SHARE OPTION SCHEMES (CAPITAL GAINS TAX) (Hansard, 10 July 1972)

§ Mr. Patrick Jenkin
I beg to move, That the Clause be read a Second time.
The Clause closes a possible loophole in the share option provisions of the Bill. The House will be aware that there is a general provision of the capital gains tax laws to be found in Section 22(4) of the Finance Act, 1965, under which an asset acquired otherwise than under a bargain at arm's length is treated as being acquired at market value and not at the price paid. The purpose of the provision is to ensure that the full capital gains tax is charged on the dispenser. It also fixes the acquisition cost of the acquirer.
A recent decision of the appellate commissioners has shown that, where the asset consists of shares issued by a company, Section 22 operates to fix the market value as the cost in the hands of the acquirer. That does not affect the issuing company because the issue of shares is not a disposal for capital gains tax purposes.
Unless the House takes steps to prevent it, this rule would operate to confer a wholly unjustified benefit where shares are issued pursuant to an approved share option scheme and the option holder 1238 acquires the shares at the option price, but under Section 22(4) of the 1965 Act he would be treated as getting them at market value. It is our intention that he should pay capital gains tax on the increase in value between the option price and market value. If he is deemed to acquire them at market value, there would be no such increase and, therefore, no liability. I assure the House that this is not the intention of the Government and we are taking the opportunity of the Clause to close the loophole.

§ Mr. Peter Rees (Dover)
Why is not the option holder in such a situation to be regarded as acquiring the shares at arm's length? It may be implicit in the appeal commissioner's decision, but none of us is privileged to know the basis of the decision. I should like to be reassured that the Amendment is not unnecessary.

§ Mr. Jenkin
Because of the relationship between a person who is acquiring under an approved share option scheme and the company for whom he is working, the transaction might be regarded as being one at arm's length, but it may equally not be so regarded. The relationship of the acquirer under the approved share option scheme may be such as to entitle a court to hold that it was an arm's length transaction and, therefore, subsection (4) would apply.
It is the advice that Ministers have received that there would be a chance of the Section taking effect in that way; and, because this would be wholly to defeat the intention of the new legislation embodied in the Bill, we have thought it right not to take that chance and to deal with the matter in the way 1239 I have described. The Clause will close any loophole that there is. I hope that the House will feel it right to accept it.

§ Dr. John Gilbert (Dudley)
I thank the Chief Secretary for his explanation of the purpose of the Clause. We welcome the motives underlying it but it will in no way diminish our fundamental opposition to the schemes in general to which the Clause relates. I agree with the Chief Secretary that this looks like being a necessary Clause to block up a potential loophole. Had matters been construed in the way he considered possible, clearly a coach and horses could have been driven through the safeguards in Schedule 12, minimal as they are.
We in no way relax our opposition to the principle of share option schemes. This became clear in a document which I have no doubt has come to the hon. Gentleman's attention recently, namely, the document setting out what the Labour Party's policy will be. We shall deal with this as a matter of the utmost priority when we form the next Government. We have made our position on the matter clear beyond peradventure and we shall deal with it in our own way in our own time.