gift of cash, but a case in which land is given to a charity. I have a particular case in mind. When the owner of land next door to a charity is perfectly willing to give that land to it such gift would be an invaluable asset to the charity, but neither the donor nor the charity would have the cash to pay the capital gains tax which would arise. If the right hon. Gentleman could make this concession the charity could take this land and the property and make use of it. The donor would rid himself of this liability to capital gains tax.

This would be a great benefit to the country and it would encourage people to make this kind of gift. The Treasury will lose nothing by it because if it is not given to a charity it will remain there frozen.

Amendment negatived.

Mr. Diamond

I beg to move Amendment No. 135, in page 157, line 10, leave out '(3) The said fraction' and insert: (3) A disposal of shares or loan stock by the transferor company which, by virtue of Schedule 13 to the Finance Act 1965 (groups of companies), is treated as giving rise to neither a gain nor a loss shall be disregarded for the purposes of sub-paragraph (2)(b) above but on the first occasion after such a disposal that there is a disposal which is not so treated of all or any of those shares or that loan stock, that sub-paragraph shall apply as if the disposal were a disposal by the transferor company. (4) The fraction referred to in sub-paragraph (2) above.

Mr. Speaker

With this Amendment it will be convenient if we take Amendment No. 199, in page 156, line 44, at end insert— 'the transferor company disposes of all or any of the shares issued on exchange by the transferee company, provided that where the transferor company is a member of a group as defined in Schedule 13 to the Finance Act, 1965, this sub-paragraph shall apply only by reference to a disposal outside the group in accordance with the provisions of that Schedule, and the gain shall be deemed to accrue to the member making that disposal'.

No. 200, in page 156, line 45, leave out from beginning to end of line 9 on page 157.

No. 290, in page 157, line 4, leave out head (c).

Mr. Diamond

This is a relieving Amendment. It deals with the charge to tax on capital gains accruing to a company resident in the United Kingdom, carrying on a trade outside the United Kingdom through a branch, which transfers this trade, together with its assets, to a company not resident in the United Kingdom in exchange for shares in the company. Under the law, the charge is postponed until for example the disposal by the transferor company of any of the shares received from the transferee company in exchange for the assets transferred. If that happens, then the charge matures.

It has been represented to us by the accountancy bodies that transfers of shares within a group of companies should be disregarded for the purpose of this paragraph. As this would accord with the principle generally followed in relation to tax on capital gains, that transfers of assets between members of a group of bodies should be disregarded, we propose to do so in this case.

For these reasons we have introduced this Amendment to make the necessary changes to paragraph 18(2).

Mr. John Hall

I do not know, Mr. Speaker, whether we are taking this Amendment separately and then coming on to the other Amendments which are in my name and in the name of my hon. Friend, or whether we are to have a general debate.

Mr. Speaker

I had suggested that we should take this one and the other three together. The hon. Gentleman will not be inhibited from speaking about his own Amendments.

Mr. Hall

Then I shall speak to the other Amendments at the same time.

I welcome the Government Amendment No. 135. It meets one of the objections I had in mind in both Amendments Nos. 199 and 200. Amendment No. 290, which we are taking at the same time, deals with a much narrower point, to which I shall come later. It refers only to the period of 10 years which was referred to in the paragraph.

Paragraph 18 is somewhat complicated. It recognises that transfer of trade to a non-resident company for shares in that company gives rise to a chargeable gain which is potential only and is not realised in a material sense at the time of exchange. It defers the actual charge by reference to four alternative conditions laid down in the Schedule in paragraphs 18(2)(b). Paragraph 2(b) has been changed by the Amendment No. 135. There are objections to the other conditions. For that reason it seems to be a logical step to impose a charge only on the effective realisation of the shares. That is the effect of the two Amendments 199 and 200.

The Amendments, in addition to producing a more logical state of affairs, have also been tabled because of the objections to the four provisions laid down in paragraph 18(2)(a) to (d). Paragraph 2(a) refers to the cessation and use of an asset and brings about a liability to charge. The difficulty is that if one has only 25 per cent. of the shareholding of the overseas, company it is difficult to police what happens to that asset; it is even more difficult if there is any further watering down by the issue of other shares at a later stage to a third party.

That in itself is a slight difficulty, although I appreciate that there could be conditions with assurances and guarantees to enable the Treasury to be assured that some watch was kept over assets transferred; the Treasury could get the necessary information about it. This would not arise if my Amendment were accepted.

Paragraph 2(c) deals with the period of 10 years. I shall go into that matter in more detail when I come to deal with Amendment No. 290.

Paragraph 18(2,d) seems to be neither necessary nor logical. The present position is that there is no disposal on the appointment of a liquidator, but as a result of this provision chargeable gain may arise which the company may not be able to offset against losses incurred during liquidation.

I hope that I have demonstrated sufficiently the unsatisfactory nature of these provisions, and that it will be possible to accept Amendments Nos. 199 and 200. If, however, through a mental abberation brought about by the hot weather, the Chief Secretary finds it difficult to accept those Amendments, I will turn to Amendment No. 290, which deals with a much more narrow point.

It is difficult to understand why the period of 10 years has been inserted. It means that any chargeable gains arising on the assets transferred are frozen—although they are payable if the asset is disposed of or in the event of certain other developments; but if the assets are not disposed of within 10 years, the chargeable gains become payable. It is difficult to understand precisely why this should be, except, possibly, that the Treasury has the same fear as I expressed in commenting on paragraph 18(2,a) that it may be difficult to police the future of these assets to find what happens to them.

Before I come to the answer to that one, perhaps I may briefly summarise the situation since the 1965 Act. The Chief Secretary will remember that originally paragraph 8 of Schedule 7 to the 1965 Act provided for exemption from the tax on chargeable gains where a business was transferred to a company as a going concern in exchange for shares. That was at least understandable, although it was, perhaps, the most undertandable of the many complicated matters of the 1965 Act.

In 1968, under paragraph 16 of Schedule 12, that exemption was restricted to individuals. The British Insurance Association, which was rather affected by the matter, pointed out, I believe, at the time to the Chief Secretary that the withdrawal of the exemption granted in the 1965 Act was of particular concern to insurance companies trading overseas which had found it necessary in some countries to convert their branch operations into local established companies, and in some cases to sell a portion of the capital locally. We all understand the necessity for this action, which arises from time to time and may be likely to arise more frequently in future as a result of growing nationalist pressure in the countries concerned.

There is another reason for this type of transfer. It applies particularly, I suppose, in North America, where there would be a considerable saving of expense by integrating branches and subsidiary companies. I believe that it was pointed out last year by the British Insurance Association, although I cannot recollect that it was discussed during the debates, that if a tax was to become chargeable on the conversion of an overseas branch into a subsidiary company, there would be a tendency for tax concessions to override commercial considerations in what was, quite rightly, described as an important section of our invisible exports.

During the discussions at the time, the Chief Secretary said that he would look at this matter, and this he did. As a result, he introduced the measures which we have been debating partly this evening. These are very satisfactory as far as they go, but it is still extremely difficult to understand why the 10-year provision has been included, unless, to revert to my opening remark, the Treasury thinks that for administrative convenience, or because of fears that it might be difficult to keep track of the assets which have passed, there must be a limited time in which the concession can be allowed to operate.

It has been suggested to me that in giving Section 468 approval, conditions could be laid down by the Treasury which would ensure that it was informed of the future of the assets and what happened to them over a period of time and that, therefore, it would not be necessary to impose a restriction of this kind.

I am not certain whether the existence of this limit and the possible liability which might arise at the end of 10 years—when, although the assets would not have been disposed of, the frozen period would come to an end—is sufficient to discourage companies taking certain commercial steps, which in normal circumstances they would take, for fear of the fiscal consequences. I do not think that that is likely to weigh heavily with them. Nevertheless, there is the possibility that in considering the possible future of their investments and the possible liability to capital gains tax at the end of a given period, they might be dissuaded from taking action which otherwise would be commercially desirable, both for the insurance companies concerned—and, for that matter, for other companies—and for the nation as a whole.

Although I do not think with any optimism that the Chief Secretary will be disposed to accept Amendments Nos. 109 and 200—I should be delighted if he did—I think that he might give close attention to Amendment No. 290, because this deals with a very real point, and I do not think that the Treasury needs to oppose it. The Treasury is expressing groundless fears in trying to cover the possibility of losing sight of assets which have been moved overseas.

10.15 p.m.

Mr. Diamond

The hon. Member for Wycombe (Mr. John Hall) was good enough to say that the main case which he made in Committee has been met by the Amendment which I have introduced. That is the case of the transferor company disposing of all or any of the shares received in exchange.

The hon. Gentleman is now asking me to go a good deal further and to extend the same privilege where the transferee company makes any disposal of the assets transferred. I did not hear what was the argument for that, except that it was a request. I can see no argument for doing that. We are concerned here with the case where liability to capital gains tax has in the normal sense arisen but, because the transaction takes the form of any exchange of an asset for another asset, one is rolling over for the time being the collection of the duty.

But once the person to whom an asset has been transferred on which capital gains tax would otherwise have been payable has parted with possession of that asset, there is no longer justification for holding over the collection of the capital gains tax, whatever the amount may be. I cannot see what is the argument for suggesting that that provision should be varied.

Mr. John Hall

I was suggesting that the tax should become liable on the effective realisation of shares which were obtained by the company in this country.

Mr. Diamond

The hon. Gentleman is not altering the case which he originally made. He is saying that where a transferee company makes its disposal the hold-over of the tax should still continue either for a short or a long time until the effective realisation to which he refers has taken place. The relevant happening is the disposal by the transferee company of the asset, and, once that happens, the link has been broken and there is no longer any justification for continuing to hold over the collection of the capital gains tax.

The hon. Gentleman then concentrated on the provision under which the assets are not transferred by the transferee, but are held over for 10 years and capital gains tax, notwithstanding that the assets are not transferred, then becomes payable

The hon. Gentleman is quite right. The reason for this is that there is very little control and very limited possibility of following up and vouching for what has happened to the asset. It is therefore necessary to have a simple formula, and 10 years is a reasonable period for which to continue to withhold collection of the capital gains tax.

The hon. Gentleman says that that might just be enough to make a sensible board act uncommercially, having regard to the weight of the capital gains tax which would otherwise become payable. We are talking of 45 per cent. of the gain on an asset. I do not know what the gain would be. But 45 per cent. of a gain is 45 per cent. of a proportion of the asset. If it was a 10 per cent. gain, it is 4½ per cent.

We are talking about the present discounted cash value of 4½ per cent. in 10 years. Anybody who cares to work that out at current rates would not regard it as of such magnitude that the president of a board would regard it as sufficient to deter the company from carrying out its functions in a normal commercial way.

I do not regard this as weighty an argument as the hon. Gentleman normally puts forward. I hope that he will agree that I have met his main point fully in relation to the transferor company disposing of its shares. In those circumstances, I hope that he will feel that his endeavours have met with adequate success and he will not feel it necessary to press the Amendments.

Amendment agreed to.

Further Amendments made: No. 136, in page 157, line 39, leave out paragraph (c) and insert: (c) the company charged to capital all or any of the interest on that borrowed money referable to a period or part of a period ending on or before the disposal, and.

No. 137, in line 43, at end add 'charged to capital'.—[Mr. Diamond.]

Mr. John Hall

I should like to thank the Chief Secretary for tabling these two Amendments, which give effect to something that he promised to do in Committee.

Further Amendments made: No. 138, in page 159, line 11, leave out `first and second companies' and insert 'companies concerned'.

No. 139, in page 160, line 10, leave out 'that Act' and insert 'the Finance Act 1965'.—[Mr. Diamond.]