§ Question proposed, That the clause stand part of the Bill.
§ Mr. David Howell
This clause governs Schedule 10, which we shall debate in detail in Committee upstairs over the next few weeks. Our purpose in having this short debate is to draw attention to the posture that the Government have taken up in relation to capital transfer tax, and I am glad to see not only the Chief Secretary and the Financial Secretary in their seats but also the former Financial Secretary who played such a part in these affairs and whose Gilbert and Sullivan clause proved such a mystery to those who had to operate the tax and discover what on earth the whole thing was about.
There is a great deal of irony in this clause, for one simple reason. In February 1975 we were told that the concessions embodied in the clause and the schedule were impossible. We were told at great length by the present Financial Secretary, the previous Financial Secretary, the present Chief Secretary, and, in his own inimitable and boorish way, the Chancellor of the Exchequer, when he condescended to join in these debates, that these things could not be done, that the concessions for which we asked, or even a part of them, were impossible.
We were told that we did not understand how the capital transfer tax would apply to small businesses, and therefore when we suggested that the rates should be lowered or the valuation principles should be altered so that the tax would bite less harshly into small businesses, we were condemned as being unable to face the realities of what this tax really meant.
Every conceivable word was thrown at us. We were described as "hysterical" by the Chancellor. It was said that we were exaggerating the true facts. The Chief Secretary said again and again that it was pointless our asking for amendments of this kind, because they would apply to all small companies. He said that if we benefited all small companies it would imply that they were all good, and he knew that there were many badly managed small companies. The Chief Secretary used many other quite strong words for him, but they were nothing 1116 compared with the vituperation we had from the Chancellor at the Report stage.
That is the irony behind this clause. A year after all that, some of those things are being done—at least in part. It would have been very much simpler for the Chief Secretary to have listened to us in the first place. But he did not listen because he thinks that he alone understands the intricacies of the tax. If only he had listened to us he would have saved himself a great deal of trouble and a great many difficulties in tax administration. There are great difficulties facing small firms which have been, during the year, facing the prospect, if a transfer has taken place in a lifetime, of very heavy tax charges.
During the Budget debate, the Chancellor said in a characteristically unattractive way that although all the objections to the capital transfer tax when it was first introduced in November-February 1974–75 merely proved what a good tax it was, nevertheless he had come to the conclusion that certain reliefs should be introduced now. The way he mentioned this in the Budget is interesting, and it demonstrates his difficulty in understanding what it is all about. He said:The lengthy and acrimonious debates which accompanied the introduction of Capital Transfer Tax revealed how important these avoidance possibilities have been, since despite the fact that the new tax is levied at far more moderate rates than the old estate duty, it produced far more hostility among those whom it affected."—[Official Report, 6th April, 1976; Vol. 908–9, c. 264.]If the Chancellor had listened to the debates a year before, he would have realised that the main aim of our hostility was preventing the taxes being charges at the levels proposed on small firms and partnerships throughout the country, whose levels of productive activity would be threatened had the tax been applied at the rates which emerged from the 1975 Finance Bill. If he had listened he would have realised what our hostility was all about. He is completely wrong about where our real opposition to this measure lies.
We have this concession involving the 30 per cent. reduction in the value transferred in the case of a sole proprietor, or partnership business, or a controlling shareholding in an unquoted company, and 30 per cent. relief also applying to farmers, separate from the 50 per cent. 1117 relief which will be quoted, and the multiple rental formula which existed in capital transfer tax as it was on the statute book before. That may sound like a major advance. It is certainly in line with the points we made again and again in the debate on the capital transfer tax. Those points were rejected as impossible, irresponsible, unnecessary and based on misunderstanding and so on. The Government must now eat them words.
This provision may be a move in the right direction, but it is pretty small beer. Things begin to look less rosy when the scale rates of CTT set out in the first Finance Act 1975, with their effect on a transfer by an individual after 26th March 1974, are compared with the movement in the retail prices index since that date. On that date the index stood at 102.6. On 16th March 1976 it was 150.6—a rise of 46.8 per cent.
Consider the position of an unquoted £100,000 business. That is not a large enterprise. It is not unreasonable to assume that the price of the assets in it would have risen by about the same rate as prices, which would make it now worth about £147,000. If we reduce that by 30 per cent., which is the new concession, we arrive back at a CTT valuation of £102,000. That means that the concession is inadequate to compensate for inflation.
The Chief Secretary has therefore made a very small move which he swore 18 months ago was impossible. But we still believe that the tax is deeply objectionable and we shall be voicing our objections in due course. There is still no exemption for families in regard to this kind of transfer, the sort of exemption which operates in practically every other Western country. We are still left with some of the highest rates of capital taxation in the Western world. Capital is still concentrated in the hands of the State and no attempt is made at broadening the ownership of capital. Above all, the tax is a wrecker of jobs at a time of high unemployment. It contributes not to the creation but to the postponement of jobs, not to investment in new equipment but to the postponement of investment. It stifles innovation and kills the enterprise which flows from small companies and similar enterprises in the economy.
1118 For those reasons we look at the concession without great enthusiasm. It takes us back to roughly where we were when all the trouble over the CTT began. We must go a great deal further before we begin to approach a sensible structure of business taxation which is commensurate with the needs of the economy in what we hope will be our economic recovery.
§ Mr. Lawson
I had not intended to intervene in the debate but I was prompted to do so by the presence on the Treasury Bench of the Minister for Transport, the former Financial Secretary. I never thought that the idea of having him back in the Treasury team would appeal to me. But after listening to his successor replying to the last debate I really felt that he ought to come back. It is good to see him now, the criminal revisiting the scene of his crime, only, in a rather curious way, he has found that his fellow conspirators are returning some of the loot—not all of it, but that is what part of the Bill is about.
It is perhaps with some anguish that the hon. Gentleman has had to sit by and watch it happen. This clause is one of many capital transfer tax clauses in the Bill. Out of 105-odd clauses in the Bill there are 42 capital transfer tax clauses. Of these only one is repealing another clause, so there is a net gain, as it were, of 41 new capital transfer tax clauses.
When the capital transfer tax was introduced we had only 31 clauses on the whole subject, but we now have another 41. It is an astonishing story of Government ineptitude, because each of these clauses is, to some extent, yielding to points we made at all hours day after day and night after night in Committee upstairs. I take the one we are now debating as an example, but it is an example which applies to them all. This is giving an abatement of 30 per cent. to businesses.
§ Mr. Lawson
The Chief Secretary says "Got it". The trouble is that the Chief Secretary himself had not got it when we proposed this in the last Finance Bill but one. For example, the Chief Secretary on 5th February in Standing Committee A was saying it would be 1119 "wholly wrong" to use the abatement system for helping businesses. He said:Assuming that to be the right thing to do in terms of helping the company, it would be the wrong thing to do in terms of fiscal privilege between two different taxpayers. If one taxpayer has £250,000 in ICI and another taxpayer has £250,000 in a small company, I cannot see why, in terms of equity, one should pay less tax than the other… I cannot see how it can be fair to give relief to one man who happens to own betting shops, or a small manufacturing company, but not another who has shares in an equally good but quoted company."—[Official Report, Standing Committee A, 5th February 1975; c. 773.]We went on day after day, night after night, trying to demonstrate to the Chief Secretary that there was some difference between being a proprietor of a little business and having a large number of shares in ICI, and that there was a difference betwen the portfolio investor and the direct investor. Yet six days later he was again saying how wrong it would be to have in mind an abatement provision for businesses. He said:I was told—I think by the hon. Member of Weston-super-Mare (Mr. Wiggin) that Lloyd George and Winston Churchill in 1925 were persuaded of the need to have this form of abatement. Both of those gentlemen were very far-seeing, but what they could not foresee was the extent to which that method of relief would engender substantial tax avoidance."—[Official Report, Standing Committee A, 11th February 1975, c. 1169.]This so-called avoidance is something he said he could not possibly allow; yet here he is now coming forward and proposing to allow it. There really is no apparent explanation; indeed, the only one I have been able to discover in the research I have carried out is that put forward in an article by the late lain Macleod, which appeared in The Times on 18th June 1968. In it he said:For some curious reason the Treasury seem reluctant to accept even incontestable propositions in the year of their birth. They are noted, filed away and appear years later as Government amendments.That is precisely what happened with the capital transfer tax—[Laughter.] This is no joke.
We had a very serious thing on that Finance Bill—a guillotine applied on Report stage. The reason that it was guillotined was the Government's refusal to entertain the very proposals that they are now putting forward in this Bill. Had they been debated on Report, as they 1120 should have been, had the debate continued on Report as it did on Committee—we achieved a substantial number of changes in Committee—then those things which the Government now put to this Committee as essential would have been done 18 months earlier and the harm caused in the intervening period would have been avoided. The guillotine on Report was constitutionally irresponsible, fiscally irresponsible and economically irresponsible, and I hope that the Chief Secretary is thoroughly ashamed of himself.
§ Mr. Graham Page (Crosby)
I join my hon. Friend the Member for Blaby (Mr. Lawson) in reminding the Chief Secretary of the Report stage on the previous Finance Bill. He will recollect how bitter I was because we gained many undertakings in Committee and were then refused them on Report. I do not complain now that we have 41 clauses to correct 31, if they do correct them and if they are not so restrictive that they do not give us the concessions on which we were given undertakings in Committee on that Bill.
I suppose that one should not look a gift horse in the mouth, even if its teeth are not perfect, but this gift horse is so hobbled that, although it is a concession along the lines for which we were pressing, it is not the whole of the concession that the Government should be giving. As my hon. Friend the Member for Guildford (Mr. Howell) said, considering inflation in this period, 30 per cent. is not all that much of a concession. How was 30 per cent. chosen? Why not 50 per cent.? Was the figure just plucked out of the air? The concession should have been much more.
I am a little doubtful about the effect of this 30 per cent. reduction on other relief. Clause 30 of the 1975 Finance Bill gave a concession of several different percentages on the acquisition of a business followed by a transfer in a short time. With the two-year restriction on the ownership for this concession to take effect, there will be a very strange jump in the tax at the end of the two-year period. I do not know why that period has been selected.
But, even worse than that, the two years is cut down if the taxpayer acquired the business through a death. In that case it is no concession at all. The 1121 two years has to be counted from the date of that death. Surely the concession which should have been given here was that given in the case of the transfer of family businesses.
If it is restricted to this extent and if, by some misfortune, the successor dies during the two years after the first owner's death, this concession will be lost altogether. So, although it is a concession, the Treasury has gone out of its way to put these restrictions on it and in certain cases make it worthless.
I hope that all Treasury Ministers have learned a lesson from this. This will take effect only from April 1976. During the previous year, people with businesses will have suffered the full 100 per cent. tax without any concession. Why, why, why did Ministers have to wait that year? It would have been better done on the previous Bill. Even when there was a guillotine on the Report stage, they could at least have given us the clauses and we should have let them through on the nod.
To fail to carry out undertakings given in Committee and then to bring them in a year later in a restricted form is not playing fair with those of us on both sides of the Committee who work very hard on Finance Bills. I hope that the Chief Secretary will take a lesson from these 41 clauses to correct 31 clauses.
§ 11.30 p.m.
§ Mr. Joel Barnett
We have had an interesting brief debate. The hon. Member for Guildford (Mr. Howell) accused me of not listening. My hon. Friend the former Financial Secretary—the present Minister for Transport—is beside me. He will remember that we sat day after day, night after night, man and boy, until 8 o'clock in the morning constantly listening. I find that accusation a little hard to take. The hon. Member for Guildford has not himself learned very much. He exaggerated the case tonight as he did then.
Once again the hon. Gentleman gave the unfair example of the way in which capital transfer tax affects the man with £100,000 worth of capital in comparison with the way in which estate duty affected him. The fair comparison is not with the man who managed to transfer his assets, meeting the seven-year condition, so that he avoided estate duty. I can see the hon. Gentleman squinting while he is 1122 thinking about it. The fair comparison is with the small business man who, for a variety of reasons, was not able or did not want to pass on his business in his lifetime and who bore estate duty on his £100,000 at higher rates than will a business man under capital transfer tax.
When hon. Gentlemen put forward the case of the small business man it denotes either that they still do not understand the way in which capital transfer tax works to the advantage of the small business man or that they are seeking to make a party political point. I do not wish to accuse them of that.
§ Mr. David Howell
The right hon. Gentleman seems to be studying my physiognomy with intense care. I was squinting at the memory of the Chief Secretary's and the Chancellor's persistent refusal to realise the basis of the case against capital transfer tax. No one is asserting that the comparison should be between a business man paying tax on a chargeable transfer and a business man who transferred without liability to estate duty and therefore paid no tax. That is not the comparison. Nor is the comparison between the full rate of estate duty and a world in which no one pays any tax.
The comparison should be with reasonable rates of capital taxation of the kind levied, for example, in EEC, OECD and Western countries, which does not result in a small business, a solely-owned business or a business predominantly owned by one person having to be sold and smashed up to pay the tax. That is the comparison we sought to make, and that is the comparison which the right hon. Gentleman should have in mind. He should get out of his mind his comparison between the present position and the position when estate duty was payable. There is no comparison there and we are not making one. He is the one who is making that comparison.
§ Mr. Barnett
I am sorry that the hon. Gentleman is not making that comparison, because he should. Estate duty was an avoidable tax, and some people managed to avoid it. I will give the Committee some figures. The hon. Member for Guildford once again made accusations about the effects of capital transfer tax on jobs, investments and so on. Those accusations should be 1123 evaluated in the light of the realities under capital transfer tax. There is a significant drop in the yield of capital transfer tax compared with the yield of death duties, even taking into account the drop in the market value of shares.
In 1972–73 the yield from estate duty was £458 million. In 1975–76 the yield from estate duty and capital transfer tax combined was £327 million. The estimate for 1976–77 is £282 million. Even allowing for the drop in stock market values, there is no evidence whatever to support the exaggerated claims made by the hon. Member for Guildford and his hon. Friends. Those figures bear out the truth that the people who are paying and will be paying capital transfer tax would not have paid estate duty, whereas small business men would have paid estate duty will now either pay no capital transfer tax or much less tax than under estate duty. That is the situation. I see that the hon. Member for Blaby (Mr. Lawson) cannot refrain from seeking to intervene every other second.
§ Mr. Lawson
I am grateful to the right hon. Gentleman for allowing me one intervention, although I would point out that in Committee it is customary to do so.
We have heard this gramophone record played many times. I am a little puzzled. Will the right hon. Gentleman explain what he is trying to justify? Is he trying to justify the 31 original capital transfer tax clauses or the 42 new ones? There is a difference. Which is he trying to justify?
§ Mr. Barnett
I shall justify both. The hon. Member made no further point than he did in his previous intervention. He said nothing new, which is unusual for him, because he usually does in his interventions. I am sorry that he felt it necessary to intervene at the point he did.
In these debates I said—and my hon. Friend the present Minister for Transport said—that it never was our intention to harm productive assets. It is not our intention now. We said that we would have a general review of capital transfer tax as we saw it settling into our tax structure. When there is a major change in our whole capital taxation 1124 structure by way of the removal of estate duty and the introduction of capital transfer tax, it is not too surprising that there should be a need to review the situation.
I do not apologise because, following that review, we came to the conclusion that it might be right to make certain additional reliefs—although when I heard the hon. Member for Blaby paraphrasing my remarks in Committee I was near to being persuaded that I had got this clause wrong. He was near to persuading me to tell my hon. Friends to vote against the clause. On reflection, I think there is a case for a further concession, but it is a matter of balance.
The hon. Member rightly referred to what I said, and I do not withdraw any words that I used then. It is basically unfair that one man should happen to have £250,000 in one asset—ICI shares, or whatever—and another man £250,000 in a small company and that there should be different levels of taxation for the two. On the other hand, one has to have a balance in not wanting to harm productive assets. I said that at the time. The hon. Member quoted me selectively.
§ Mr. Barnett
The hon. Member for Hertfordshire, South (Mr. Parkinson) is getting as bad as the hon. Member for Blaby.
§ Mr. Parkinson
I regard that as a compliment.
Does the right hon. Gentleman now accept that all these exemptions under estate duty, which he persisted in describing as loopholes, were designed for just the same reason—to allow productive assets not to be penalised? Why is it so to be admired that he is introducing loopholes under capital transfer tax whereas under estate duty he was continually talking about closing them? He is making loopholes now.
§ Mr. Barnett
Because the hon. Member is sitting next to the hon. Member for Blaby he finds it difficult to listen. This is a matter of getting the balance right between equity, on the one hand, and helping small businesses, on the other. I am not pretending that I may not have gone slightly too far; listening to my remarks being referred to by the 1125 hon. Member, I find it possible that I may have gone too far.
When the hon. Member says that we are introducing loopholes he does not take into account the substantial difference between capital transfer tax and estate duty, although he has been constantly telling us the difference between the two. Although in Clause 64 we have made some additional reliefs for small businesses, there still remains a substantial difference between capital transfer tax and estate duty.
§ Dr. Bray
If my right hon. Friend is nearly persuaded, can he imagine the great effect of the eloquence of the hon. Member for Blaby (Mr. Lawson) on the Back Benches? Can my right hon. Friend explain why, from the example he gave of the man owning £250,000-worth of ICI shares, there should not now be a splendid market for small companies worth about £250,000, with the ICI shareholder selling his shares in ICI, buying such a small company, holding it for two years and then selling it again, thus avoiding paying the full rate of CTT?
§ Mr. Barnett
That is an interesting point. I shall be happy to consider the situation further, particularly in the light of the comments made by the hon. Member for Blaby, who sought to convince me through my own words that perhaps we have gone too far in the matter. That is possible, and I am happy to reconsider.
In Clause 64 we seek to fix relief at 30 per cent. of the assets value of the business. The effect of the reduction in tax in practice will be such as almost to eliminate in some cases the tax for very small close companies, and in other cases it will broadly correspond to about 45 per cent. reduction in the rate. That is wider than the estate duty, which was confined to specific detail.
The new relief will be extended to all genuine business assets. My view is that the combination of total reliefs for small businesses under CTT is very substantial. The combination between husband and wife being able to transfer the whole of the assets free of the tax, or split the assets and take advantage of the tax and the way it works, the increase in the annual exemption, the exemption out of income, the interest-free 1126 loan, the payments over eight years—all these things will provide substantial relief for small business from the tax. What we are doing in Clause 64 may well be going too far, but it is giving very substantial relief to small businesses.
The right hon. Member for Crosby (Mr. Page) complained—I am not surprised when, having made some relief, there are complaints that one should go further—about the two-year ownership condition. The purpose is to prevent avoidance by deathbed purchases, which were a notorious feature of estate duty, particularly in the case of agricultural land.
The relief will apply to all assets of a farming business, including agricultural land in so far as it does not benefit from relief for agricultural land under Schedule 8 of the Finance Act 1975 as modified by Clause 65 of this Bill. I hope that that will be considered a substantial additional relief.
§ Mr. Graham Page
The business of providing tenanted property is excluded from this relief. I understand that perhaps if it is tenanted houses, but does it also apply to agricultural land? If one is in the business of providing tenanted agricultural land, does that get relief as a business?
§ Mr. Barnett
If the right hon. Gentleman is referring to a landlord letting land, the answer is that the relief does not apply, but it does apply to a tenant, who would be entitled to the business relief on tenant's assets.
I was asked a question about forestry on Second Reading. I can tell the Committee that woodlands run as a business equally benefit from the new 30 per cent. reduction, except as regards the timber, to the extent that the deferment of tax is claimed under Schedule 9 of the Finance Act 1975. I hope that those remarks make it clear to the Committee that Clause 64 goes a long way to meet the various commitments and undertakings given in the debate we had during those long days and nights. I hope that the clause will be acceptable to the Committee.
§ Question put and agreed to.
§ Clause 64 ordered to stand part of the Bill.