§ Mr. Joel BarnettI beg to move Amendment No. 126, in page 24, line 56, leave out from beginning to 'shall' and insert:
'Without prejudice to subsection (3) of section 36 or subsection (3) of section 37 of this Act, nothing either of those sections'.
§ No. 220, in page 24, line 56, leave out subsection 6.
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No. 185, in Clause 36, page 25, line 20, leave out from ' exceed ' to end of line 23 and insert:
such part of the amount attributable to the share disposed of by him calculated in accordance with subsection (4) below.
(4) The part mentioned in paragraph (b) of the preceding subsection shall be such part of the development gain, which would have accrued as stated in paragraph (a) of the said subsection, as the amount of such development gain bears to the gross value of land owned by the company at the time of the disposal'.
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No. 221, in Clause 36, page 25, line 20, leave out from 'exceed' to end of line 23 and insert:
'one half of such part of the amount mentioned in subsection 3A below as is attributable to the shares disposed of by him.
3A. The amount mentioned in paragraph (b) of subsection (3) above is such part of the chargeable gain as the net development gains that would have accrued as mentioned in paragraph (a) of that subsection bears to the aggregate of the net development gains and net chargeable gains that would have accrued to the company on the assumptions made in the said paragraph (a). For the purpose of this paragraph net development gains means the excess of the total development gains over the total development losses and net chargeable gains means the excess of the total chargeable gains over the total allowable losses'.
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No. 223, in Clause 36, page 25, line 23, at end insert:
'(4) Where an allowable loss accrues to a person on a disposal of shares in a company to which subsection (1) above aplpies, the development loss accruing to him in respect of the disposal shall be the lesser of—
and Government Amendments Nos. 127 to 134.
Mr. BarnetSome of the Government amendments relate to Clause 36, which deems a disposal of shares by a shareholder with a material interest in a close land-owning company to be a disposal of land, and where a chargeable gain arises treats it as a development gain.
The purpose of this group of amendments is to reduce by one-half the amount of unrealised development gains of a close land-owning company or of a land settlement which is attributed to a material shareholder or beneficiary on the disposal of his shares or his interest. The amendments also ensure that any unrealised development losses of the company or trust are deducted in determining the amount of the unrealised development gains to be attributed to the shareholder or beneficiary.
During the Committee stage debate on an amendment designed to restrict the charge under Clause 36 to the first disposal only of the relevant shares I announced that I was prepared to put forward a concession on Report to relieve the double taxation of development gains in the hands of the company and the shareholder. I said then that I thought it was inequitable that the limitation in Clause 36(3) took no account of the potential corporation tax liability of the companies. The amendments seek to meet that undertaking.
Amendment No. 220 seeks to delete Clause 35(6), and the right hon. Member for Crosby (Mr. Page) has a point here. In replying to the debate in Committee I explained that the Government had decided that the proposals for development losses should not be extended to such indirect disposals or to those covered by Clause 37 since it was unlikely that the disposal of shares to which Clause 36 applies, or trust interest, to which Clause 37 applies, would give rise to a development loss.
I asked the right hon. Gentleman at the time to give some examples of what he had in mind, either in correspondence 1221 or orally, and I said that I should be happy to consider them and table amendments on Report. No doubt the right hon. Gentleman has been rather busy in the meantime, but I have not yet had examples. If it is possible for the right hon. Gentleman to explain to me the point I was not able to grasp at the earlier stage, I should be happy to consider doing something at a later stage.
I turn to Amendment No. 221. The amendment aims to cut down the development gain attributed by Clause 36 to a shareholder disposing of shares in a close company. It is a more complicated version of Amendment No. 363, which was tabled but not moved in Committee.
The effect of the amendment, so far as I can follow it—and it is somewhat complicated—is to arrive at a fraction, being the land companies' net unrealised development gains over their net unrealised total land gains, to apply that fraction to the shareholder's gains on his share disposal, and to charge the shareholder to development gains tax only on the part of the amount he would get if it were shared out among all the shareholders on a winding-up.
It is not clear why it should be thought equitable first to arrive at a development gain element in a particular shareholder's gain on a share disposal and then attribute this notionally to all the shareholders in a winding-up. I do not see any real merit in the proposal.
Then there is Amendment No. 223. It is intended to provide for development losses incurred indirectly on a disposal of shares in a close company. Again, if I had been shown some examples of potential cases, I would have considered them.
I refer next to Amendment No. 185, which seeks to restrict the unrealised development gains apportioned to shareholders within the charge to tax under Clause 36. The amendment aims to restrict the gain on the disposal of shares still further by reducing the apportioned gain in the ratio which the unrealised development gain bears to the gross value of the land owned by the company at the time of the disposal. It is not clear why such an apportionment should be thought to be equitable. At any rate, the drafting of the amendment is obscure and it is uncertain what effect it would have.
1222 I have tried to deal with the vast array of amendments and I hope that the Government amendments will be accepted.
§ Mr. Graham PageAmendment No. 220 relates to development losses. It seeks to deal with development losses which arise on a disposal of shares in close land-owning companies. Amendment No. 223 seeks to provide that development losses deemed to arise on a disposal of shares in close companies should be calculated in the same way as development gains.
In Committee the Chief Secretary asked me to give examples. There are plenty of examples, although I cannot give specific "live" cases, so to speak. However, I can give examples of what may happen. I start with the feeling that the Chief Secretary is under a misapprehension that close companies which own land are always formed solely for the purpose of tax avoidance. That is the impression I gained from the hon. Gentleman in Committee. But that is not the case. There are many close companies formed not for tax avoidance purposes, and it is those companies which I seek to protect against swingeing taxation by these provisions. Where the shares in a close company are owned by several members of a family, they are all likely to have a material interest because since they are related they come in as associates, and thus every transaction that takes place in the shares of the company will be within the scope of Clause 36.
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Many such transactions will not be carried out for tax avoidance purposes. For example, some of the shares may be held in a family settlement of trust for children who become absolutely entitled to shares on attaining the age of, say, 18. The trustees will have a deemed disposal when the beneficiary becomes absolutely entitled to the shares, but they will not be able to postpone the disposal until the company has realised its development gains. That is one instance where there may be hardship unless an amendment such as No. 223 is included.
Another example is when four individuals combine together to form a company to develop land. It is not unknown where four join together like that for 1223 them to fall out with each other. One may sell his shares to the others on a formula based on the value of the assets. Clause 36 may catch a vast number of ordinary commercial transactions and it is inequitable to allow the clause to bite on only successful transactions.
What I seek to do in Amendments Nos. 220 and 223 is to say that if there is a loss, as there may well be in the instances that I have cited, the benefit should be given to the taxpayer, as it is in other parts of the Bill relating to development gains. If a company has made a loss because, for example, it has bought land at prices reflecting hope value and that hope value never materialises, the shareholder should be allowed relief for that loss in the same way as he would have paid tax had there been a gain.
I come now to Amendment No. 221, to which the Chief Secretary alluded. He said that he could not understand it. It is not very difficult. It provides a more equitable method of apportioning development gains to the shareholders of a close land-owning company. The effect of paragraph (3)(a) of the amendment is to treat as a development gain the proportion of the shareholder's capital gain that the company's development gain bears to its total gain instead of treating the whole of the shareholder's capital gain as development gain up to the amount of the company's development gain. It retains the 50 per cent. reduction that appears in the Government's amendments, but it is an effort to be a little fairer to shareholders in the close company in these circumstances.
I hope that, without asking me for any specific live cases, the Chief Secretary will take the examples I have given and that, if amendments cannot be made at this stage, he will give some assurance that the matter will be considered later. I have come to the conclusion that Opposition Members should be addressing not the Chief Secretary but the working party that has been set up, because it seems that the working party will accept and put forward for legislation the amendments that we are now putting forward in the hope that they will be included in the Bill.
§ Mr. Norman LamontI am sorry that the Chief Secretary finds our amendment obscurely worded, and I accept his criticisms. I am sure he will recognise that the principle behind Amendment No. 185 is the same as the principles behind some of the amendments we tabled in Committee, particularly Amendment No. 363 which was not selected but which was discussed in the "Clause stand part" debate.
An important point is raised in Amendments Nos. 185 and 221. Leaving aside what the Chief Secretary said about the amendment not being properly worded, I am a little puzzled by his question why we thought it necessary to put forward an amendment which would apportion a development gain rateably to a sale of shares in a close company. In Committee I gave two precise and detailed mathematical examples of the unfairness of a person being taxed on the sale of shares in a close land-owning company to a much greater extent than the development gain, within the company, increased the price of the shares being disposed of. I put it like that a a simple principle. That is a fairly clear principle, and in equity it is fairly clear that a development gain should be apportioned rateably in any assessment of a deemed gain in a disposal of shares.
I have files outside and I could produce many mathematical examples, but I do not wish to detain my hon. Friends longer than is necessary. Specific examples were given in Committee, and I thought that the Chief Secretary had taken the point. He did not comment on the examples in Committee, but I thought that he had understood them. I was a little disappointed when he said that he could not see why a development gain should be apportioned rateably. We can go into greater detail on another occasion, but the argument on equity is clear.
§ Mr. Joel BarnettWhen I said that the amendment was obscure I was not intending to be difficult. Without going into mathematical examples, the net result of what the hon. Gentleman suggests could be that where there was a gain of £20,000 only £4,000 of the gain would be treated as a development gain in the hands of the shareholders. When we look at this 1225 again, if we find that the hon. Gentleman is right, we shall be happy to do something about it in the autumn Finance Bill.
§ Mr. Graham PageIf this is corrected retrospectively in a future Budget, I shall not complain about retrospection.
§ Mr. BarnettI am delighted to hear that the right hon. Gentleman would not in those circumstances complain about retrospection. I noted with interest the right hon. Gentleman's examples, and when we have had an opportunity to look at them in greater detail, if he is right, I will do as I have suggested. Meanwhile, I hope that the House will accept the amendment.
§ Agreement agreed to.