§ 'There shall be a relief in the value transferred of 30 per cent. subject to the assets consisting of shares in an unquoted company where the transferor together with five or less other persons has control of the business.'—[Mr. David Mitchell.]
§ Brought up, and read the First time.
§ Mr. David MitchellI beg to move, That the clause be read a Second time.
§ Mr. Deputy Speaker (Mr. Oscar Murton)With this we may take the following amendments: No. 113, in Schedule 10, page 138, line 40, leave out first 'transferor)' and insert 'transferors'.
No. 114, in line 40, leave out second 'transferor' and insert '4 or less transferors'.
No. 115, in line 40, leave out from second 'transferor' to 'and' in line 3 and insert:
'a major shareholding in the company immediately before the transfer, and a major shareholding means for the purpose of this Act not less than 20 per cent. of the shares in, or securities of, the company'.
§ Mr. MitchellI should, first, declare an interest. The clause has been put down with a view to helping the Government because they may feel able to accept it. The Government have already recognised the strength of the case embodied in the clause, because they have given the 30 per cent. rebate on valuation for capital transfer tax in the case of an unquoted company where the shareholding concerned is 51 per cent. or more.
We realise that the Government have ben afraid of their left wing and its known desire to destroy family businesses. Possibly they have not yet felt able to extend the concession announced in the 588 Budget to companies where the shareholding is less than 51 per cent. Indeed, the new clause suggests that that should be the position
where the transferor together with five or less other persons has control of the business.In that circumstance, as I shall illustrate. the case is as compelling as in the case that the Government have accepted, where 51 per cent. or more applies.Although we realise that the Minister is normally restrained from being able to accept an amendment that gives small businesses such as family businesses, some protection from the inroads of capital transfer tax, at this hour of the night he could slip through such an amendment without his hon. Friends below the Gangway noticing what he is doing. Indeed, there is now only one Labour Member below the Gangway, and his recumbent position suggests that he would not be aware of the Minister's acceptance.
The position is quite simple. The Government have given an offset of 30 per cent. in the case of a shareholding of over 51 per cent. Basically, the 30 per cent. discount, if that expression may be used, takes account of the degree of inflation that has occurred since capital transfer tax was first introduced. There is no offset for the 20 per cent. to 51 per cent. shareholding in a company, but it is just as difficult for companies where there is that sort of shareholding to pass from one generation to the next.
The House must have in mind that any business that has been built up from near scratch during the lifetime of the proprietor will have a substantial liability to capital gains tax even before it starts to pay capital transfer tax. There will be few funds outside the average family business with which to pay the transfer tax. Where the wealth of a family is tied up in a business that it has spent many years building up, which will be passed on, or should be, to the next generation to make larger, perhaps to a size where it may be floated on the Stock Exchange, there will be no funds with which to pay the tax other than in the business.
I do not know whether the Government have considered the possibility of allowing the business as such to pay tax in that circumstance. That would ease the real central problem—namely, that 589 the next generation to inherit the business and run it will be able to pay the capital transfer tax liability only by taking money out of the business in terms of gross salary and accumulating sufficient post income tax net salary to pay the capital transfer tax. Anyone who does his sums will realise that it is not conceivably possible in any business larger than about £100,000 to take out enough money to meet the transfer tax liability, even over eight years and interest-free. In a business worth £250,000 one would have to take out in salary over eight years more than the total value of the business to have a net sum with which to pay capital transfer tax. The Government must recognise that something should be done.
The amendment gives the Government the opportunity to extend it right across the board in the case of significant holdings in unquoted small businesses. I urge the Government to accept the clause. Not a single member of the Tribune Group is in the Chamber, and the Minister could quietly accept the clause and do much good for smaller businesses.
§ Mr. RidleyI support my hon. Friend the Member for Basingstoke (Mr. Mitchell). We are in an extraordinary position. We are rapidly going back to the old estate duty. Every time the Government look at the ugly capital transfer tax, they create a few more estate duty-type provisions.
I welcome the major concession for private businesses, but already the Government have created two types of taxpayer—the taxpayer who has a 51 per cent. holding in a private company and the tax payer who has 49 per cent. holding. They are treated as totally different people, like hon. Members of the House, who are divided between those who either allege or declare themselves to have, or have not, found themselves outside incomes. One group receives one level of remuneration and the other a different level.
My hon. Friend the Member for Basingstoke is right to spotlight the similar situation in the taxation treatment of shareholders. It would be more sensible and equitable to say that it should apply to all shareholders. The tax is unworkable, impossible and useless.
590 The amelioration in the clause helps, because the problems always arise in raising cash to pay the tax. Whether one has a small or large share one has to sell it, or part of it, to find the money to pay the tax, especially when it stands at the penal levels of capital transfer tax. That means that the control of that block of shares passes to the person who buys the shares. By that means the ownership pattern is broken up. That is made worse if a person who has a 51 per cent. holding receives relief while the minority shareholders do not.
In most private companies the 51 per cent. shareholder will be in a position to object to a new purchaser. He can say that he will not agree to the transfer of minority shares to Mr. X because he does not like him. He can destroy the value of the shares. That is the danger. In happy companies with happy relationships it is probably easier for the minority shareholder to ask the majority shareholder to lend him a few shares so that he can qualify for the 51 per cent. holding before he dies, with an agreement that they will be passed on after he dies.
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This presupposes a mutual trust and respect among shareholders that is not always to be found in the private sector of the economy. In commending my hon. Friend's clause I congratulate the Government on their slow and painful progress towards realising that all the things they did in the absurd capital transfer tax have to be unwound. The Government can do this in the absence of the Left wing and we will not say too much to embarrass them.
§ Mr. Peter Viggers (Gosport)I support the new clause. Investment in a small, unquoted, close company is indeed like walking a tightrope. One is throwing oneself very much on the sympathy and co-operation of one's colleagues. I speak as one who has to declare an interest as an investor in a close company. When a profit has been made in a close company there is corporation tax of 52 per cent. to pay and then income tax on the benefit of the amount that goes through to the individual.
At the moment there is a tax over-kill on close companies. This causes distortion and means that owners of such 591 companies are forced to consider whether they might be better employed in forming a partnership, or some kind of overseas partnership, or whether it is necessary for them to un-close the company, which can be done in certain circumstances. All of these are distorting factors which should not be present. Close companies ought to be able to operate without the principals having to devote so much of their valuable management time to trying to work through a maze of tax regulations. It is clear that the modest concession now proposed will be beneficial to small companies and thus, indirectly, to the country.
§ Mr. Denzil DaviesThe speeches from the Conservative Benches have been moderate. I am told that there are no members of the Tribune Group present and therefore I may take certain action. Despite this, I am afraid that, even at this late hour, I cannot accept the new clause or the amendments. The clause seeks to extend the 30 per cent. relief now given to majority shareholdings—a shareholding in excess of 50 per cent.—of an unquoted company to minority holdings—presumably 49 per cent. or 20 per cent. The argument is that if we can give this relief to the majority shareholding we can do so for the minority holding.
The hon. Member for Cirencester and Tewkesbury (Mr. Ridley), with his usual perspicacity in these matters, put it clearly when he said that we are moving back to the old estate duty, when we gave a 45 per cent. relief, in certain cases, to a majority shareholding in respect of estate duty. Perhaps I ought to remind the hon. Gentleman that the Bolton Committee, which examined small businesses, considered extending the 45 per cent. relief to minority holdings and came down fairly strongly against such a move.
The clause seeks to extend the 30 per cent. relief to minority holdings. The Bolton Committee looked at this in the context of estate duty and came to a conclusion similar to that we have reached in confining this relief to majority holdings.
There were a number of debates in Committee about this matter. My right hon. Friend the Chief Secretary made the 592 point, which I have to make again, that there is a difference between a majority holding and a minority holding, and not just in the number of shares held. The hon. Member for Cirencester and Tewkesbury said that the 51 per cent. holder would be able to object to the new purchaser. That is one factor to be taken into account.
There are other factors. The person with more than 50 per cent. can stop all sorts of things being done, or can do all sorts of things that the holder of 49 per cent. cannot. The 2 per cent. difference is often worth more than the percentage difference of 2 per cent. of the company's assets.
It will be recognised that there is a substantial difference between a majority holding and a minority holding. We seek to relieve the majority holder in respect of the additional value, because he has a valuation additional to the normal valuation of the shares.
Once one goes below 50 per cent. there is no point at which one can say one should stop. One could go down to 5 per cent. My experience of the valuation of shares leads me to believe that minority holdings are not worth all that much. The view was expressed at one time—perhaps the Estate Duty Office would not agree—that a minority holding was not worth much more than par value. It is a respectable view, because as one reaches the lower percentages one finds that the minority shareholder cannot exercise any control, and is left in a precarious position.
We have made a major concession in giving the 30 per cent. relief and we have thought it right to keep the concession to holdings of 51 per cent. or more bearing in mind that the Bolton Committee also came to the conclusion that estate duty relief should not be extended to a minority holding.
§ Mr. David MitchellWould the Minister consider the possibility that under certain circumstances the company could pay the tax? I realise that that introduces a new concept, but it gets over the substantial problem that it will not be possible for an individual to accumulate sufficient money to pay capital transfer tax liability out of his post-income tax income.
§ Mr. DaviesThe possibility of a company paying the tax was raised in connection with estate duty, and in one instance such a concession was operated by the Estate Duty Office. The hon. Member is asking for this to be applied generally. The question has been con-considered in the past but it has been decided for various reasons that it is not possible. There are difficulties about extracting funds from companies, and there may be opportunities to extract funds which we would not want to allow.
I take the hon. Member's point; there may be difficulties about paying the tax —although it can be spread over eight years—that might be alleviated by allowing the company to pay the tax. But we think it right to give relief to the majority holders, recognising the additional value that a majority holding confers upon the holder. We cannot extend the concession to the minority holder.
§ Mr. ViggersIs the Minister saying that a person called upon to assess the value of a minority holding in an unquoted company will follow the Minister's line, which is that smaller minority holdings in companies have a value almost as low as par?
§ Mr. DaviesCertainly not as low as par. That was a view I have heard expressed. It is recognised by the Estate Duty Office that the value becomes less and less as the minority holding decreases, and that there is a difference in value between 51 per cent. and something less than 50 per cent. That has always been recognised. That is one argument. My right hon. Friend the Chief Secretary put forward the same argument in Committee for basing relief on a majority holding, because once below 50 per cent. there is a considerable decrease in terms of valuing the shares.
§ Sir Geoffrey HoweI must add my voice to those of my hon. Friends in pressing this proposition upon the Minister of State. The general case of principle put forward by my hon. Friend the Member for Basingstoke (Mr. Mitchell)—a principle that seems to be inescapable and right—is that if there is a case for the concession for the majority shareholding there is a case for the concession in respect of other shareholdings. The 594 fallacy of the Minister's argument was that he asserted that they are to be distinguished from each other as black from white and that the majority shareholding is white, which passes through the gate where the relief is available, but the other shareholding, including that set out in my hon. Friend's amendment, is of a totally different kind.
§ Mr. RidleySurely the argument put forward is even more extraordinary. It is that while the majority shareholding is actually worth less, because it is a minority shareholding, the person will have to pay more tax. Less shares mean less value, but the person will have to pay more tax. He gets clobbered all the way along the line.
§ Sir G. HoweThe point that my hon. Friend mentions is that if the value of the minority shareholding is less per share than the value of the majority shareholding it seems hard to give that person no abatement of the kind promised for the majority shareholding. It may well be that the tax, in cash terms, is less, because the cash value of the share is less, but the rate at which it is biting is higher. I cannot believe it is right to allow the Government to take refuge in the argument they advance. My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) says that this is another example of the way in which the Government are having gradually to retrace their steps by filling Finance Bill after Finance Bill, for years ahead, with reconstruction jobs in relation to the disastrous legislation they introduced last year. It is not for me to say what attitude my hon. Friend the Member for Basingstoke should take to the Government's response, but he may well be as dissatisfied as I am.
§ Mr. David MitchellI had anticipated that the Minister would respond in a much more generous and reasonable fashion, but in view of the fact that he has not it seems to me proper that we should vote on this matter.
§ Question put, That the clause be read a Second time:—
§ The House proceeded to a Division; but no Member being willing to act as Teller for the Ayes, Mr. DEPUTY SPEAKER declared that the Noes had it.
§ Question accordingly negatived.