GILT-EDGED SECURITIES EXEMPT FROM TAX ON CAPITAL GAINS (Hansard, 17 July 1969)

§ Mr. John Hall (Wycombe)
I beg to move Amendment No. 52, in page 51, line 6, after second 'gains' insert: `or case VII of Schedule D income tax'.

§ Mr. Speaker
With this Amendment we may take the following Amendments:

§ Mr. Hall
I come to the starting stocks for the third time, and I hope that I will get off to a good start. These Amendments begin a group of Amendments dealing with capital gains. In the course of our discussions in Committee, the Chief Secretary, who was then replying to some of the Amendments I moved, said that 1017 he nearly always accepted my Amendments. I hope that I shall enjoy that same good fortune from the Financial Secretary, because these Amendments are eminently reasonable, and should, I am sure, commend themselves to the Government. I expect no real difficulty in persuading the Government to accept them, especially as I can speak comparatively briefly.
The Amendments are designed to relieve gilts of all capital gains tax whether they have been held for twelve months or for a longer period. Amendment No. 52 deals with the liability of the individual under Case VII of Schedule D, whereas Amendment No. 54, together with the consequential Amendment No. 111 to Schedule 18, excludes companies from liability.
It will be remembered that in the Finance Act, 1965, short-term gains resulting from the sale of listed Government and Government guaranteed stocks were exempted from capital gains tax. That exemption was withdrawn by Section 33 of the Finance Act, 1968, in the case of aquisitions and disposals after 19th March of that year. This year, much to the gratification of the bodies concerned when first announced, the Chancellor of the Exchequer exempted gilts from future penalties of capital gains tax, although in view of the fact that the losses which were built up on gilts before the relevant date—which must be considerable—can no longer be offset against gains, I should think that the enthusiasm with which the concession was first greeted was rather diminished as time went on.
Presumably, when the Chancellor of the Exchequer gave this concession for gilts he had in mind the importance of strengthening the gilt-edged market. He must realise that failure to allow relief from tax on short-term gains prejudices, and must prejudice the attainment of that objective. The Financial Secretary will doubtless have seen the letter written by the Life Offices Association and the Associated Scottish Life Offices, to the Chancellor of the Exchequer on this point. It is worth recalling one or two of the points they made, because they are associations with considerable experience in the gilt-edged market.
They pointed out: Life assurance offices are big institutional investors and the long-term nature of their 1018 business makes them major dealers in the gilt edged market. They went on to say: The attractions of the market still, however, remain greatly diminished owing to the imposition of a tax on the short-term gains on gilt-edged operations of the institutions. May we therefore make a plea to the Government to go the whole hog and free the gilt-edged market altogether for full institutional participation? Your decision on this could be vitally important from a long-term point of view because of the influence it would have on the amount big institutional investors, like life offices, would trade in the gilt-edged market and therefore invest in it. It is a very powerful point, and I have on other occasions pointed out the necessity of abolishing the tax on short-term gains in any case.
Why does not the Financial Secretary go the whole hog, as the life offices have urged, and abolish the tax on short-term gains on gilts? I should have thought that both logic and self interest would dictate the wisdom of freeing the gilt-edged market from all capital gains liability. It would help to strengthen the market, and might go some way to offset the unfortunate impression perhaps created by the refusal to allow past losses on gilts to be set against capital gains in the market, a point that we have already discussed.
This simple series of Amendments would give effect to something that everyone would welcome, and which I feel sure the Government themselves would welcome. I commend them to the Financial Secretary in the happy confidence that he will find himself able to accept them.

§ Mr. Harold Lever
I start with a considerable prejudice in favour of the Amendment because of course the short-term capital gains tax was an introduction of the Conservative Chancellor and at the time it came in, although it has been continued by the present Government, I was not vociferous in applause for the concept of a short-term capital gains tax. I start therefore with a deal of sympathy in supposing that it is a bad tax.
There are difficulties, however, in giving the relief requested by the Opposition Amendment, on two heads. Firstly, it is true that the more active the dealing impulse in this market the greater the strength of the gilt market ultimately. I have a great deal of sympathy with 1019 that argument and if there were no other argument against it than the simple one that the Chancellor in making the concession was trying to encourage people to buy and hold gilts for some time and not go in and out, I might have been in some difficulty in claiming that the argument for holding was stronger than the active dealing impulse.
But the difficulty is that the market does not lend itself to the exemption of gilts from short-term capital gains tax if there is no long-term capital gain because of the inevitable consequences of any rules and devices to cope with it and as stocks reach a point of coupon dividend they tend to have accrued in their price a rough approximation and sometimes a very exact appraisal of the amount of dividend about to fall due. It is quite clear that if we exempted gilt-edged from capital gains tax on short sales we would allow anyone who wanted to buy gilt-edged and sit for five months to accrue the coupon in the form of capital gains and then to sell.
If the Opposition said that at some point it is worth reviewing the whole rather complex problem involved in disposing of this danger it would have a good point, but in the present state of our affairs, it is not possible to make this concession because of the danger that people would simply buy for four, five or nearly six months before selling gilts and then realise them as capital gains what in fact is nearly six months income.
We have to have regard to the encouragement which the Chancellor seeks to give to people to hold for a rather more substantial period than active dealing. In those circumstances I have to reject the Amendment but I am not out of sympathy with a review of the whole position in due time for reasons which might be advantageous to the Revenue. It may have occurred to hon. Members that this is not in the long term to the advantage of the Revenue. Hon. Members of the opinion that there should never be a tax on gilts may be glad to know that the Revenue are not the gainers but the losers, but for the reasons I have given I think they will agree that in the present state of our tax law and in the present state of accruing coupons we could not consider the exemption of short- 1020 term gains. At present we want a more pronounced encouragement to the somewhat longer holders of gilts by giving them the long-term tax exemption.

§ Mr. Peter Hordern (Horsham)
The Financial Secretary did not seem to be altogether happy with that reply. Has any appraisal been made of the loss of revenue by the selling of gilt-edged securities with the interest involved? Surely it is now of great advantage to insurance companies and other institutions to sell gilt-edged securities on a short-term basis before the year is up, simply because that is the only way in which they can reasonably offset some of their short-term capital gains in other directions. I wonder if the countervailing balance and advantage which the Financial Secretary says is gained by the Revenue by not allowing the capital gains tax not to be applied to short-term transactions is not completely lost by the practice of dealings in this way.

§ Mr. Harold Lever
My fundamental objection to doing it is the present state of the law governing accrued coupons. I do not think that we could remove altogether short-term gains tax, because it would simply be a licence to anybody to invest in gilt-edged securities and derive the whole of the income of his investment as tax free capital gain.
Without going into a statistical inquiry, I am sure that the loss to which we would be open on that head would be much greater than the other source of loss to which the hon. Gentleman referred, which is one of the reasons why I hinted that I can see revenue advantages in abolishing the short-term capital gains tax. However, before that can be undertaken the whole taxation system of accruing coupons would have to be reviewed. This is a rather complex business. We do not want to upset the market by doing it for any foreseeable time ahead. Therefore, I am afraid that we shall have to sacrifice the possibility of removing short-term capital gains tax.

§ Mr. Harold Lever
I beg to move Amendment No. 233, in page 51, line 44, at end add: 'and (c) in relation to a disposal of specified securities to which, by virtue of this subsection, subsection (1) above does not apply, 1021 the expenditure allowable under paragraph 4 of Schedule 6 to the Finance Act, 1965 (cost of acquisition, etc.) shall, notwithstanding the provisions as to the pooling of securities in Schedule 7 to that Act, be determined by reference to the acquisition of the securities identified in accordance with paragraph (b) above'. The purpose of this official Amendment is to clarify the method of computation to be adopted when under Clause 35(4) corporation tax becomes chargeable on a gain realised by a company on a disposable of British Government securities that it has held for not more than 12 months. I hope that this rather technical Amendment will prove acceptable to the House.

§ Mr. Harold Lever
I beg to move Amendment No. 234, in page 52, line 11, at end insert: (7) Part III of Schedule 18 to this Act shall have effect in relation to certain disposals of 6½ per cent. Treasury Stock, 1971 issued by way of compensation in accordance with section 10 of the Iron and Steel Act, 1967. I suggest that with this Amendment we take the related Amendment No. 235, which will add a new Part III to Schedule 18.
This is a concession which allows taxpayers who have had a loss on a holding of steel shares or stock on the time of nationalisation and who received 6½ per cent. Treasury stock by way of compensation to claim relief for this loss if they disposed of their holding of Treasury stock after Budget day, notwithstanding that the disposal of Treasury stock cannot, under Clause 35, give rise to any chargeable gain or allowable loss. This is a provision to deal with the losses of steel share-holders who losses have been converted into a loss in gilts and they are made, I think rightly, the exception to the general rule.