§ In my Budget Statement last year I said that I was not persuaded that it would be right to introduce indexation for capital gains tax but that I proposed to review the incidence of the tax in the ensuing year.
§ The issue is whether I should alter capitan gains tax to take account of the fact that someone who sells a chargeable asset has to pay tax on a gain measured in money terms although inflation may have reduced the real gain or indeed even turned it into a loss. Different suggestions have been put forward for dealing with this problem. Some people propose that the cost of the asset should be written up on an index; others that the gain should be scaled down according to how long the asset has been owned. It has even been suggested that, because of inflation, capital gains tax should be abolished altogether.
§ The crucial question is whether those people with chargeable assets should have their tax liabilities insulated from the effect of inflation. I have come to the conclusion that this would not be right. For income tax, although I have increased the personal allowances during my two years as Chancellor, I have not been able to do so sufficiently to eliminate fiscal drag completely. Income tax liabilities have not, therefore, been insulated from inflation.
§ Then there are the millions of investors who have no prospect of any capital gains on their assets—those who put their money into building societies, savings banks and the like. If assets such as shares and land are to be indexed for capital gains tax, logic requires that these millions of other investors should be treated as having incurred losses on their assets. We just cannot afford to go down this road.268
§ I have, therefore, concluded that there should be no change in the structure of capital gains tax. The right answer to inflation is not to tinker with the effects but to cure the disease, and this we are doing.
§ However, I propose to increase, with effect from 1975–76, the total amount of disposals that can be made annually without any charge to capital gains tax from £500 to £1,000. This will mean that those with modest amounts of capital—£500 to £1,000—are unlikely to become chargeable to capital gains tax, so that they at least will be protected from the effects of inflation. This change will cost about £750,000 in a full year.