HC Deb 10 July 1972 vol 840 cc1350-9

Subsections (4), (5) and (7) of section 20 of the Finance Act 1965 and subsections (3), (4) and (5) of section 21 of that Act shall be amended to include the word "tapered" before the phrases "chargeable gain" and "chargeable gains" wherever they occur and before the phrases "allowable loss" and "allowable losses" wherever they occur, and section 22(9) of the Finance Act 1965 shall be amended to include at the end of the following: — Provided that, for the purposes of subsections (4), (5) and (7) of section 20 of this Act and of subsections (3), (4) and (5) of section 21 of this Act, any chargeable gain or allowable loss computed in accordance with the said Schedules shall be reduced by tapering to the extent of one-twentieth of that chargeable gain or allowable loss for every completed year from the date of acquisition to the date of disposal, both dates inclusive, and any chargeable gain or allowable loss so reduced shall be referred to as a tapered chargeable gain or as the case may be, as a tapered allowable loss".—[Mr. Peter Rees.]

Brought up, and read the First time.

Mr. Peter Rees

I beg to move, That the Clause be read a Second time.

It is trite to observe that we must review from time to time the scope of our taxes and their rates by reference to the rates of inflation that are prevalent. This is important when the rates of inflation are at 2 per cent. or 3 per cent., as they were before 1964, but it becomes even more important when the rates of inflation are rising at a steeper pitch. The higher rates serve only to emphasise the harsher aspects of our system of taxation which my right hon. Friend has done so much to ameliorate in the last two Budgets.

The income tax and surtax rates have borne hard on people who by no present standard are well off. Until recently, surtax started at £40 per week, which I understand is the current going rate for a docker. It is possible to draw a different inference from that, and I might do so on another occasion. Estate duty clearly bears harshly on estates which by no stretch of the imagination could be called those of the wealthy class when houses of a relatively modest scale change hands at £15,000.

Capital gains tax provides the harshest examples. As I understood the tax when it was introduced in 1964, its authors designed it as a tax on capital gains in the truest sense. If property doubles in price over 20 or 30 years by the mere process of inflation, it must be self-evident that capital gains tax is in many cases charged on nothing that is in any real sense a gain. Over the past few years capital gains tax has become depressingly akin to a wealth tax. This may commend it to right hon. and hon. Friends opposite, but I hope that it will not commend it to my right hon. and hon. Friends.

This is the simple justification for the Clause, which is designed to taper down to nothing over a period of 20 years a capital gain or, by the same process, a capital loss. In other words, a capital gain or loss is reduced by one-twentieth each year that the asset is held by the taxpayer, so that over 20 years there will be no gain or no loss.

The relief that is envisaged by the Clause may be crude in its operation, but I hope to be forgiven for observing that the tax is relatively crude in its operation. In a sense, this relief carries on the thinking introduced in the Finance Act, 1962, in the taxation of short-term gains, because such gains are largely of a speculative nature.

I hope that that House will feel that there is a qualitative distinction between gains of a short-term or speculative nature and gains accruing on the disposal of assets which have been held for a long time. The Clause is designed to introduce a measure of elementary justice in the economic climate of the times, and I hope that it will commend itself to the House and the Government on that basis.

Mr. James Ramsden (Harrogate)

I welcome the presence on the Front Bench of my right hon. Friend the Minister of Agriculture, Fisheries and Food. The Clause, although it is of general interest, is of special concern to the farming industry. I declare an interest in that I farm.

My hon. and learned Friend the Member for Dover (Mr. Peter Rees) was right to emphasise the consideration arising from a high rate of inflation in the past and its effect upon the capital gains tax. The case for an abatement, for tapering relief in the case of assets which have been held for a long time, is this. I accept the justice of the capital gains tax when people sell assets to live, so that they can, by making a capital gain, maintain a standard of life or maintain an income level in circumstances where the growth in share value, for example, has replaced the growth in income after tax.

The case is different when, as in the case of land, people tend to sell the asset only when obliged to do so by dire necessity. In the nature of things, farmers want to hang on to their land. A disposal probably takes place only when the farmer wants to hand on to his son or for some other reason, usually prompted by hard necessity. It is a rather different case, and falls outside what I at any rate understand as the original justification for the introduction of capital gains tax.

Therefore, I would see some equity in a tapering relief on gains which are very largely paper gains and the result of inflation, along the lines advocated by my hon. and learned Friend. His argument, which I support, applies not only to farms but to other categories of small businesses where the disposal of an asset and the consequent chargeable gain may make the continuous running of that business a matter of great difficulty if it does not have ready access to loan capital, as is the case with many small firms.

I hope that my hon. Friend the Minister will look with some favour on the Clause. We are encouraged to think that he may because of the answer given by one of the Treasury Ministers on25th April indicating that the question of tapering relief, was under consideration. I hope we shall hear the outcome of those considerations.

Mr. David Mitchell (Basingstoke)

I, too, declare what interest I have in the same context and also mention that in supporting the Clause I have the support of the Small Business Association, as I believe a number of my hon. Friends also have in this connection. I have some criticism of the Amendment, because 20 years is a long time, and I believe that in the context of the economy as it stands today 10 years might be more appropriate. But a little is better than nothing.

My first point is that the capital gains tax, without such a tapering device as is proposed, is a disincentive to new entrepreneurial activity. We have seen from the Bolton Report that that is one of the factors which the Bolton Committee noticed. We all know how important it is at present to have new businesses as the seed bed for future prosperity. With our entry into the Common Market, that is even more true. These businesses can, if they grow, as they will if they are encouraged, also provide considerable employment.

Secondly, there is the taxation of paper gain. This point was put very well in the Committee stage of our consideration of the 1965 Measure, by my hon. Friend the present Financial Secretary. I will not embarrass him by quoting what he said. It was also put very well by my hon. Friend the Chief Secretary in a publication, "Taxes for Today", published by the Bow Group, in which he said: In the first place, it would be unjust to tax 'paper profits'—profits that are not genuine because they are due to a rise in monetary not real values. To do so is confiscatory. He was right to take that view.

I am particularly glad to see my right hon. Friend the Minister of Agriculture, Fisheries and Food here. I join in pressing upon him the view being expressed increasingly by some farmers, especially those who are owner-occupiers of their farms, who want to pass the business on to their sons. It is not a case of selling. They do not want to break up the holding, but they have not the money to pay the tax when they pass the farm on to their sons.

Thirdly, there is the locking-in effect, a considerable distortion of business. We have old men hanging on in business who should have retired, and small businesses which should be amalgamating into larger and more viable units. This is not happening because there is a locking-in effect and a disincentive to older people to retire, knowing that when they do a large slab of their capital will be removed from them.

12.15 a.m.

It is fair to say to the Chancellor that the whole of the philosophy on which he has based the change in corporation tax this year to the imputation system is founded on the recirculation of money through the Stock Exchange. If there is a locking-in device preventing people from changing stocks and shares and moving into the growing industries and out of the old, we are, through capital gains tax, vitiating part of what the Chancellor is trying to achieve by the changes in corporation tax.

Capital gains tax is a discouragement to plough back into industry. Many of us know of businesses the proprietors of which are faced with the choice of ploughing money back into the business or taking it out and going on holiday or buying a yacht, or whatever it may be. The disincentive to ploughing back is that, not only must a person have to pay corporation tax, but he must recognise that he is building up an ever-greater liability to capital gains tax which at some stage will have to be paid. In most family businesses there is a life cycle of about 20 years, which means that once every 20 years there must be a massive loss of working capital from the business and a long period, when the younger generation comes in, of retrenchment, which is the very reverse of what is in the national interest.

In a recent Parliamentary Answer it was revealed that £850 million has been withdrawn from the private sector in capital gains tax since 1965.This money would be better left providing work and enterprise in the business community rather than being withdrawn into the maw of the Government. The tax is cumulative in effect. It is damaging and distorting and a disincentive to change. I hope that the Government will heed the comments made tonight and assure us that next year they will propose changes along lines of the Clause.

Dr. Gilbert

We on this side are not in sympathy with the new Clause. It seemed to me implicit in what the hon. and learned Member for Dover (Mr. Peter Rees) said—and I hope that I am not distorting what he said—that it was only short-term gains which were speculative and that longer-term gains had acquired a patina of respectability which meant that they did not qualify for the sort of relief proposed in his new Clause. We do not accept that distinction between short-term and long-term gains, although we recognise that they have had different tax treatment in the past.

One can hold penny stocks for a long time and wind up with a very large gain which was just as speculative when it arose whether one had had it for a short or a long time. One can think of many examples closer to home, such as the affairs of Mr. Harry Hyams, which have lately attracted much attention. As I understand the new Clause, all Mr. Hyams has to do is to hang on for about 12 years and he will get the whole of his capital gain on Centre Point without paying a penny of capital gains tax. If that is the intention of hon. Members opposite, then we dissent entirely from their philosophy.

We understand the basic point that one can have taxation of paper profits in some circumstances. While recognising that, we see no other form of income that is receiving the sort of relief against inflation that is proposed for capital gains in the new Clause. Therefore, if enacted, it would contribute further inequity to the tax system.

Furthermore, in commenting on what was said by the hon. Member for Basingstoke (Mr. David Mitchell), I found it a little far fetched that he should pray in aid that capital gains tax is an incentive to people to spend their money on wild consumption rather than ploughing it back in what was apparently a profitable industry. I do not wish to make too much of that point. I merely want to point out that the speeches we have heard so far from hon. Gentlemen opposite find no echo on this side of the House.

Mr. Nott

If capital gains tax could be looked at in isolation there might be a case for eliminating the inflationary element in chargeable gains; but capital gains tax cannot be looked at in isolation because inflation affects everyone in relation to their resources and outgoings. If the Government were to make a concession for capital gains tax payers to take account of inflation there would be pressure for action to protect other groups.

I thought it would be helpful if I quickly rehearsed on this occasion a few of the arguments on the other side because my hon. Friend the Member for Basingstoke (Mr. David Mitchell) has made this point in Committee, and it is frequently made in the House. Therefore, I will put one or two of the objections to this principle.

There are grounds for suggesting, for instance, that there should be an adjustment of the computation of trading profits to take account of inflation in both the value of stocks and the cost of replacing capital assets. Investors in savings banks and building societies—indeed, in any investment on which there was no question of a possible capital gain arising—could claim that in real terms their investments showed a loss over a period and that their incomes from the investments ought not to be taxed except in so far as they exceeded their real loss of capital. For National Savings and Government securities it would be likely to raise again the whole question of making these investments inflation-proof by some kind of indexing. Finally, for wage and salary earners in general the Government might be asked to undertake that personal allowances would always be increased so as to ensure that increases in income which merely compensated for inflation did not produce higher tax charges.

I appreciate that all these points are arguable and could be debated long into the night. However, capital gains tax cannot be considered in isolation when we are talking about inflation; it has to be considered in the wider context.

The House will be aware that inflation exercises its effects on most aspects of our national life. Certainly the Government are fully aware of inflation on tax liabilities in general. That is why we shall keep this point under review, as indeed my hon. Friend the Member for Basingstoke has been told on several occasions both at Question Time and in Committee upstairs. The House will appreciate that there would be unfortunate implications—I put it no higher than that—when the Government's policy is to conquer inflation, if we considered building into the tax code a provision to mitigate the effects of inflation on the tax liabilities of one particular group.

I could put forward arguments why I feel that the system suggested in the new Clause is not the most appropriate to be used if we wished to work a taper into the system. I think that it would be better to arrange it in such a way that the purchase price was adjusted for the fall in the value of money which had occurred over the period so that the tax itself would be payable in the same depreciated currency as the disposal and the cost would be written up by a necessary amount to allow for inflation. That would be rather a different way from the system proposed in the new Clause.

Basically, the problem is one of singling out one type of taxation and giving that some inflation-proofing when inflation affects tax liabilities and people's outgoings generally. There is also one further practical point, on which I should not rely, but I mention it briefly. Tapering of any kind would introduce substantial complications into the capital gains tax system at a time when the Government are trying, I think with some degree of success, to simplify tax computations and to improve the whole administration of the tax system.

I say to my hon. Friends who have made this point before—and they are resourceful in making it in the House—that my right hon. Friend has noted it. I cannot give any assurances, but we shall keep the matter under review. I hope that that will be sufficient—

Mr. Ramsden

I notice that my right hon. Friend the Minister for Agriculture is here. Would he and my hon. Friend undertake to look at this point. We have an agriculture policy which aims at amalgamating holdings and creating larger units, and we have a fiscal policy which will inevitably have the effect of fragmenting those units. There is a contradiction and a problem which requires to be studied. If my hon. Friend gives an undertaking that he will look at it seriously, I think that we shall be much encouraged.

Mr. Nott

I appreciate the point made by my right hon. Friend. The question of the break up of agricultural estates is recognised in estate duty law. On the previous Clause we dealt with the 45 per cent. relief. I appreciate the point made by my right hon. Friend on farm amalgamation schemes. In certain circumstances these work in the opposite direction, but that does not get rid of the general point that I was making, namely, that we are being asked to work inflation-proofing into the system for one category of taxpayer. Although we understand the point being made and will keep it under review, I cannot go further than that.

Mr. Peter Rees

My hon. Friend, with his customary lucidity, has highlighted all sorts of problems thrown up by inflation in the tax system. Unfortunately, he shrank from the inevitable conclusion that the whole system should be subject to review.

I demur at my hon. Friend's statement that the Clause introduces an element of complication, because this is one sphere in which he and my right hon. Friend have done nothing to reduce the complications, although they have removed deemed disposals from the charge to tax.

However, on my hon. Friend's assurance that he will keep the whole system under review and in the confident expectation that my right hon. Friend will reduce inflation to acceptable levels, I beg to ask leave to withdraw the Motion.

Motion, and Clause, by leave withdrawn.