ABOLITION OF CHARGE TO CAPITAL GAINS TAX ON DEATH, ETC.

HC Deb 20 May 1971 vol 817 cc1557-607

5.12 p.m.

Mr. Piers Dixon (Truro)

I beg to move Amendment No. 19, in page 45, line 42, at end add: (3) Where, by virtue of subsection (3) of section 25 of the Finance Act 1965, the assets forming part of any settled property are deemed to be disposed of and reacquired by the trustee on the occasion occurring after 30th March, 1971 when a person becomes absolutely entitled thereto as against the trustee, then, if that occasion is an event other than the termination of a life interest (within the meaning of that section) by the death of the person entitled to that interest, there shall be substituted for the consideration equal to the market value of the said assets a consideration such as to secure that neither a gain nor a loss accrues to the trustee. (4) Where the last preceding subsection of this section applies then in relation to a subsequent disposal of the asset the person making the disposal shall be treated for the purposes of Part II of Schedule 6 to the Finance Act, 1965 as if the trustee's acquisition or provision of the asset had been his or her acquisition or provision of it. (5) Section 25(4) of the Finance Act, 1965 (termination of a life interest in settled property treated as disposal by trustee) shall not apply in relation to any termination of a life interest occurring after 30th March, 1971 otherwise than by reason of the death of the person entitled to that interest. Most of my hon. Friends have been very pleased by the provisions which have been introduced by the Clause, which has gone a long way to removing a number of anomalies involved in deemed disposals. But many of us think that there are still anomalies which continue to exist and could cause really quite unreasonable and capricious examples of unfairness.

I should like to give the Committee a number of examples. For example, a small businessman may have a business worth, say, £20,000. He may die and leave his business to his two sons, one aged 25 and one aged 15, in equal parts, one half to his older son absolutely and the other half to his younger son, through trustees to which the younger son would be entitled absolutely on reaching the age of 21. Let us suppose that the two sons work industriously and vigorously and that by the time the younger son reaches the age of majority the business is then worth £40,000. The younger son, at this point, becomes absolutely entitled to his half share, but he discovers, to his horror, that he has to pay £3,000 to the taxman, and what he thought was worth £20,000 is worth only £17,000. Meanwhile, the older brother goes merrily along with a share which is worth £20,000. I ask the Committee whether this purely capricious arrangement is fair.

Another example would be that of a man who again left £20,000 in investments to his two schoolgirl daughters. He leaves his investments to his trustees, with the power of appointment. In the fullness of time, both girls grow up. The older sister marries a ne'er-do-well spendthrift, and the trustees quite properly decide not to give the older daughter any money but to keep it firmly in their hands. In due course the younger daughter marries a fine, upstanding man, and the trustees have no hesitation in handing over her share to her directly. The money has appreciated—it has been well invested—from £20,000 to £40,000. But the younger girl discovers, to her horror, that she does not receive £20,000 but has to pay capital gains tax and that she and her husband have to be satisfied with the income from £17,000. Meanwhile, her prodigal sister and prodigal brother-in-law continue to live off the income of £20,000. I ask the Committee whether this also is a fair distinction. It is a purely capricious distinction.

Mr. R. T. Paget (Northampton)

If the younger daughter did not want the money, would not the simplest method be to ask the trustees to treat her in the same way as the older sister and retain it for her?

Mr. Dixon

If I were the younger daughter's professional adviser—which I should not be—I would strongly counsel her to do just that. But we are not here to advise citizens how to conform to the capricious behaviour of the law as it is; we are here to try to change the law while we can in order that it should be sensible and consistent.

One final example: there may be a man who leaves, say, £10,000 to his widow during her lifetime and then absolutely to his children, but he may also make a perfectly reasonable provision that if his widow marries again the investments should go absolutely to the children. The money continues to appreciate, but here, incongruously, the more his investments appreciate after his death, the less willingly and less eagerly do his children welcome the possibility of their mother marrying again, and the less willingly do they look forward to the prospect of a step-father joining the family group. Supposing that the investments appreciate from £10,000 to £20,000, at the point where their mother marries again that £20,000 is worth only £17,000. if the mother does not marry again the children will eventually have the full £20,000.

That is not fair and is not conducive to good family relations. If there is an actual disposal of assets, I should be the first person to agree that 70 per cent. of the profits are available actually to be spent; indeed, in certain cases, that money may be spent on riotous living. But in the case of a deemed disposal, no such thing arises, and the beneficiaries continue to have to live strictly within their income.

Under an actual disposal, 30 per cent. of the proceeds are immediately available in cash to answer the demands of the taxman, but under a deemed disposal the wretched beneficiary who has received no cash suddenly has to find some cash. Frequently, in the case of family businesses in particular, it will be difficult to realise that cash. It will often have to be done at a moment when it may not suit the business to realise assets. Other assets may have to be sold, and this will in turn give rise to further capital gains and further capital gains tax. It is with these considerations in mind that I commend the Amendment to the House.

Mr. J. Bruce-Gardyne (South Angus)

I support my hon. Friend the Member for Truro (Mr. Dixon). There can be no defence for the principle of deemed disposal, the basis of which is that tax is charged where no disposal has occurred. We on this side strongly welcome the Government's attempt in this Clause to get rid of this principle. No one should imagine that we are carping at these substantial mercies, but there are still one or two anomalies. I should like to think that the Government could accept the Amendments and get rid altogether of the totally unjustifiable imposition of the deemed disposal introduced by the last Government.

When my hon. Friend mentioned the problem of the estate left in trust to a wife and, on her remarriage, absolutely to the children, I recalled the arguments in another place about the way in which the courts sometimes try to assess a wife's value for remarriage. There has been a great deal of contention about this. I hope that the Amendments could avoid introducing a new element of discrimination when a widow remarries.

I am particularly concerned about the impact of deemed disposals on family companies because of the vital importance of those companies in the economy of areas like Scotland. There is no doubt—this point can be developed on the Question, "That the Clause stand part of the Bill"—that for the family company whose assets cannot easily be realised, deemed disposals create severe problems and may even lead to the forced sale of the company and its absorption into a larger unit.

With the Amendments, we should see the last of this iniquitous imposition coming at the time of death. The United States, which has had a capital gains tax for some time, has never gone to the absurd and unjustifiable lengths of imposing a system of deemed disposals such as the last Government introduced. I should like us to get rid of it altogether.

Mr. Tam Dalyell (West Lothian)

Doubtless we could have a very revealing debate on the family company and the Scottish economy, from which it might emerge that many of Scotland's economic problems are related to this complex and interesting subject. But that is not the point of my intervention.

In our constituency work there arise very complicated questions of settlements as a result of remarriage. I have had to write to the Treasury on three such cases in eight years. Are the Treasury Ministers satisfied that the law in the whole complex of situations surrounding the conditions attached to remarriage is satisfactory? Does it not give the Inland Revenue an absolutely inordinate amount of work? Is this one of the parts of our tax system where there is less than the equity which we normally associate with the British tax system? It may be difficult to answer this question immediately, but perhaps it could be answered in writing or at the convenience of Treasury Ministers. It is a substantial point.

Mr. Peter Hordern (Horsham)

How much will it cost to tidy up all these deemed disposals to which the Amendment applies? I agree with everything said by my hon. Friend the Member for Truro (Mr. Dixon) and the cogent examples he gave.

This Clause is wholly admirable. We felt strongly about the imposition of capital gains tax as well as death duties on death, and voted strongly against this proposition when it was introduced in 1965. Thankfully, the Clause puts this right; but we also felt strongly against the whole principle of deemed disposals. I am glad that the Clause also abolishes the disgraceful artificial valuation of estates at 15-year intervals.

But, that principle having been rejected, and because of the known dislike of the Conservative Party for the monstrous principle of deemed disposals, should not this Amendment be accepted, and more tidying up done, to make it clear not only that we do not accept the principle but that capital gains tax should not apply unless a disposal has taken place?

The Financial Secretary to the Treasury (Mr. Patrick Jenkin)

My hon. Friend the Member for Truro (Mr. Dixon) moved the Amendment in his customary modest and reasonable way, and I will try to respond in kind. To clear up one misapprehension, it would, of course, have been possible for the last Administration to introduce a tax which attached only when there was an actual disposal for cash. Instead, they introduced a tax which attaches to property and imposes a charge in much wider circumstances—not just when there is a disposal for cash nut when there is a disposal.

For instance—this has not been mentioned today—the tax attaches when there is a gift, a disposal without consideration. If the logic of some of the arguments of my hon. Friends were to be followed through, clearly it would extend equally to a disposal by way of gift. This would follow.

5.30 p.m.

One is entitled, on the footing that the tax is a tax on disposals, to have regard to the changes of ownership and in the nature of ownership that take place. For example, when a contingent interest becomes vested or when there is a movement of property under a settlement, as in the third case cited by my hon. Friend the Member for Truro, of the widow who remarried, one may regard that as a disposal, admittedly not for cash, within the general pattern of the tax as it stands.

The Clause was aimed at one particular form of deemed disposal; namely, disposal where there is a concurrent or related charge to estate duty. I remind the Committee of what my right hon. Friend the Chancellor of the Exchequer said in his Budget Statement: To impose this charge on an occasion when the estate, including the accrued gains, is already being charged to estate duty at rates which rise to 80 per cent. results, in my view, in an altogether excessive burden."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1379–80.] For this reason Clause 49 is designedly confined to that range of cases—it is probably true to say that it covers substantially most of the deemed disposals —where there is this concurrent or related charge to estate duty.

As my hon. Friends who have spoken on this issue have pointed out, the Amendment would move the exemption well beyond that, and although there are arguments which can legitimately be advanced in its favour, which is what my hon. Friends have done, the Amendment would go beyond what my right hon. Friend felt was appropriate and necessary in this Budget.

Mr. Joel Barnett (Heywood and Royton)

When the hon. Gentleman says that the Amendment would go beyond what his right hon. Friend wants to do in this Budget, may I ask him to say whether his right hon. Friend is accepting the principle that disposal should be for cash in capital gains tax terms and that he is, therefore, accepting the basic argument presented by his hon. Friends?

Mr. Jenkin

I shall be coming to that later. When we come to the Question "That the Clause stand part of the Bill" I will comment on the Government's attitude towards this whole issue. At this point I am merely saying that in this Budget the relief which we have introduced in this sphere is the one which seemed to us to have the highest priority; namely, the case where the charge to capital gains tax is concurrent with or related to a charge to estate duty on the same property.

My hon. Friend the Member for Truro suggested that the results were capricious. In any reasonably complicated tax system such as ours, it is inevitable that quite minor differences in the treatment of property and in the arrangements which taxpayers may make for their affairs will give rise to differences in their tax treatment. Speaking generally, one would not wish this to happen, unless there were, as it were, justifiable reasons for such a difference in treatment.

For example, in the case of a settlement on an infant where the infant is absolutely entitled, which is a completely bare trust, there is no change in the nature of that infant's ownership of the asset when he comes of age, and capital gains tax does not attach. It is where the contingent interest becomes vested—the first example my hon. Friend gave—that on the present pattern of the tax the tax attaches, because there is a change in the nature of the ownership.

I advance this argument not because I place a great deal of weight on it but because it is fair to point it out, that people will dispose of assets in that form partly with a view to avoiding possible liability to estate duty. Supposing the infant dies before coming of age. If it is a contingent interest ended before it ever vests in possession, no estate duty attaches. One is not, therefore, entitled to say that these results are highly capricious because they turn out to be different, simply because the trusts, relationships and so on are different. Where it is a bare trust, there is no deemed disposal and no attachment.

My hon. Friend the Member for Horsham (Mr. Hordern) asked me to give the cost of meeting the Amendment. I asked the same question and was told that it was not possible to give an estimate of the cost but that it would be likely to be significant. I ask the Committee to bear in mind that the relief which Clause 49 already gives is nothing in 1971–72, because it is matched by the increase in estate duty, but is estimated to amount net in a full year, after taking account of the increase in estate duty, to £15 million. This is significant and represents a modest first step in the reform of capital gains tax to which we were committed when we came to office.

Mr. Barnett

Will the hon. Gentleman give an estimate of the future likely cost of the Clause? He referred to £15 million. What will it cost in future years?

Mr. Jenkin

I could not answer that without notice. However, I will seek the information, and if I get it before the end of the debate I will give it to the hon. Gentleman.

I emphasise that the figure of £15 million is the net cost. If one were to take the gross cost, without allowing for the estate duty exemption, it would, of course, be substantially more. Indeed, it would be £25 million, but there is the extra £10 million of estate duty. In relation to the reliefs given in direct and personal taxation in the Budget, I think the Committee might feel disposed to agree that this represents a reasonable first step.

The hon. Member for Heywood and Royton (Mr. Barnett) asked me to state our attitude to the principle on which the tax is based. I may be able to explore this more fully on the Question "That the Clause stand part of the Bill". At this point I content myself with saying that before the election we undertook to review capital gains tax. We have concentrated in the first seven to 10 months in office on embarking on major reforms in personal, company and indirect taxation. We have made what the Committee may regard as a reasonable first step, by eliminating some of the grosser anomalies in capital gains tax.

Mr. Bruce-Gardyne

My hon. Friend says with justification that the Government have made a reasonable first step in this direction. In contemplating future steps, will the Government look with favour on the American example of a capital gains tax which arises only on disposals of cash?

Mr. Jenkin

I think I would be wise to say no more than what I was about to say, which is that we are continuing our review of the whole system of taxation. There are obviously many areas that require careful study and, perhaps, reform. In carrying out this review, my colleagues in the Treasury will, as they have always said, not exclude anything. We are prepared to look at any precedents, patterns and systems of taxation in any other countries which may have something to teach us.

I see the argument that if one takes deemed disposals as a group, there does not seem to be a great deal of difference in principle between the deemed disposals dealt with in the Bill and the deemed disposals mentioned by my hon. Friends. But if one takes the particular argument which my right hon. Friend advanced in his Budget Statement for limiting the relief at this stage to this case, where there is a concurrent or related estate duty charge, it manifestly does not apply to the class of deemed disposables covered by the Amendment, and it could make a significant addition to the relief we have given.

Of course, the Government are very sensible of the need to make sure that the tax system should not press disproportionately hard on family businesses. Indeed, it may be thought that we have already made a number of quite significant changes. I have no doubt that the Committee has already taken note of an important Amendment, which my hon. Friend the Chief Secretary to the Treasury has tabled for the Committee upstairs, in relation to estate duty. But I am entitled to say of this Amendment that there is already in the law—in Schedule 10(4) of the Finance Act, 1965 —provision for some relief against the possible consequences which my hon. Friend envisaged in the event of a sale of shares in a privately-owned company. Circumstances are spelt out in that provision in which the liability to capital gains tax may be spread over a period of up to eight years in order to avoid the sort of hardships and difficulties which my hon. Friend has in mind. It may be that we shall want at some stage to look at that, but some provision is there already.

If I were asked to sum up in a sentence my attitude to the Amendment, I would say that it is one that I would not be prepared to resist to the last ditch, but that at this stage, in this year, and bearing in mind the relief we have already given and the rationale for confining relief at this stage to cases involving a concurrent estate duty charge and that we are committed to a continuing review of the whole tax system, not least capital gains tax, I hope that my hon. Friend will feel it right not to press the Amendment to a Division.

Mr. John Boyd-Carpenter (Kingston-upon-Thames)

Since it is the normal role of Financial Secretaries to resist innumerable Amendments to the last ditch, I suppose the fact that my hon. Friend excludes the last ditch on this occasion may be some encouragement.

As I understand my hon. Friend's argument, it is that as a first step—I think he used that expression on no fewer than three occasions—he desires to restrict the removal of tax to cases where estate duty falls. On the assumption that as a matter of construction a first step is always followed by at least a second step, I suppose that we can draw some measure of satisfaction from the tone of my hon. Friend's reply, but I want to put to him one or two points arising, even on his own principle.

If I understand my hon. Friend correctly, the Chancellor thinks that on this occasion, as a first step, there should be relief from capital gains tax where estate duty also falls. But how close in point of time must the falling of an estate duty liability be for this principle to operate? I have in mind a simple and fairly usual case of a man with two children who dies when one has attained his majority but the other is still a minor. The man leaves his estate to both. The elder child's portion of the estate will pass —subject, of course, to estate duty—to him under this Clause without capital gains tax falling, but the younger child's share will probably go into the hands of trustees, perhaps for quite a limited time, during the remainder of the minority.

5.45 p.m.

As I understand it, when the younger child comes of age and the trustees hand his portion over to him, there will be liability to capital gains tax. If the minority is a prolonged one—where the younger child is aged only one or two —1 suppose that the principle of only giving the relief where estate duty has also fallen has some respectability as a result of the duration of time since the estate liability arose. But if the remaining minority is quite short—say, a year or 18 months—does it not fall within the principle and is it not unfair that whereas the elder child who, by sheer accident of time, is just of age when the father dies get the full relief of the Clause and pays no capital gains tax on his portion, the younger child, again through the accident of age, encounters a relatively slight delay while the property goes to trustees before coming to him, and thus becomes liable to capital gains tax?

This is a point which has only arisen because of the Government's concession in respect of death. It is, therefore, a new point. Apart from the general principle of there being no capital gains tax where there is no effective realisation, there is the more limited but quite important point that the Chancellor has himself created certain anomalies of this kind by the concession he has made. I appreciate that this is almost always the tiresome consequence of making concessions, and it is an argument which Treasury Ministers from time to time have adduced against making a concession at all. My hon. Friend may indeed fall back on that one. But I ask him to consider seriously whether this is not an unfair anomaly, and also the time factor between the death of the testator and the coming into possession of the minor, on attaining his majority, which, under the Clause as it stands, will exclude the liability to capital gains tax.

Mr. Martin McLaren (Bristol, North-West)

We can take a good deal of comfort and encouragement from the reasonable reply of my hon. Friend the Financial Secretary. I hope that in future years we shall be able to confine the tax to actual disposals made by way of sale and that we shall get rid of the whole business of deemed disposals, because where there is a deemed disposal the law is imputing a state of affairs which is otherwise than reality. That occurs in various places throughout the tax system, and wherever it occurs it brings the system into unpopular and capricious waters. I hope that we shall get rid of all that.

I think it is true that the limited concession in the Clause will open the way to large anomalies unless the door is made wider. For instance, one may have a life tenant who may be such for about 50 years. In the event of his death, no capital gains tax will now be paid. On the other hand, one may have a settlement where there is no life tenant. Then, as the law stands, every 15 years the chopper remorselessly falls. That is not an equitable or fair situation. Now that the dyke has been breached, I hope that the flood will be made more generous, if not this year then next year.

Sir Tatton Brinton (Kidderminster)

Although it may be said by the Revenue that the concession for which we are asking would cost £10 million, £15 million, or whatever the estimate is for this year, and perhaps greater sums in later years, this is not a true cost. It is a deferment of the collection of the capital gains tax.

We are not asking for any removal of a capital gains liability. We are asking merely that it should not be collected until realisation. The base for capital gains tax would be carried forward in the hands of the new presumptive owner in the case of a gift or on a transfer from trustees, and the base would remain as it always was, so that on any ultimate disposal a greater sum of capital gains tax would be paid. The present system of deemed disposal merely collects the inbuilt element of capital gains tax contained in an asset at an earlier date before there is an actual final sale for cash.

In the light of that, it is most misleading to quote a one-year reduction in revenue, because it is deferred. We all know that the Revenue is always inclined to make the taxpayer pay up earlier in the case of capital gains tax. This tendency should be resisted. Payment should fall due on final disposal only. I stress again that there would be no ultimate loss of tax to the nation.

Mr. Patrick Jenkin

I entirely take the point made by my hon. Friend the Member for Kidderminster (Sir T. Brinton), that as the Amendment has been drafted it is a deferment of tax. However, there are certain categories of assets which on any reasonable balance of probability would never be disposed of for value, and it is a question of judgment and of balancing the various claims upon the Exchequer and upon taxpayers before deciding whether one postpones, as it were, for ever any liability to capital gains tax.

To my hon. Friend the Member for Bristol, North-West (Mr. McLaren) I say —I say this with hesitation to an hon. Member who has been in the House of Commons for longer than I have—that it is not exactly an invitation to a Treasury Minister to make a small concession to be told that now that he has opened the dyke the breach must be widened and the flood must come pouring through. My right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) indicated that this was an argument which Treasury Minister were prone to put in resisting any concessions. My right hon. Friend the Chancellor has made a limited concession in the Budget, but it is one of some significance, and to go beyond it at this stage would be wrong.

I feel with some glee that we may have caught out my right hon. Friend the Member for Kingston-upon-Thames. We are talking about a capital gains tax. We are talking about a tax on gains realised at particular times. It follows that the exemption in the Clause is for gains that have accrued up to the date of a death. They are then charged to estate duty and we exempt them from capital gains. Any further gains that accrue after the date of the death, as in the example my right hon. Friend took, are not affected by the exemption we have given, because the effect of the exemption includes also a writing up of the value of the asset at the date of the death.

The logic of the concession which is embodied in the Clause is that those gains up to the point of death are taxed; they are subject to estate duty. My right hon. Friend made it clear that it was excessive that they should be charged to two taxes, that they should be subjected to a dual taxation. They have paid tax. Any further gains subject to tax, as in my right hon. Friend's example, start afresh. Even if the beneficiary disposes of the assets within a year it is entirely appropriate and in accordance with the principles of tax law that any gains between the date of the death and the date of the disposal should be subject to capital gains.

Mr. Boyd-Carpenter

I do not think that my right hon. Friend has quite got the point. I was putting the case of the two beneficiaries, one of whom being of age obtains and continues, let us assume, to hold the property bequeathed, free in the meantime of capital gains. The other beneficiary, simply through the accident of the age that he or she is at the death of the testator, is kept out of the property for a year or two and therefore gets the property minus the capital gains which have accrued since the testator's death. Therefore, though the younger child may have been left precisely the same amount as the elder, through the purely capricious accident of age he gets a smaller bequest. This is an anomaly. If my hon. Friend were in that position I am sure that he would feel it.

Mr. Jenkin

I accept the case that my right hon. Friend is making now, but it is exactly the case which was made by my hon. Friend the Member for Truro (Mr. Dixon). I understood that my right hon. Friend was earlier attempting to justify dealing with that case by reference to the death which had immediately preceded it. I was concerned to say that the exemption in the Clause on that death relates to gains which have accrued up to the date of that death and it in no way relates to any gains which have accrued subsequently. Even if the disposal after the death takes place after one year, five years or 10 years, it does not seem to me to advance the argument to say that other gains were subject to another tax earlier on. I would find it very difficult to accept on that logic that we should extend the relief given in the Clause as suggested in the Amendment.

I hope that I have said enough to indicate the reasons why I hope that my hon. Friends will feel it right not to press the Amendment this year. I give an undertaking that we will study it in the course of our continuing review of the capital gains taxation. With that, perhaps my hon. Friend the Member for Truro will feel disposed not to press the Amendment.

Mr. Dixon

I am slightly disappointed by what my hon. Friend the Financial Secretary has just said to us. In particular, I was not entirely impressed when he said that certain capricious situations might well arise under the proposed legislation, but, after all, there are many other capricious situations. I prefer to think that the rôle of hon. Members is to help Ministers to iron out some of these capricious situations.

However, my hon. Friend has in his remarks, particularly those about the future year, given many of us much comfort and much comfort to small businesses. Therefore, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Question proposed, That the Clause stand part of the Bill.

[Sir ROBERT GRANT-FERRIS in the Chair.]

Mr. David Marquand (Ashfield)

It is rather sad to have to move to a certain amount of controversy with the Financial Secretary from having been able to sit back and enjoy the skill with which he resisted his hon. Friends on the last Amendment. I am sorry to say that a certain amount of controversy is bound to arise in this debate.

On Second Reading the Chancellor of the Exchequer expressed the hope that when the Clause was considered he would have the support of the Opposition. I am sorry to have to tell the Chancellor—I do not suppose he will be particularly surprised to hear it—that we have now considered the Clause very carefully and the more we have considered it the more we dislike it.

Before stating the arguments which have led us to this conclusion, I want to put some questions to the Financial Secretary about the Government's assumptions regarding the Clause. On page 28 of the Financial Statement, the Government say that the net loss which this Clause will impose on the Revenue in a full year will be £15 million, and that this is to be made up of a fall in the yield of capital gains tax of £30 million—

6.0 p.m.

Mr. Patrick Jenkin

No, £25 million.

Mr. Marquand

Footnote (a) refers to £30 million and £15 million.

Mr. Jenkin

Perhaps I can help the hon. Gentleman. Inevitably, the Inland Revenue has adjusted its estimates as further information has become available. I am advised that the right figures are £25 million, with a further £10 million for estate duty, and, therefore, a net loss of £15 million.

Mr. Marquand

I am obliged to the hon. Gentleman. The point which I ask him to elucidate is one which was raised briefly by my hon. Friend the Member for Heywood and Royton (Mr. Barnett), as to what exactly the Government mean by "a full year". Does it mean the next full year, or a full year later on? This is very important, because the whole nature of capital gains tax is such that the yield will build up over a longish period of time. The capital gains tax on individuals yielded £7.5 million in 1966–67 and, according to the Financial Statement, the yield in 1970–71 is £140 million. This is a substantial buildup since it was first introduced.

Obviously the build-up is likely to continue for a considerable period—at the very least, for the first 15 years—because the provisions regarding trusts will start to have effect only then, and in some cases there may be deferrals to a very much later date, so that the full effect of the 1965 provisions will not come into effect until 35 or 40 years after that date.

If the Committee is to appraise the significance of what the Government propose in this Clause, it is important to know how far ahead the Revenue's estimates of the cost go. I know that it is difficult for the hon. Gentleman to provide precise figures, for obvious reasons, but it would be helpful if we could have some idea of the Treasury's thinking on this matter.

In a way, my second question is even more important. In the United States it is generally assumed that, as a result of the fact that under American law capital gains tax is not charged at death, something like two-thirds of the total of capital gains which would otherwise be taxed escape taxation. The Government estimate that the loss of revenue from capital gains tax as a result of this Clause will be only £25 million obviously implies that they take a very different view. It seems to hon. Members on this side of the Committee that it is essential for the Government to explain why they take such a different view from that taken by the authorities in the United States. It is essential, too, that we should be told what assumptions the Government are making about what is sometimes called the "locking in" effect of this provision.

The Financial Secretary will know that two successive Secretaries of the United States Treasury, neither exactly a bloody-handed Bolshevik—Secretary Douglas Dillon in 1963 and Secretary Henry Fowler in 1969—told the Congress that in their view the fact that capital gains tax is not charged at death has had a significant effect on the behaviour of elderly property owners.

In 1963 Secretary Dillon said: Present law permits the exemption from income tax"— under American law, of course, capital gains tax counts as income tax— of capital gains accrued when the appreciated assets are transferred at death. The prospect of eventual tax-free transfer of accrued gains with a stepped-up basis equal to the new market value in the hands of heirs distorts investment choices and frequently results in complete immobility of investments of older persons. Secretary Dillon, of course, was a pillar of financial orthodoxy in the United States.

One of his successors, Secretary Fowler, told the House Ways and Means Committee and the Senate Finance Committee in February, 1969: When tax liability is allowed to depend on whether an appreciated asset is sold or kept until death, the tax law operates to produce undesirable economic effects, particularly in cases of older people. Assets become immobilised; investors become 'locked-in' by the prospect of avoiding income tax completely if they hold appreciated assets until death rather than selling them. This freezing of investment positions deprives the economy of the fruits of an unencumbered flow of capital toward areas of enterprise promising larger rewards. One of the reasons why many American authorities have concluded that as much as two-thirds of the total capital gains which would otherwise be subject to tax in the United States escaped taxation because of the exemption at death is the result of this locking-in effect. If we are to judge the full effect of Clause 49 on the Revenue, it is essential to know what view Her Majesty's Government take about locking in by elderly people. When they forecast that the yield of capital gains tax will fall by only £25 million, are they assuming that the Clause will have no effect on capital disposals by elderly people? If they are assuming that, what possible reason can they have for believing that British property owners will behave in such a markedly different fashion from their American counterparts? If they do not assume that, what possible value can their estimates have? It is essential to have some indication of the assumptions and thinking of the Government on this matter if we are to appraise the Clause in a sensible fashion.

I turn now to the arguments which I imagine will be produced in favour of the Clause and which support the proposition that for capital gains tax death should not count as a disposal.

I was not a Member of this House in the strenuous days of 1965. Perhaps it was good for my health that I was not. However, I have been reading the debates on the 1965 Finance Bill to discover the major arguments against deemed disposal on death. I think that I can guess which passages the Financial Secretary may have thought of quoting.

It appears that three main arguments have been advanced. The first is that to charge capital gains at death is inequitable because it is a form of double taxation, in the sense that the Revenue has both estate duty and capital gains tax. However, that argument involves a fundamental misconception of what capital gains tax is. Estate duty is levied on the estate as a whole, but capital gains tax is levied on the increase in spending power resulting from the appreciation of a capital asset. The two are quite different.

The Government can, if they wish, say that they do not want a capital gains tax at all. They can say that it is wrong to tax this form of increment in spending power for many reasons. There are powerful arguments for that view, which on balance I do not accept, but they can say that.

If the Government accept the proposition that capital gains ought to be taxed, it seems that in logic they cannot advance the argument that capital gains tax and estate duty comprise a form of double taxation, that if we are to have a capital gains tax it can only be to tax an increase in spending power and that this is different from the total worth of an estate.

Mr. Bruce-Gardyne

Is the hon. Gentleman trying to say that particular assets which fall to be taxed for estate duty and capital gains tax are, in some sense, different capital assets? If so, in what way?

Mr. Marquand

I am not saying that. Capital gains tax is not a tax on the capital asset as such; it is a tax on the difference between the worth of the asset when first acquired and its worth now. It is not the same as a tax on the total asset as such. If the hon. Gentleman cannot see this point, I am sorry for him. It is clear to me and, I think, to the Financial Secretary. If not, then in logic the Government would be abandoning the whole idea of the capital gains tax altogether.

Mr. Patrick Jenkin

The only person to whom it was not clear was the person who was to pay it.

Mr. Marquand

That may be.

Sir T. Brinton

Will the hon. Gentleman give way?

Mr. Marquand

No.

Sir T. Brinton

This is relevant to the hon. Gentleman's argument.

Mr. Marquand

It may be relevant, but it is difficult to deal schizophrenically with two different interventions at the same time. I had better deal first with what the Financial Secretary said about its not being clear to the individual who paid the tax. I shall be coming to the possible hardship which might be caused. My point is that there is a clear distinction in logic between the two different taxes.

Sir T. Brinton

I am grateful to the hon. Gentleman for giving way. I apologise for interrupting him again. I was going to agree with the point which he stressed several times. In dealing with the philosophy behind the capital gains tax the hon. Gentleman has three times used the expression "increment" or "increase in spending power". I am entirely in agreement; that is also my concept. But the corollary surely is that this spending power only becomes spending power if the asset is realised. In other words, the object of the capital gains tax—I was glad to hear him almost admit it—was to get at assets which were realised at a profit and the proceeds used for other purposes. When the asset is preserved as a saving and not realised, there is obviously no increment in spending power.

Mr. Marquand

The burden of the hon. Gentleman's remarks is that we should not count death as a disposal. I shall come to that fundamental argument later. If he will bear with me, I will not answer that point now.

The second ground advanced during the debates in 1965, which was also put forward, at least by implication, by the Chancellor when he spoke about this matter either in his Budget Statement or on Second Reading, was that of hardship, that the combination of capital gains tax and estate duty coming at the same time caused a great deal of hardship to individuals and particularly to small businesses. I necessarily take the hardship argument seriously. However, it is important to point out that in 1965 the Government tried to go some way to meet that argument. It may be that they did not go far enough. I am not saying that they did. However, it seems a dangerous proposition to say that because of the hardship argument we must destroy one of the fundamental pillars on which the capital gains tax is based rather than try to deal with hardship in other ways. This is the central point in that connection.

6.15 p.m.

A third reason was advanced by the Financial Secretary not in the 1965 debates but more recently in the Budget debate on 1st April, when he seemed to be implying that a reason for eliminating deemed disposal on death was that the capital gains tax, as it now works, is a tax on inflation. Perhaps I should remind the hon. Gentleman of his remarks on that occasion. He said: We have been pressed over the past few months to provide a taper for capital gains tax to prevent it being a tax on inflation. I do not think that it has been generally appreciated that ending the deemed disposal on death goes part of the way to meet that case…In that way we can claim to have met at least in part the criticism of the tax which has been widely voiced."—[OFFICIAL REPORT, 1st April, 1971; Vol. 814, c. 1697.] That is a very dangerous argument for the Financial Secretary to use. If the argument about deemed disposal on death is valid, then it is valid about the capital gains tax. If the Government are saying that the paper appreciation in capital values which has taken place is not the real appreciation and it is therefore wrong and inequitable to tax the paper appreciation because this is merely the result of inflation, then that argument applies to capital gains tax. Therefore, to introduce the argument as a justification for eliminating the deemed disposal seems to be opening the door to pressure on the Government from their back benchers eventually to eliminate the capital gains tax altogether. That argument is not valid in any case.

It is true that inflation can mean that paper capital gains are larger than real capital gains; but the same is true of earned or any other income. If the Government are saying that taxation ought not to be levied on increases in income which result from inflation and do not represent real gains, it seems that what we have now will be somewhat different from the Budget which was announced.

I turn to the argument against the Clause and in favour of retaining the deemed disposal on death. The fundamental point is that deemed disposal on death is an integral part of an effective capital gains tax and that without it capital gains tax will be much less likely to achieve the aims for which it was designed.

In our view the capital gains tax is designed to serve two major purposes. First, it is designed to create greater equity between one taxpayer and another. As I said before—the hon. Member for Kidderminster (Sir T. Brinton) reminded me that I had said it several times, so I feel a little apologetic for saying it again—in our view capital gains represent an increase in spending power as much as income does and, therefore, they ought to be taxed for that reason. It is inequitable to levy taxation on those who increase their spending power as a result of income and not to tax those who increase their spending power as a result of capital gains. That is why the United States has had taxation of capital gains in one form or another ever since the federal income tax was introduced; it has always regarded capital gains as being a form of income.

Second, we believe as a matter of principle in the redistribution of wealth and income in our society. Capital gains bulk very much larger in the incomes of wealth people than in the incomes of those lower down the scale. There can be no dispute about that. If we fail to tax capital gains, we are discriminating heavily in favour of wealthy members of society.

Why does the removal of deemed disposal on death interfere with those aims? I have already mentioned that in the view of many competent authorities in the United States about two-thirds of capital gains escape taxation via that route, which is being introduced into the Bill. The result is to lower the effective rate of tax on capital gains to around 10 per cent. instead of the figure of over 30 per cent. which it is theoretically.

I have quoted Secretary Fowler once, but it is worth quoting him again. This is what he told the House Ways and Means Committee and the Senate Committee on Finance in 1969: It is apparent that the present system of not taxing appreciation on assets transferred at death has serious defects: The present system is grossly inequitable and substantially impairs the progressivity of the tax structure. At least $15 billion a year of capital gains fall completely outside the income tax system. The Government may say that that will not happen here, but if they are to persuade us of that it is up to them to demonstrate why.

If the Clause is passed, the situation which American tax reformers have deplored, and which two successive American Administrations have tried to change, will be created in this country. The "lock-in" effect will be produced here, with resulting ill effects on the capital market. That is an argument which should appeal to Conservative hon. Members. Since the heir to a capital asset will he deemed to have acquired it at its value when he inherited it, the appreciation between its original acquisition and the death will never be taxed, even if the heir later disposes of it. There can be no doubt that it will mean that in many cases capital gains will in effect be handed down from generation to generation and escape taxation altogether.

Mr. Cecil Parkinson (Enfield, West)

Is the hon. Gentleman taking into account estate duty? Only if estate duty is paid will the exemption be available. In other words, there is a capital levy on death, but the hon. Gentleman seems to be ignoring it.

Mr. Marquand

I do not want to retrace my steps that far back in the argument. I have tried to deal with the point about estate duty. I put forward the argument which I think the Financial Secretary implicitly accepted for himself, even if not as far as the taxpayer is concerned, that estate duty and capital gains tax are levied on different things. Therefore, the hon. Gentleman's intervention does not apply.

The Clause will produce a situation that is inequitable as between individuals and unjust as between social classes. Therefore, I urge my hon. Friends to register their opposition to it in the Lobby.

I go further than that. An Opposition should always think twice before committing themselves to repeal legislation introduced by the Government of the day. In this case, we have considered the advantages and disadvantages of making such a commitment very carefully, and have come to the conclusion that, to give fair warning about the policy of a future Labour Government, it is right to make clear now that when we return to power we shall repeal the Clause and restore the integrity of the tax. As to the charge of capital gains tax on death and the associated provisions with regard to trusts, we shall restore the position to what it would have been if this Bill had never been introduced.

Mr. Bruce-Gardyne

I listened with great interest to the hon. Member for Ashfield (Mr. Marquand). If he were a magistrate, I would not much like to come up before him for speeding where there was a 30 m.p.h. limit, because he would say, "I shall fine you £5 for exceeding the 30 m.p.h. limit, and as that limit subsumes the 40 m.p.h. limit, and you were driving at 50 m.p.h., I shall fine you another £5 for going at more than 40 m.p.h." I would not find that equitable or acceptable. That, it seems to me, was the hon. Gentleman's basic argument in trying to pretend that capital gains tax levied on top of the incidence of death duty was not double taxation of the same assets. As my hon. Friend the Financial Secretary said, it certainly must feel that way to the individual who suffers from it.

I was interested to hear why the Opposition chose to debate the Clause on the floor of the House, and to hear all their arguments for voting against it. At one point I thought that we would have the remarkable spectacle of the Opposition marching into the Lobbies against the Clause on the ground that it would inhibit the unencumbered flow of funds to companies promising larger rewards. That would have been the day, particularly after the Opposition's efforts in opposing Clause 22, and the possibility outlined there of encouraging the movement of assets to companies that could use them more effectively by reducing the element of discrimination against investment income.

I was also very interested in the way in which the hon. Gentleman kept harping back to the United States. At one point he said that the United States had had a capital gains tax for years. Indeed, it has, and, it is also very careful never to have made the provisions which the Clause is designed to remove from the tax.

Mr. Marquand

Two Administrations, the Johnson Administration and the Kennedy Administration, both of which I should have thought the hon. Gentleman would regard as being less than bloody Bolsheviks, have sought to do exactly what the Clause undoes for us.

Mr. Bruce-Gardyne

Yes, and Congress in its wisdom always prevented them from doing so, as I am sure the Committee tonight will prevent the hon. Gentleman doing what he wants to do. I was depressed to hear him commit his party to repealing at least part of the Clause. I listened carefully, and I gathered that he was not committing it to repeal the 15-year provision.

Mr. Marquand

I did say, "…together with the associated provisions regarding trusts." That covers that point.

Mr. Bruce-Gardyne

That only makes the position worse. I was depressed to hear that, because I wonder whether the Opposition have appreciated the impact which the provisions which the Clause is designed to repeal have had, and are having, on family companies. That is the particular burden to which I want to refer briefly this evening.

6.30 p.m.

My right hon. Friend the Chancellor made the case very clearly in his Budget Statement, when he said: To impose this charge"— that is the charge to capital gains tax on death— on an occasion when the estate, including the accrued gains, is already being charged to estate duty at rates which rise to 80 per cent. results, in my view, in an altogether excessive burden, and this can cause particular difficulties for family companies."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1379–80.] I am particularly concerned about this, because I believe that the damage which this sort of legislation has done to family companies has been particularly deleterious in areas like Scotland, and I want to explain briefly why I hold that view.

The effect of capital gains tax impositions on top of extremely onerous estate duty tax and the effect of the 15-year disposal rule, on family companies, where the assets are not easily marketable or realisable, can be fairly catastrophic, and the direct effect is that in so many cases it has forced family companies to sell out to larger concerns which can offer them a marketable equity. The trouble about that is that the larger concern is often a United Kingdom-based group—probably based in London—which, as we have seen all too often in recent months, may take very little notice of the subsidiary which it has acquired under those circumstances, which used to have profound local roots in areas like Scotland.

Those who are concerned, as some of us are, about the way in which areas like Scotland are in danger of becoming what have been described as branch factory economies, should view with particular alarm undertakings by the Labour Party to encourage further the disappearance of the only type of companies that are likely to have profound local roots, with research and development and management on the spot in Scotland. I hope that the hon. Member for West Lothian (Mr. Dalyell) and his hon. Friends from Scotland will appreciate that when they go into the Lobby tonight to vote in favour of the clear undertaking given by the hon. Member for Ashfield to reverse the provisions which are designed to diminish the damage to family companies, they are voting, in effect, for the extension of a branch factory economy in areas like Scotland, and the destruction of local management with local research and development facilities. I hope that the activities of hon. Gentlemen opposite will be appreciated in areas like Scotland where so much damage has already been done by this kind of Clause.

Mr. Michael Meacher (Oldham, West)

I believe that my hon. Friend the Member for Ashfield (Mr. Marquand) has dealt ably with the question of tax gains accruing to the rich as a result of this Clause. Although that is obviously a main aspect of the Clause, the amount of revenue forgone as a result of this tax concession is by no means the only issue raised, and I wish to dwell on another aspect of it.

That is particularly the case since these charges to capital gains tax imposed under Section 25 of the 1965 Finance Act and now proposed for repeal, were so easily avoided. The treating of the end of certain 15-year periods as the termination of life interest in settled property was easily avoided as a result of taking out a life interest just prior to the date by paying an annuity to one of the beneficiaries. Under Section 10 of the 1966 Finance Act an annuitant is regarded as a life tenant. Once the precise date concluding a 15-year period was safely passed, the payment of the annuity could immediately be stopped.

Similarly, the charge to capital gains tax was never particularly onerous because, under Section 26 of the 1965 Finance Act, it was stipulated that it was treatable as a debt to the estate, so that even the estate which was subject to the top marginal rate of 80 per cent. was still entitled to a remission of four-fifths of the charge.

But even if the amount of revenue forgone as a result of this tax concession is not a prime consideration, at least in the short-term, there are two matters which are of prime importance.

The first is the Government's attitude to discretionary trusts. Is it the Government's view that discretionary trusts should be given a free rein to drive a horse and carriage through the estate duty regulations? I accept that is well recognised that discretionary trusts in feudal times, when based on the tenure of freehold land, had a proper function, but now that the principal assets are entirely stocks and shares, the prime object of the settlor, in almost every case, is a diminution of the incidence of taxation on the income of beneficiaries, and on the estate as a whole or on its transmission on the death of the settlor.

Apart from the anti-avoidance legislation in the 1969 Act, virtually the only other main limitation on the permanent exclusion of family settlements from liability to estate duty are laid down by the generous perpetuity periods provided under the Perpetuities and Accumulations Act of 1964. Almost certainly, however, if the trustees know what they are doing the capital will have been distributed well before that, and it is able to embark on a new lease of life entirely free of estate duty, and subject only to the 7-year rule risk, but subject only to that.

In order to assist the disappearance of large amounts of capital from the attentions of the estate duty office, the courts have been equally obliging. Where a settlement has been drafted in an imprudent manner, or where its tax saving clauses have been overtaken by subsequent anti-avoidance legislation, steps can be taken to vary the trust deed. It is true that in the case of infants, or unascertained beneficiaries, an application must be made to the courts, and that can be made under the Variation of Trusts Act, but the use to which this Act has been put is almost entirely one of tax avoidance, and there is virtually no court decision in recent times, with one exception, when an application to vary the trust has been refused on the ground that its object was tax avoidance.

The Government may take the view, and I have heard the Financial Secretary express it, that tax avoidance is acceptable provided it keeps within the law.

Sir Gerald Nabarro (Worcestershire, South)

Hear, hear. That is what the law is for.

Mr. Meacher

I shall come to that. I submit very firmly that—

Mr. Patrick Jenkin

The hon. Gentleman has purported to quote me. If he is going to put words into my mouth, he must quote exactly what I said, otherwise he will give a misleading slant to my views.

Mr. Meacher

Would the hon. Gentleman like to state his position on this issue?

Mr. Jenkin

The hon. Gentleman referred to what I said.

Mr. Meacher

I was not quoting the hon. Gentleman's words. I was putting forward what I thought was clearly his view, which he gave the House a few nights ago in his winding-up speech. I do not think that the hon. Gentleman can escape from the view—but I invite him to try—that he accepts that where tax avoidance can take place within the law that is acceptable to the Conservative Party and to the Government. I submit that such split-mindedness will not do. The Government cannot pose on the one hand, acting on the advice of the Inland Revenue, as the guardians and upholders of the tax laws, while at the same time conniving at the efforts of the City to undo the effects of those same laws. Morality cannot be divided by such unscrupulous hair-splitting distinctions.

Sir G. Nabarro

While we are on the question of fiscal morality perhaps the hon. Gentleman could explain to the Committee why the Labour Government decided that it would be a good thing to retain capital gains duty not only in respect of appreciation, of equities or unit trusts but also capital gains duty on all gilt-edged stocks, thereby so warping the whole of the capital gains duty arrangements as to invite on the part of all investors legal avoidance of capital gains duty. Answer that point.

Mr. Meacher

I can very easily answer it.

Sir G. Nabarro

But the hon. Gentleman will only give a wrong answer.

Mr. Meacher

The hon. Gentleman would be advised to listen before he makes a judgment. It seems to me that fiscal administration of the market of this kind is entirely separate from legal avoidance, where the object is to reduce the amount of tax which has tended to accrue from capital appreciation. This is merely a perfectly proper way of manipulating the market to ensure a proper flow into a socially desirable end, such as gilt-edged stocks. It is entirely different.

Sir G. Nabarro

Since the hon. Gentleman feels that investment in gilt-edged stocks is socially desirable but that investment in, for example, I.C.I., the Hudson Bay Company, and other blue chip equity stock is socially undesirable, he should take his fiscal philosophy to a soap box in Hyde Park rather than to employ it in a Committee of the House of Commons.

Mr. Meacher

Before making allegaitons of that kind the hon. Gentleman would do well to listen to the logic of what I have said.

Sir G. Nabarro

There is no logic in it.

Mr. Meacher

The fact that the hon. Gentleman does not understand it does not mean that there is no logic in it. The fact that socially it is proper to manage the market in a particular way by no means indicates that it is socially improper—and, of course, it is not—to invest in blue-chip equities. The point I am making is that since discretionary trusts are widely recognised as tax avoidance devices on a massive scale, and since it is widely accepted that they have lost whatever positive function they may have had, the Government's refusal to move on this matter can only be construed as condoning manipulation by the rich, while at the same time busily appointing the Fisher Committee to pry into the petty misdeeds of the poor.

The Government's indifference to the violation of the proper function of family settlements is also evident from international comparisons. The American and West German Governments at present have recently been endeavouring to take steps to overcome the protection afforded from investigation by the tax authorities as a result of establishing a trust in Lichtenstein, with its favourable trust laws, and the opening of a Swiss bank as trustees to take full advantage of the Swiss banking secrecy laws. But this Government's palsied posturing of inactivity on this account is now to be reinforced by Clause 49. As a result these private trusts will be freed even further from any regulation whatever.

This same insouciance was displayed in an Answer given to me by the Financial Secretary on 11th February. I then asked: how many private discretionary and other family settlements are in operation in Great Britain; and what is his estimate of the amount of money covered by such trusts? The Answer was: This information is not available."—[OFFICIAL REPORT, 11th February, 1971; Vol. 810, c 241.] And the Government have no intention of finding out.

Professor Ravel, an extremely well known authority on this subject, is perhaps more mindful of this matter than the Government and recently sought to establish the magnitude of these trusts by calculating the aggregate market value of personal trusts administered by corporate trustees. The figure he reached for 1961 was £1,700 million. Today it is probably nearer £3,000 million.

Sir G. Nabarro

He made it up.

Mr. Meacher

The hon. Member for Worcestershire, South makes such remarks when he finds certain facts extremely inconvenient.

Sir G. Nabarro

rose—

6.45 p.m.

Mr. Meacher

No, I will not give way to any further unnecessary interruptions based on such lack of knowledge. As I was saying, the value of such private trusts today is probably in the region of £3,000 million, but even in 1961 they came to a value of some 3½ per cent. of the Inland Revenue's estimate of total net personal wealth.

I return to my fundamental question. What do the Government regard as a proper system of tax for discretionary trusts? There was an advertisement only a year ago in the Law Society Gazette which said The disadvantages caused by the Finance Act 1969 can be overcome with skilful drafting and careful administration. It is possible to (1) avoid a charge to estate duty on a trust asset on the death of any beneficiary, (2) increase the net income to beneficiaries, and (3) avoid the charge to capital gains tax normally made on trust assets. Of course, the third of those does not now apply since it has been made entirely otiose by the Clause. But these were not mere preening of advertisement copy. Since the central difficulty in taxing discretionary trusts, that of measuring what share of the total income of the fund any single beneficiary may be said to own, has been resolved by calculating what share of the total income of the fund has been paid out to him over the seven years preceding his death, which in many cases is a nil amount, then death duty liability will still often remain even under the new dispensation at precisely nothing. By ensuring that the only beneficiaries to whom income is paid are young ones, there is little risk even under the present rules. Where there are older beneficiaries who require further income, then various arrangements can be made—for example, by gearing the trust policies to capital appreciation without income, for example through life endowment policies, or through capital shares, or works of art which yield no income at all. I again ask what the Government intend to do about discretionary trusts. Do they propose to stand idly by while permitting this flagrant tax avoidance to flourish, which is contrary to any clear function served by such family settlements?

This prompts me to ask my second main question. With what justification do the Government propose to abolish certain capital taxes when it is widely acknowledged that the volume of taxes on capital is unduly low in comparison with the volume of taxes on income? Also there is evidence that the discrepancy is widening. In 1969–70 taxes on capital comprised only 8.4 per cent. of the total Government tax revenue, while taxes on income came to 91.6 per cent. But by 1970–71 the provisional outturn suggests the proportion yielded by capital taxes fell to 7.9 per cent. Do the Government intend to promote this trend artificially even further? Will the Financial Secretary tell the House loud and clear precisely what the Government regard as the proper balance of taxes on capital as compared with taxes on income?

The Clause will not make a huge difference, at least in the short term, to the Treasury's coffer. Of far greater symbolic importance is the glaring manner in which it has once again been so clearly exposed how soft the Government are on wealth holders, and softest of all on that tiny coterie of its supporters whose wealth is large enough to be tied up in sizeable discretionary trusts and whose obvious machinations will now be able to proceed much more easily.

Mr. Peter Rees (Dover)

I had not intended to intervene in the debate but, having been treated to a lecture on tax avoidance by the hon. Member for Oldham, West (Mr. Meacher), a lecture larded with unlikely metaphors and a great deal of inaccuracy, I feel stung to intervene briefly—

Sir G. Nabarro

Mostly hallucinations.

Mr. Rees

The burden of the hon. Gentleman's complaint seems to be, on the one hand, that the rather unworthy measures of the capital gains tax legislation in 1965 are to be decently interred today, or so I hope, or, on the other hand, those measures were not particularly effective. It must be one way or the other, but not both. Perhaps at the risk of sounding a little portentous I may be allowed to put him right on one or two things.

In point of history, discretionary settlements were not known in feudal times, and were never a satisfactory vehicle for holding land. On the matter of tax avoid-dance, in which he, like so many of his hon. Friends, seems to be obsessed, it was not all that easy to escape the 15-year charge by appointing an annuity. Many professional people would have been very doubtful about giving that advice. It is only because the hon. Gentleman has never had the responsibility of giving professional advice that he has made it sound so simple.

Mr. Meacher

From his vast knowledge, as someone who did give professional advice, will the hon. and learned Gentleman say what professional advice he would have given to enable rich clients to avoid this duty?

Mr. Rees

I will certainly not bore the House with advice which I might have given in a hypothetical situation.

Forgive me for sounding a little pedantic, but if the hon. Gentleman had had to cope with the multiplicity of cases one meets in professional life, the variations in settlements and so on, he would not have made the avoidance measures which he has been bandying around sound so easy. They are by no means foolproof, and I very much doubt whether those who are advising my hon. Friend the Financial Secretary to the Treasury would have said that they were not worth testing out in the courts. If they had been worth testing out in the courts, I am not at all certain that they would have stood up to close scrutiny.

The hon. Gentleman said that the charge on death was not very effective because it was deductible. Again, it must be one way or the other. Until this Finance Bill there were two charges on death, one under estate duty and one under capital gains tax. It is not, as the hon. Member for Ashfield (Mr. Marquand) said, as if they were charged on different bases. It is a case of the greater comprising the less. Estate duty is subject to a low threshold, and here I congratulate my right hon. Friend the Chancellor of the Exchequer on raising the threshold. I hope that he will raise it further in subsequent Finance Bills. Subject to that threshold, every single asset, whether or not it has increased in value, is subject to estate duty. Capital gains tax was charged only on capital appreciation. Since we are talking about capital appreciation in an era of inflation, it is right to stress that many chargeable gains are not in any real commercial sense a gain. They are purely illusory.

Mr. Barnett

Wages.

Mr. Rees

Wages on the whole have done considerably better than dividends. The share taken by dividends has been a good deal less over the last ten years. Dividends have not held their proportion in an inflationary era, and we have to bear that in mind.

The third point casually thrown out by the hon. Member for Oldham, West was, "What about Lichtenstein settlements?" There are, first, certain exchange control difficulties and, beyond that, Section 412 of the 1952 Act, now incorporated in the 1970 Act, makes it difficult to set up a foolproof foreign settlement. There are considerable difficulties and I am not persuaded that all that number are invulnerable to the Revenue. I am not encouraging my hon. and right hon. Friends to probe more deeply, but it is wrong for the hon. Member for Oldham, West to pretend that one only has to whistle up some smart lawyer in Zurich or Vaduz and one's problem is solved.

On the point that discretionary settlements can run on and on, keeping a vast agglomeration of wealth out of the clutches of the Revenue, all I say is, good luck to them, because the Revenue dips its shovels too deeply into agglomerations. As the hon. Gentleman was fair enough to point out, discretionary settlements can at a maximum run only for 80 years. In any event, they are often broken up before. They are not a vehicle carrying family wealth into infinity.

I wish to stress one particular disadvantage of the 15-year rule. My hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) touched on this. Supposing a person has a small family company and wants to preserve the shares in the family. He puts them into a discretionary settlement. It may be that they do not generate a great deal of income and it may be that there are no other assets in the settlement. How can one meet the 15-year charge other than by selling shares in the family company? It may be possible to get accommodation from the I.C.F.C., but that is not the way to build up a small or medium-sized family company. If one wants diversity and business experience, and if one wants to encourage initiative, these are the companies to encourage, and these are the companies which are hit particularly by this ill-judged measure.

Anything that limits the charge to capital gains tax to situations where a genuine gain has been realised and where cash has actually come into the pocket is to be welcomed. There is a very good case on grounds of administrative efficiency and complication for abolishing it altogether. The cost of collection is so astronomic compared with the amount collected that I hope my right hon. Friend will seriously consider, politics apart, whether there are not good economic, social and administrative reasons for abolishing it altogether.

That is not the point we are debating today. Today we are decently interring two unreasonable little measures introduced in 1965 which, as the hon. Member for Oldham, West has pointed out, have not been entirely successful, even from his point of view. I shall vote for this measure with real conviction and absolute pleasure.

Mr. Dalyell

The hon. and learned Member for Dover (Mr. Peter Rees) cannot be entirely surprised that we are obsessed with tax avoidance when one thinks of the sheer amount of brain power devoted to income tax advisers and income tax lawyers. The contrast that occurs to many of us is that if we are obsessed with this why is the party opposite obsessed with the trivia? Had the Conservative Party not been obsessed with trivia it would not have set up the Fisher Committee. We seem to have an extraordinary scale of values. We are told not to be obsessed with substantial sums of money, yet a family which, if not on the poverty line, may be at least very near it has to go through a rigorous, unpleasant, often degrading and undignified examination. This is what many decent people of all political thought object to.

The hon. and learned Member for Dover said that it is not as easy as just whistling up a smart lawyer in Zurich or "Bad" something—

Sir G. Nabarro

Vaduz, Lichtenstein.

Mr. Dalyell

Obviously the hon. Member for Worcestershire, South (Sir G. Nabarro) is well versed on the advice which is available in Lichtenstein.

Sir G. Nabarro

I know the geography of Europe and I know exactly what goes on in Vaduz, Lichtenstein, but I do not suppose the hon. Gentleman has ever heard of it.

Mr. Dalyell

The hon. Member for Worcestershire, South (Sir G. Nabarro) knows his way around. We on this side of the Committee want to help a few people who do not know their way around.

Sir G. Nabarro

I spend my life leading the hon. Gentleman.

7.0 p.m.

Mr. Dalyell

There is a major point here. Here we have the admission that there are those who know their way around, who have, perhaps, the education and the certainly the finance to employ lawyers, and those who do not. This is a very serious kind of division because it leads to a great deal of ill feeling. When hon. Gentlemen opposite ask about one of the causes of the economic dissatisaction in this country, they could do no better than to look at this matter fairly objectively.

As a Scottish Member of Parliament, I say to the hon. Member for South Angus (Mr. Bruce-Gardyne) that his speech seemed very curious. Surely the smallest companies, on whose behalf he was trying to win sympathy, are exempt anyway. To exempt the bigger companies would surely create the most enormous loopholes in the capital gains system, and here there would really be a complete blow to equity. Of course, in the well-run closed company, we all know that arrangements can be made to protect genuine company interests. If there are examples of a serious company in Scotland, giving employment, which has failed to make these arrangements, I should be interested to see them, either in public or in private.

What especially bothers us, as my hon. Friends have said at length and with considerable eloquence, is that what this is all about is the redistribution of wealth, and it is the redistribution of wealth in the wrong direction. I can understand that the Treasury may have administrative arguments, and we have to try to be fair minded about it. Here I think that my question may be answered to my disadvantage, but I should like to know what the valuation problems are in trying to calculate, on top of estate duty, capital gains duty on death. There may be none. On the other hand, it strikes some of us who have come back to this subject that the problems of the shortage of valuers are very real. I put that in question form because I want a Treasury view on the subject. But whatever the answer to that particular question, because it is redistributing wealth in the wrong direction it is a very unsatisfactory move.

Sir T. Brinton

I should like to try to bring the debate back to what we are really talking about. We had a long and interesting lecture on how to avoid taxation given by the hon. Member for Oldham, West (Mr. Meacher), and I thought that I was learning something until my hon. and learned Friend the Member for Dover (Mr. Peter Rees) shot him down. We are back where we started.

Basically we are talking about capital gains tax. I was interested in the speech of the hon. Member for Ashfield (Mr. Marquand) because he said something in the context of capital gains tax with which I would agree. His first point on the basis for capital gains tax is that it is a way of taxing the increase in spending power which arises from the possession of capital. I am paraphrasing what he said. Those are not his words but I think that he would accept that that is what he meant. So far so good. But spending power, as I said in an intervention, only exists when the asset is turned into a spendable form, that is, cash. The fact that one possesses, for instance, an ancient castle in Scotland which may theoretically have a great value is of no use if it cannot be sold, as many unfortunate possessors of castles have discovered. They may have a theoretically large value, but this is immaterial if it is not turned into spendable wealth.

There is a confusion in the minds of hon. Gentlemen opposite, even in the context of their own opinion on this matter. Wealth and the use of it can only be expressed in terms of spending power. If one has a large and valuable asset in the form of shares or gold bars but one never spends it, that does not affect the economic activity of the country nor does it buy one so much as a single extra whisky and soda. But when one turns it into cash and spends it, when one is then enjoying it, it is at that point that the capital gains tax takes care of the difference between those with capital and those without it—when it comes to spending power. I have always thought that that was the whole basis of the tax.

The hon. Member for Ashfield took us a step further. He said that our object was the redistribution of wealth. In other words, despite the fact that wealth has been accumulated, saved and preserved and only the income from it used—and heavily taxed—that does not matter to him. He must destroy the capital asset by getting it dished out by one means or another. His Government adopted the very unfair means of deemed proposals where no cash transaction has taken place. I maintain that this is a logical contradiction.

If we confine capital gains tax—at 30 per cent., the highest capital gains tax in the world—solely to occasions when an asset has been realised and turned into cash, we shall get as much social justice as we can and, at the same time, equity between one payer of the tax and another. This is the centre of our argument at this stage and of the Amendment. It is the illogicality of having certain human events and transactions involving no alteration in the status of an asset or liability to tax when in all other circumstances the only liability for tax on any asset is when one sells it. This seems illogical and unfair.

Even taking the argument of the Labour Party as to redistribution of wealth, this is sufficiently catered for by catching for tax assets whenever they are realised and turned into cash. If we limit it to that, we shall get just as sure a redistribution as we ever will by the previous means.

The arguments about discretionary and other forms of trust are not germane to the question of capital gains tax. If hon. Members opposite want to do something about those, they will have to find a means of doing so, and no doubt they can. But to try to tackle this question by subjecting to capital gains tax assets not realised is not, even by their book, the right way to go about it.

I hope that the Government will listen carefully to what has been said. The concessions are very welcome and fair regarding death and the avoidance of a double tax in that rather unfortunate circumstance. We should remember that we are talking about the highest rate of death duty in the world. Hon. Members opposite talk as though we were taxed at the same rate as other nations. We speak of exemptions which no other nation would be foolish enough to follow.

In considering the whole question of estate duty, I hope that the Government will remember the adverse effects that it has on the family unit. The French have fully realised this in the exemptions and reliefs for inheritances within the family and in the fact that the duty there is not an estate duty but a legacy duty, so as to preserve the family unit while catching at a very high rate people outside the family, or relatives not particularly close. We should adopt that system.

On top of a death duty rate going up to 80 per cent., further to levy capital gains tax as well is an injustice, and we welcome the fact that the Government have dealt with it. We ask the Government to bear in mind that, none the less, they have left one or two anomalies untouched, and we hope that they will deal with them next year.

Mr. Patrick Jenkin

This has been an interesting debate. Perhaps I might begin by correcting an intervention which I made in the speech of the hon. Member for Ashfield (Mr. Marquand) when he asked about the cost. The gross cost of the capital gains tax relief under this Clause is £30 million, but made up as £25 million for the relief on death and some £5 million for the relief on discretionary trusts. But as against that there is the increased charge to estate duty, for the reasons which the hon. Member for Oldham, West (Mr. Meacher) gave, because there will now be no relief from estate duty for the capital gains. That is £15 million, so that the net cost is £15 million.

The hon. Member for Ashfield said that that was all right for next year but asked: what about the position in the years ahead? When we say a full year, we mean a full year. It has never been the practice of Treasury Ministers to try to forecast the effect of tax changes over a long period. Some effort was made when capital gains tax was introduced to say that it would not raise much in the first few years but that after a while it would raise a little more. The yield has risen, but it is asking too much to expect the Treasury and the Inland Revenue to attempt to estimate over a long period the effect of a single change of this nature.

Mr. Marquand

Of course I accept that the hon. Gentleman cannot give anything like precise figures, in the nature of the case, and I take his point that, normally, it would be unreasonable to ask the Treasury to make judgments of this kind about future yield of taxes, but surely, in this case, since the nature of the tax is such that it is bound to build up over a considerable period, it is not unreasonable to ask the Minister for some indication of the order of magnitude which he has in mind.

Mr. Jenkin

However hard the hon. Gentleman presses me, I will not be drawn on this, because I simply have no figures that I can quote to the Committee. However, clearly, as the yield from estate duty rises, presumably so will the effect of what is here being relieved.

The hon. Member's second question was whether we were afraid of the phenomenon which he described as "locking in", which had happened in the United States. He asked what the cost of locking in might be and quoted the United States figure of two-thirds of the total yield. But, as my hon. Friends have said in this and the earlier debate, the United States capital gains tax is of a very different sort. It is, in fact, only on gains realised for cash, and, therefore, does not have the scope of the capital gains tax in this country.

We have included in the figure of £15 million—I would ask the Committee not to press me on this—some estimate of the effect of some "locking in", because it would be foolish to deny that this would happen. But there are many factors which weigh with elderly people as to whether or not they sell or retain investments to the ends of their lives. The experience which we have gained as a result of the £5,000 exemption has not suggested—[Interruption.] The hon. Member is aware that there is a £5,000 exemption at present and that if one holds on to one's gains until death, the £5,000 would apply. There is not much evidence that that has influenced the investment holding habits of elderly people.

We do not expect the effect of "locking in" bearing in mind our capital gains tax, to be anything like that described by the Secretaries to the Treasury in the evidence read by the hon. Member for Ashfield. But perhaps the strongest argument is that one cannot draw parallels between what happens in America and what happens here on the interaction of capital gains tax and estate duty without taking into account the enormous disparity between the levels of estate duty in this country and in America.

Taking an estate of £25,000, the estate duty in this country is 14 per cent. and in America it is nothing. On an estate of £40,000, it is 23.7 per cent. here and 4.25 per cent. in America. On £100,000 in this country it is 46.5 per cent., and in America 1863 per cent. One is dealing with a totally different order of magnitude, and the whole essence of the Clause is that the gains themselves are liable to tax at these very steep rates in any event.

[Mrs. LENA JEGER in the Chair]

7.15 p.m.

Mr. Dick Taverne (Lincoln)

I would not deny that the rates of estate duty in America are much lower than they are here, but the hon. Member should not exaggerate them. If one considers the sums involved as a proportion of wealth and as a proportion of the wealthiest, the figures are quite different from those which the Minister cited. Facile comparisons based on exchange rates are always misleading in this kind of context.

Mr. Jenkin

This would to some extent be so, although the gap is narrowing, but it is very difficult. One could concoct figures on a comparable cost of living index—[Interruption.] But that will not make all that much difference to the enormous disparity of figures which I have quoted. On £1 million the rate would be 38.33 per cent. in America, whereas it is nearly 75 per cent. here.

If only that rate of estate duty is suffered in America and one is not charged to capital gains on death, there is, of course, every incentive to hold the property until death. In this country the pressures and effects of the interaction between the burdens of estate duty and the burdens of capital gains tax are totally different, so I do not begin to draw the same gloomy conclusions which the hon. Member drew from the evidence which he cited which had been given to Congressional committees.

The hon. Member surprised me—I fear that this will hang around the neck of the Labour Party like a millstone—by showing that, at this stage of a Parliament, they are prepared to start making specific tax commitments of that sort. The wisdom of my right hon. Friends when in Opposition was that we did not make any specific tax commitments until right at the end. The hon. Gentleman will probably rue the day that he pledged his party to repeal this Clause. He will dismay some of his hon. Friends. When the Clause which we are now nullifying was introduced in 1965, many of his right hon. and hon. Friends spoke very strongly against it. I was tempted to do no more than read out the speeches of the right hon. Member for Manchester, Cheetham (Mr. Harold Lever)—

Mr. Barnett

I have read them.

Mr. Jenkin

Then it will come as no surprise to the hon. Gentleman to know that his right hon. Friend, who subsequently became a Treasury Minister, in the strongest possible language—bearing in mind that he was addressing one of his own hon. Friends, one of my predecessors as Financial Secretary—opposed the charge of capital gains on death. In one of his speeches—

Mr. Barnett indicated dissent.

Mr. Jenkin

The hon. Gentleman may shake his head, but he should listen to this, because he need not assume that all his hon. Friends will warmly support the pledge which the hon. Member for Ashfield gave.

In the Committee on the 1965 Finance Bill, dealing with the Clause which this Clause nullifies, the right hon. Gentleman said in one of the most astonishing passages in his speech: The Financial Secretary will be relieved to know that I propose to express strong 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. I would say to the hon. Member for Oldham, West that the right hon. Gentleman went on to make a perfectly valid point: But, ex hypothesi, the Clause will bear on those people who do pay it. The people who avoid and evade it will not bear the Capital Gains Tax on their estates."—[OFFICIAL REPORT, 26th May, 1965; Vol. 713, c. 638, 639.] The charge to capital gains tax on deemed disposal automatically catches only those people whose estates are brought into charge to estate duty, so to regard the deemed disposal on death as in some way countering the tax avoidance which we all know happens because of the rearrangement of estates and assets is to delude oneself. The point was adequately made there by the hon. Gentleman's right hon. Friend.

Mr. Dalyell

Having said that tax avoidance takes place, is it not rather ungenerous of the hon. Gentleman not to rebuke his hon. and learned Friend the Member for Dover (Mr. Peter Lees) for saying that we are obsessed with the subject?

Mr. Jenkin

I will come to the question of tax avoidance shortly.

It was not only the right hon. Member for Manchester, Cheetham who took that view. A gentleman by the name of William Baxter, who used to represent West Stirlingshire-[HON. MEMBERS: "He still does."] I apologise to him. Let us say that we have missed the hon. Member. [Interruption.] I understand that he has been far from well.

Mr. Woodrow Wyatt is another who expressed himself in strong language against the Labour proposal of that time, but I will spare the Committee quotations from his speeches. The hon. Member for Heywood and Royton (Mr. Barnett) picked on the one thing that would affect him—namely, capital gains tax on the goodwill of his professional accountancy business—and he said that that should not be charged to capital gains tax. That was understandable. The estate which he will have built up by his professional skill and hard work throughout his lifetime will be charged to estate duty, unless he is skilful enough to make dispositions to avoid that. Not only Labour hon. Members have taken this view. The right hon. Member for Orkney and Shetland (Mr. Grimond) said that it was wrong to impose on the same assets a further tax in respect of capital gains and that it seemed eminently sensible and compelling not to do so.

The case which my right hon. Friend made in his Budget Statement and which I have reiterated is that it is nonsense, given the rates of estate duty that we charge, to subject estates on death to the further tax of capital gains tax. The sheer inequity of this is shown by the fact that the proportion of total tax on death as represented by capital gains as opposed to estate duty is vastly higher on small than on big estates.

The figures are illuminating. Assuming the case of an estate of which one-quarter of the value is represented by gains—one can take different figures and go up to one-half or down to one-tenth-in 1970–71 on an estate of £25,000 the capital gains tax was £375 and the estate duty was £4,012, giving a total of £4,387. In 1971–72 the total tax paid on death will be £3,500, and, therefore, the ratio of gains tax to estate duty is 20.2 per cent.

However, if one takes an estate of £1 million, the capital gains tax is £73,500 and the estate duty is £684,650, giving a total of £758,150, compared with £746 in the current year with no capital gains charged; and the ratio, instead of being 20 per cent. in the case of a £25,000 estate, is now only 1.5 per cent.

In other words, by reimposing the deemed disposal charge on death, hon. Gentlemen opposite would be imposing a vastly greater burden on small estates compared with the largest, which seems astonishing for any political party to do, let alone the Labour Party.

Hon. Gentlemen opposite cannot have thought out the implications of what they are doing. If the disparity is as great as that—as great as one-fifth on a £25,000 estate and only 1.5 per cent. on an estate of £1 million—I seriously question whether they could have thought out this pledge before giving it because it cannot represent sensible fiscal policy.

Mr. Meacher

Is not the mystery which the Financial Secretary purports to find simply pricked by the fact that people with very large estates do not pay estate duty in anything like the amounts that the hon. Gentleman has said they do? Far from being a highly progressive tax in this country, estate duty is probably in practice a regressive one. His figures are, therefore, totally meaningless.

Mr. Jenkin

I advise the hon. Gentleman to read the speeches that were made in 1965 by his right hon. Friend the Member for Cheetham, who pointed out that it is only when estate duty is charged that the capital gains tax deemed disposal charge on death comes into play. It does not attach to people who escape estate duty.

Consider, next, discretionary trusts. The Labour Party introduced estate duty for discretionary trusts in 1969. It was hon. Gentlemen opposite who set the seven-year limit, of which the right hon. Gentleman was so critical. To reimpose capital gains tax on deemed disposals on death is a grossly regressive form of taxation to introduce, as the figures make abundantly clear.

What are the other reasons why we wish to abandon this dual charge on death? The hon. Member for Oldham, West asked what were the likely savings in manpower. The answer is 50 man years of time in the Inland Revenue and vastly more among taxpayers and their advisers, as the hon. Member for Heywood and Royton will confirm.

I am sorry that I did not answer the question posed by the hon. Member for West Lothian (Mr. Dalyell) about taxation on remarriage. I would like to look into that and I will write to him.

The hon. Member for Oldham, West referred to tax avoidance generally. I assure him that, as part of our general review of taxation, we always have regard to the protection of the Revenue from unacceptable avoidance. However, tax avoidance is, as much as anything else, a product of high rates of taxation. It is the purpose of the Government to bring our rates of taxation down to more reasonable levels, and by that means we hope significantly to reduce the amount of avoidance.

It is always the duty of Treasury Ministers to secure a balance between the needs of the Revenue, equity and the climate of economic wealth. There is no doubt that excessive rates of taxation—as in this case a dual burden of tax on death—affect the climate of wealth of companies, and particularly of family companies, on which so much of the prosperity of the nation depends.

When I heard the hon. Member for Ashfield give that foolish pledge, which the Opposition will regret, I was reminded of that celebrated intervention by the hon. Member for Edmonton (Mr. Albu) in a speech by my right hon. Friend the Prime Minister when he was Leader of the Opposition. My right hon. Friend said that the Labour Government's taxation policies would mean the end of the small family company, and the hon. Member for Edmonton was quoted in HANSARD as saying, "And about time." The hon. Member for Ashfield, by giving that pledge, has declared no less unmistakably unremitting hostility to tens of thousands of family companies, and I have no doubt that they will take note of what he has said when considering how to vote at the next Election.

7.30 p.m.

Mr. Barnett

I am afraid that it looks as though we are going to spend a lot of time in Committee upstairs, because the Financial Secretary does not seem to have taken to heart the way in which my noble Friend, Lord Diamond, used to deal with these debates when he was Chief Secretary to the Treasury.

Sir G. Nabarro

Look where it got him! He got knocked out.

Mr. Barnett

An interesting point, but nevertheless, as hon. Members who were in the last Parliament will recall, under the most intense provocation my noble Friend showed an equanimity and a lack of patronising manner which we have certainly not had from the Financial Secretary. If the hon. Gentleman intends to go on being patronising in that way, we shall take an awful long time upstairs in Committee.

It is interesting to note the hon. Gentleman's selective agreement with what has been said from time to time by my right hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever). I am very fond of my right hon. Friend, but I do not mind occasionally selectively disagreeing with some of the things he has said. I am not prepared to agree with all that he has said, but it is interesting to see that the Financial Secretary is accepting as gospel, as it were, certain things said by my right hon. Friend, particularly in relation to capital gains tax, although my right hon. Friend in fact holds certain views which the hon. Gentleman is not quite so keen on.

I want to take up the main point on the question of deemed disposal. I wonder whether hon. Members opposite quite realise what they are doing. The hon. Member for Kidderminster (Sir T. Brinton) accused us of being, as it were, vindictive, of not understanding what we were saying or doing.

Sir T. Brinton

I said nothing about vindictiveness.

Mr. Barnett

What the hon. Gentleman and some of his hon. Friends have been saying about deemed disposal leads me to believe that they cannot nave understood the massive loophole that is left once one decides that a capital gain should only be taxed when realised for cash.

On the previous Amendment, the Financial Secretary, dealing with the question of whether or not one should revert at some time in future to disposals only for cash being subject to capital gains tax, gave a reply which was far from satisfactory. He did not give a clear denial that he would not perhaps one day revert to taxing capital gains only on cash disposal. If he is going to have that sort of capital gains tax, then, in effect, he is killing it. If that is what the Government want to do they should be honest enough to say so rather than dig a massive hole which will virtually kill the tax. The hon. Gentleman made it clear that he would not do anything this year on the question of trusts. He left himself free to deal with this; on another occasion. He implied that he is prepared at some time in future to consider gains tax purely and simply on disposal for cash, with all that that would mean. None of the lucid and strong arguments presented by my hon. Friend the Member for Ashfield (Mr. Marquand) have been answered by hon. Members opposite.

The Financial Secretary did not reply effectively on the question of the economic effect of the locking in which will occur on this Clause. He made only two points. First, he claimed, one cannot compare it with the United States position, because one has to look at the levels of estate duty in this country. But, as my hon. Friend the Member for Oldham, West (Mr. Meacher) rightly said, to quote the levels of estate duty in this country is totally misleading because they are not paid. The hon. Gentleman's second argument on the economic effect of locking in was that there is no evidence that this is likely to happen because the exemption we now have for up to £5,000 has not proved that this is the case at present. That is not an argument at all. We are talking about a totally different situation where one is exempting everything rather than just the comparatively small amount of gains of £5,000. We really have not had an answer to the economic arguments put by my hon. Friend the Member for Ashfield.

The argument about double taxation is a myth because, in practice, capital gain is an increase—certainly as far as we on this side are concerned. There is a difference between taxing a capital gain and taxing the capital. If hon. Members opposite cannot appreciate that, then we have not been able to persuade them in the debate. That being so, I do not suppose that I shall be able to persuade them now. But, clearly, there is a considerable distinction between taxing capital and taxing an increase in that capital. If hon. Members opposite cannot see that, then I am afraid that we are not getting very far.

Mr. Patrick Jenkin

The hon. Gentleman is talking about the two taxes. It occurs to me that I may inadvertently, not have got the drift of the argument wrong, but may have misled the House on the 20 per cent. and 1.5 per cent. figures which I quoted. These are actual reductions in tax-20 per cent. at the £25,000 level and 1.5 per cent. at the £1 million level. That is the effect of the two taxes the hon. Gentleman is talking about.

Mr. Barnett

The hon. Gentleman is quoting figures which are irrelevant, because it all entirely depends on the sort of capital gain element in the £25,000 and the capital gain element in the £1 million estate. It is no use his giving us these irrelevant figures.

I turn now to the question of hardship to the small close company. The hon. Member for South Angus (Mr. Bruce-Gardyne) was kind enough to quote what I said in the 1965 debates and the fact that I was making a plea not necessarily for myself but for smaller professional firms and their goodwill. [Laughter.] I do not want to pretend to the Committee that I am wholly altruistic in these matters. I am as happy as anyone else to have my own tax reduced.

There was considerable exemption for small close companies, but to suggest that we should exempt all close companies, no matter what their size, from capital gains tax in the way suggested would be to create an enormous loophole, and to say that the present situation is, as it were, a death blow to family companies is outrageous nonsense. If such a company left itself in such a state that it was destroyed, then, quite frankly, it would deserve to be. If it were so ill-advised as not to prepare itself for the possibility that a director would die and therefore have to pay estate duty, then it would have a singularly badly-advised board of directors.

Mr. Peter Rees

How can a company assist the personal representatives of a deceased shareholder to meet estate duty?

Mr. Barnett

I am surprised at the hon. and learned Gentleman asking me such questions. I can assure him that there are possibilities for close companies to help themselves to avoid the worst incidence of estate duty. If the hon. and learned Gentleman would care to see me outside I will explain them to him. It would be an extraordinarily bad close company which left itself in such a position that it would be destroyed because of either this tax or estate duty.

The only other argument was that which we heard on the question of trusts. We had tear-jerking speeches about how terrible it was that poor beneficiaries of trusts would be subject to capital gains tax. The hon. and learned Member for Dover told us that it is not easy to set up trusts. I agree, but that is not an argument for allowing a trust and the tax avoidance on a massive scale that goes with it.

I accept that we shall not be able to convince right hon. and hon. Members opposite. The philosophical difference between us is that we on this side consider capital gains to be another form of income which should be taxed. Hon.

Members opposite seek by every loophole possible to allow the maximum possible avoidance of this tax. They would be more honest if they said forthrightly, "We do not want a capital gains tax". Instead of that, they want to assist trusts, settlements and every other form of avoidance. We on this side think that the Clause is the thin end of the wedge. I ask my right hon. and hon. Friends to vote against it.

Question put, That the Clause stand part of the Bill:—

The Committee divided: Ayes 155, Noes 116.

Division No. 369.]	AYES	[7.45 p.m.
Adley, Robert	Goodhew, Victor	More, Jasper
Atkins, Humphrey	Gorst, John	Morrison, Charles (Devizes)
Baker, Kenneth (St. Marylebone)	Gower, Raymond	Nabarro, Sir Gerald
Baker, W. H. K. (Banff)	Grant, Anthony (Harrow, C.)	Neave, Airey
Barber, Rt. Hn. Anthony	Gray, Hamish	Normanton, Tom
Bell, Ronald	Green, Alan	Nott, John
Benyon, W.	Grieve, Percy	Oppenheim, Mrs. Sally
Biffen, John	Grimond, Rt. Hn. J.	Orr, Capt. L. P. S.
Blaker, Peter	Grylls, Michael	Owen, Idris (Stockport, N.)
Boardman, Tom (Leicester, S.W.)	Gummer, Selwyn	Page, Graham (Crosby)
Body, Richard	Gurden, Harold	Pardoe, John
Boscawen, Robert	Hall, John (Wycombe)	Parkinson, Cecil (Enfield, W.)
Bossom, Sir Clive	Harrison, Brian (Maldon)	Percival, Ian
Bowden, Andrew	Hawkins, Paul	Powell, Rt. Hn. J. Enooh
Boyd-Carpenter, Rt. Hn. John	Hay, John	Pym, Rt. Hn. Francis
Bray, Ronald	Hayhoe, Barney	Raison, Timothy
Bruce-Gardyne, J.	Higgins, Terence L.	Redmond, Robert
Buck, Antony	Hiley, Joseph	Reed, Laurance (Bolton, E.)
Butler, Adam (Bosworth)	Hill, James (Southampton, Test)	Rees, Peter (Dover)
Carlisle, Mark	Holland, Philip	Nippon, Rt. Hn. Geoffrey
Chichester-Clark, R.	Hordern, Peter	Rossi, Hugh (Hornsey)
Churchill, W. S.	Hughes, Robert (Aberdeen, N.)	Rost, Peter
Clark, William (Surrey, E.)	Hunt, John	Russell, Sir Ronald
Clegg, Walter	Hutchison, Michael Clark	Scott-Hopkins, James
Coombs, Derek	Iremonger, T. L.	Shelton, William (Clapham)
Cordle, John	James, David	Soref, Harold
Cormack, Patrick	Jenkin, Patrick (Woodford)	Spence, John
Costain, A. P.	Jennings, J. C. (Burton)	Stainton, Keith
Critchley, Julian	Kilfedder, James	Stewart-Smith, D. G. (Belper)
Crouch, David	King, Tom (Bridgwater)	Stodart, Anthony (Edinburgh, W.)
Crowder, F. P.	Kinsey, J. R.	Stokes, John
Curran, Charles	Knox, David	Stuttaford, Dr. Tom
d'Avigdor-Goldsmid, Maj.-Gen, James	Lane, David	Sutcliffe, John
Dean, Paul	Langford-Holt, Sir John	Taylor, Frank (Moss Side)
Deedes, Rt. Hn. W. P.	Legge-Bourke, Sir Harry	Taylor, Robert (Croydon, N.W.)
Digby, Simon Wingfield	Lloyd, Ian (P'tsm'th, Langstone)	Temple, John M.
Dixon, Piers	Longden, Gilbert	Tugendhat, Christopher
Dodds-Parker, Douglas	Luce, R. N.	Turton, Rt. Hn. R. H.
Dykes, Hugh	McCrindle, R. A.	van Straubenzee, W. R.
Elliot, Capt. Walter (Carshalton)	McLaren, Martin	Vaughan, Dr. Gerard
Elliott, R. W. (N'c'tle-upon-Tyne, N.)	Maclean, Sir Fitzroy	Vickers, Dame Joan
Emery, Peter	McMaster, Stanley	Waddington, David
Eyre, Reginald	McNair-Wilson, Michael	Ward, Dame Irene
Fell, Anthony	McNair-Wilson, Patrick (NewForest)	Warren, Kenneth
Fenner, Mrs. Peggy	Madel, David	Weatherill, Bernard
Finsberg, Geoffrey (Hampstead)	Mather, Carol	Wells, John (Maidstone)
Fisher, Nigel (Surbiton)	Maude, Angus	White, Roger (Gravesend)
Fookes, Miss Janet	Maudling, Rt. Hn. Reginald	Wilkinson, John
Fortescue, Tim	Meyer, Sir Anthony	Woodhouse, Hn. Christopher
Fox, Marcus	Miscampbell, Norman
Fry, Peter	Moate, Roger	TELLERS FOR THE AYES:
Gardner, Edward	Money, Ernie	Mr. Hector Monro and
Goodhart, Philip	Montgomery, Fergus	Mr. Keith Speed.
NOES
Albu, Austen	Atkinson, Norman	Blenkinsop, Arthur
Allen, Scholefield	Barnett, Joel	Callaghan, Rt. Hn. James
Archer, Peter (Rowley Regis)	Bidwell, Sydney	Carmichael, Neil
Carter, Ray (Birmingh'm, Northfield)	Jones, Dan (Burnley)	prentice, Rt. Hn. Reg.
Carter-Jones, Lewis (Eccles)	Judd, Frank	Prescott, John
Castle, Rt. Hn. Barbara	Kaufman, Gerald	Price, William (Rugby)
Cocks, Michael (Bristol, S.)	Kelley, Richard	Rees, Merlyn (Leeds, S.)
Crossman, Rt. Hn. Richard	Latham, Arthur	Roderick, Caerwyn E.(Br'c'n & R'dnor)
Cunningham, G. (Islington, S.W.)	Lawson, George	Rodgers, William (Stockton-on-Tees)
Dalyell, Tam	Lee, Rt. Hn. Frederick	Roper, John
Darling, Rt. Hn. George	Leonard, Dick	Ross, Rt. Hn. William (Kilmarnock)
Davidson, Arthur	Lever, Rt. Hn. Harold	Sheldon, Robert (Ashton-under-Lyne)
Davies, Denzil (Llanelly)	Lewis, Ron (Carlisle)	Shore, Rt. Hn. Peter (Stepney)
Davis, Clinton (Hackney, C.)	Lipton, Marcus	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)
Deakins, Eric	Lomas, Kenneth	Silkin, Hn. S. C. (Dulwich)
de Freitas, Rt. Hn. Sir Geoffrey	Mabon, Dr. J. Dickson	Sillars, James
Douglas, Dick (Stirlingshire, E.)	McElhone, Frank	Skinner, Dennis
Eadie, Alex	Mackenzie, Gregor	Small, William
Edwards, Robert (Bilston)	Mackie, John	Spearing, Nigel
Fisher, Mrs. Doris (B'ham, Ladywood)	Mackintosh, John P.	Spriggs, Leslie
Fitch, Alan (Wigan)	McMillan, Tom (Glasgow, C.)	Stallard, A. W.
Fletcher, Raymond (Ilkeston)	MacPherson, Malcolm	Stewart, Rt. Hn. Michael (Fulham)
Foley, Maurice	Mallalieu, E. L. (Brigg)	Stoddart, David (Swindon)
Foot, Michael	Marks, Kenneth	Stonehouse, Rt. Hn. John
Fraser, John (Norwood)	Marquand, David	Strang, Gavin
Gilbert, Dr. John	Mayhew, Christopher	Summerskill, Hn. Dr. Shirley
Golding, John	Meacher, Michael	Taverne, Dick
Gordon Walker, Rt. Hn. P. C.	Mendelson, John	Thomas, Jeffrey (Abertillery)
Grant, John D. (Islington, E.)	Millan, Bruce	Torney, Tom
Hamilton, William (Fife, W.)	Molloy, William	Weitzman, David
Hart, Rt. Hn. Judith	Morgan, Elystan (Cardiganshire)	Wellbeloved, James
Hattersley, Roy	Morris, Charles R. (Openshaw)	Wells, William (Walsall, N.)
Healey, Rt. Hn. Denis	Morris, Rt. Hn. John (Aberavon)	Whitehead, Phillip
Horam, John	O'Malley, Brian	Whitlock, William
Houghton, Rt. Hn. Douglas	Orbach, Maurice	Wilson, Alexander (Hamilton)
Hughes, Robert (Aberdeen, N.)	Oswald, Thomas	Wilson, Rt. Hn. Harold (Huyton)
Hunter, Adam	Paget, R. T.
Jenkins, Hugh (Putney)	Parker, John (Dagenham)	TELLERS FOR THE NOES:
Jenkins, Rt. Hn. Roy (Stechford)	Pavitt, Laurie	Mr. Ernest Armstrong and
Johnson, James (K'ston-on-Hull, W.)	Perry, Ernest G.	Mr. William Hamling.