§ ' 1. This section has effect in relation to the disposal of an asset where—
- (a) the disposal is one to which section 22(4) of the Finance Act 1965 (gifts etc.) applies or which is deemed to take place by virtue of section 25(3) or (4) of that Act (settled property); and
- (b) a reduction in respect of the asset either—
- (i) is made under Schedule 10 to this Act (capital transfer tax relief on business property) in relation to a chargeable transfer taking place on the occasion of the disposal; or
- (ii) would be so made if there were a chargeable transfer on that occasion and a claim were duly made under that Schedule; and
- (c) no reduction in respect of the asset is made under Schedule 8 to the Finance Act 1975 (capital transfer tax relief for agricultural property and shares and debentures of companies owning agricultural property); and
- (d) a claim for relief under this section is made within two years of the end of the year of assessment in which the disposal is made or such longer time as the Board may allow.
§ 2. Where subsection I above applies the consideration on the disposal of the asset for the purposes of the said sections 22(4) and 25(3) or (4) shall be treated as reduced by 30 per cent.
§ 3. For the purposes of Part HI of the said Act of 1965 (capital gains)—
- (a) the consideration for the disposal of the asset shall, if apart from this section a gain would accrue on the disposal, be determined as if the market value of the asset were reduced by the amount mentioned in subsection (6)(a) or (b) below whichever is the smaller; and
- (b) the consideration for the acquisition of the asset on the disposal shall be determined as if its market value were reduced by the amount mentioned in subsection (7) below.
§ 4. Subsection (3) above does not affect the computation of development gains: and any gain computed in accordance with that subsection shall be a chargeable gain only to the extent, if any, to which it exceeds any development gain accruing on the disposal in question.
§ 5. Subsection (3) above does not affect the computation of development losses except that, where paragraph (b) of that subsection applies to the computation of the chargeable gain or allowable loss accruing on a disposal, no development loss shall accrue on the disposal unless there is an allowable loss as so computed and, if there is such an allowable loss, 1128 the amount of the development loss shall not exceed the amount of that allowable loss.
§ 6. The amounts referred to in subsection (3) (a) above are—
- (a) an amount equal to the fraction of the market value of the asset of which—
- (i) the numerator is the amount of the reduction in respect of the asset that is made under this section; and
- (ii) the denominator is the value of the asset as it is or would be taken into account in relation to the disposal in question before any reduction under this section;
- (b) the amount by which the market value of the asset exceeds the aggregate of—
- (i) the sums allowable in relation to the disposal under paragraph 4 of Schedule 6 to the said Act of 1965 (acquisition cost etc.); and
- (ii) the amount of any development gain accruing on the disposal;
§ and the sums mentioned in paragraph (b)(i) above shall be determined without any reduction under section 33(1)(b) or (2)(b) of the said Act of 1965 or paragraph 18(4) of Schedule 3 to the Finance Act 1974 (replacement of business assets).
§ 7. The amount referred to in subsection (3)(b) above is the difference between—
- (a) the gains chargeable on the disposal (whether as chargeable gains, development gains or partly one and partly the other); and
- (b) the gains that would have been so chargeable if this section had not been enacted.
§ 8. Any claim under this section shall be made—
- (a) in the case of a disposal to which the said section 22(4) applies, by the person making the disposal and the person to whom it is made; and
- (b) in any other case, by the person making the disposal.
§ 9. This section applies to disposals made after 6th April 1976.'—[Mr. Cope.]
§ Brought up, and read the First time.
§ The Deputy Chairman (Sir Myer Galpern)
With this we may discuss new Clause 2—[Elimination of double taxation]:'Where on a capital transfer a liability to capital gains tax arises in respect of the same assets the tax shall not exceed the liability for charge to capital transfer tax or to capital gains tax whichever is the greater.'
§ Mr. Cope
I beg to move, That the clause be read a Second time.
We have here a gift tax horse which I am proposing to look in the mouth. Under the Bill's provisions there will be an anomalous position. The Chief Secretary has explained that under Clause 1129 65 the agricultural property relief provides a 50 per cent. reduction for the property to which it applies. This relief applies both to capital gains tax and capital transfer tax. I hope that the Chief Secretary will confirm this.
§ Mr. Cope
As I understand it, relief under Clause 65, the agricultural property relief, will apply both to capital transfer tax and capital gains tax. This arises because the relief under Clause 65 is done by reference to Section 55 of the Finance (No. 2) Act 1975, which in itself modifies Schedule 8 of the Finance Act 1975. It seems that the capital gains relief provided by the No. 2 Act must also apply to the principal Act of 1975 and hence to the relief in Clause 65. I think that the Chief Secretary is confirming that I am correct in this surmise.
§ Mr. Cope
It does help my speech, because the relief I am seeking to insert with this clause is exactly the same relief for business assets, in relation to capital gains tax, as is conferred in respect of agricultural property relief under Clause 65. Agricultural property relief was introduced in the first place at the start of the capital transfer tax but did not immediately apply to capital gains tax. It was extended to that later in the year.
It seems that this relief on business assets should not apply only to capital transfer tax, but, like the agricultural property relief, should also be extended to capital gains tax. There is a strong case, but no doubt it will be made in discussion on new Clause 2, for capital transfer tax to apply to gifts and at death and for capital gains tax to apply only to sales. As long as the Government fail to recognise this, if they do not have the wisdom to look kindly on new Clause 2, they should at least see the reasonableness, as they have done in the case of agricultural property relief, of dealing with both the taxes on the same sort of basis.
The anomaly arises in a slightly complicated way because of the history and the fact that the relief for agricultural property was not in the first place applied to the capital gains tax as well as to the 1130 capital transfer tax. Nevertheless, the small business relief is applied by a new schedule in the Bill; therefore the new clause is required if the CGT is to be similarly affected.
Although the drafting looks rather complicated, I am sure the Chief Secretary will have recognised that it is modelled basically on Section 55 of the Finance (No. 2) Act 1975 and is not really as novel as it looks at first sight.
Last year, as hon. Gentlemen have already mentioned in the last debate, both upstairs and downstairs Ministers lectured us about how the CTT, CGT and the combination thereof would not damage small businesses and agriculture. It was obviously realised, as we discovered in the last debate and in the Budget speech, that they would be damaged to a certain extent. The Chancellor of the Exchequer gave two basic reasons—which were more or less repeated by the Chief Secretary tonight, surprisingly enough—for the clauses put forward, to meet legitimate grievances and to remedy technical defects.
New Clause 1 is in the class of technical defects rather than legitimate grievances, and I hope that the Chief Secretary sees it in those terms. In case he should see it as a legitimate grievance, or a possible legitimate grievance, it is necessary for me to follow up for a moment what he was saying about balance, because that would apply if it were in the prospective legitimate grievance category. What he meant by balance, it seemed to me, was a balance between principles, which he reckons he stated in the earlier debates, and loopholes, which he reckons he is dealing with now.
The real principle involved is whether or not these businesses should be broken up at the time when the proprietor dies or passes on the business to the people, whoever they are, who take it over, because that, quite simply, is the effect of the combination of CTT and CGT.
The Government have recognised this to a certain extent but not to the degree that I should like to see. The Chancellor of the Exchequer, in his Budget speech—and the Chief Secretary repeated it in very similar words—was concerned to ensure that the tax does not damage productive activities which are of value to the national economy. It is bund to damage them, even if new Clause 1 were 1131 carried, and even if new Clause 2 were carried as well. It is a typical exaggeration of the Chancellor of the Exchequer, and the question is how much the damage will be. In my opinion, the damage is still too great.
It seems to me extraordinary that in this choice between CTT and CGT the Government have chosen to help the stagnant business rather than the growing one. Capital transfer tax, on a business of a given size, applies the same whether the business has grown in the last few years or is stagnant. Capital gains tax applies more to the business which has grown steadily than to the one which is stagnant. To relieve the capital transfer tax liability and not the capital gains tax liability is to help stagnant companies at the expense of the growing companies.
I see my hon. Friend the Member for Oswestry (Mr. Biffen) on the Front Bench. Therefore, I should add at once that by "stagnant" I mean "stagnant" in money terms. In real terms a business, even if it stands still, can seem a growing business, and capital gains tax is charged on the inflation that affects the business as well as its actual growth. For all these reasons, new Clause 1 ought, I think, to commend itself to the Committee.
§ Mr. David Mitchell
I wish to say a few words on the subject of new Clause 1 and to link with them some comments on new Clause 2.
We should welcome the Government's belated conversion to at least some of the cases that we were putting to them last year to illustrate that they had to do something for the smaller business sector and that what they were proposing then was inadequate. What they are proposing this year is still inadequate, because their concession applies to majority holdings, and even a holding of 20 per cent can be of significant importance in terms of the retention of a small business as an ongoing unit if it has to be sold outside the family.
Secondly, the Government's concession today does no more than offset inflation, which has itself pushed businesses into a higher rate of capital transfer tax. We have to remember that since this proposal was first introduced, inflation has gone 1132 up some 46.8 per cent. Inevitably, the tax liability is enormously greater on the same assets.
Thirdly, the Government's concession does not remove the double taxation of capital transfer tax and capital gains tax. Earlier, the Chief Secretary said that the Government did not want to kill productive assets. Those words cheered me, because I felt that they might be the forerunner to his accepting new Clause 1, new Clause 2, or both, since they would do a great deal to take the Government along the road indicated by the right hon. Gentleman of not wanting to kill productive assets.
If we are to have a healthy private sector, we have to have substantial capital investment in it. Taxation, which is designed to take large chunks of capital away from smaller businesses inevitably will strip business of the capital that they need to keep themselves modern and competitive. The worst aspect of it is that, the more vigorous the business, the greater the liability to capital gains tax will be.
I take just one example. Let us suppose that a business has been started from nothing and that, during a man's life, it has been built up to £300,000. Roughly one-third of that will go in capital gains tax, so there is £100,000 gone, leaving £200,000. If that is to be preserved intact and passed to the next generation in the business, before the concession was announced there would have had to be £211,870 of other assets brought in and paid over in tax to leave this asset intact. With the 30 per cent reduction that we get now, the bill will be £140,000.
Would it be possible for a business of £300,000, with £100,000 going out for capital gains tax, then to find about £140,000 over an eight-year period? To do that, the proprietors would have to draw out £17,000 a year, post tax, before they started to pay anything to keep themselves. I reckon that they would therefore require to have a gross income in excess of £60,000 a year for eight years before they would be able to pay the tax liability. What business of £200,000 or £300,000 of assets could pay to the proprietors that sort of income to enable them to find the money to pay the capital gains tax liability?
1133 With the concession that we have today, unless the Government give the further concession asked for in new Clause 2, it is certain that the growing business which is making a vigorous contribution to Britain's economy will be savagely hit by the combination of capital gains tax and capital transfer tax. These businesses which should be providing the future growth of our economy will be savagely hit. I urge the Chief Secretary to accept new Clause 2.
§ Mr. Lawson
I am grateful for the privilege of catching your eye, Sir Myer.
The remarks of my hon. Friend the Member for Basingstoke (Mr. Mitchell) were precisely to the point and I support them unreservedly. They make a nonsense of the Chief Secretary's claim, which he has repeated tonight, that capital transfer tax is no worse—indeed that its rates are less onerous—than the estate duty which preceded it. For the right hon. Gentleman failed to mention that with estate duty there was no cumulation with capital gains tax. Capital gains tax was paid when there was a disposal during lifetime and estate duty on death—but never the two together. With capital transfer tax the combined effect of the two taxes produces really vicious and penal rates.
§ Mr. David Mitchell
My hon. Friend gives me the opportunity of drawing attention to a total fallacy in the comments made earlier by the Chief Secretary when he said the tax take from capital transfer tax was less than the take from estate duty. The right hon. Gentleman's figures failed to take into account that, as capital transfer tax is payable on a husband or wife survivor, there is a time lag of some years until the surviving spouse dies. Projections for tax takes for this year, next year and the year after are nothing compared with the actual take which will occur shortly after that.
§ Mr. Lawson
My hon. Friend has made a most pertinent observation. I am not sure whether he was intervening in my speech or in the contribution which the Chief Secretary is about to make, but the point was so pertinent that it was well worth making.
The Chief Secretary is a funny fellow. In our last debate, we had an example of 1134 how he had given a sensible concession which he had previously refused, time and again, to yield to us, despite the cogency of our arguments. But the one thing which he had agreed last year needed to be done is the one thing he has not done.
The right hon. Gentleman said in our debates last year that the cumulation of capital transfer tax and capital gains tax was wholly wrong. He so likes to hear me quoting his own words to him that I shall quote what he said last year:Let me turn now to capital gains tax. The arguments about capital gains tax indicate a need for an examination of that tax. That I do not dispute.He went on about the cumulative effect and said:I hasten to add that I accept that in certain instances it can be unfair. Where a man has been running his company from 1965 for 10 years a substantial liability to capital gains tax would accrue. The answer there lies more with a reform of the capital gains tax, whether it be by way of indexation which the hon. Gentleman is so fond of, or another way which others may prefer, a more progressive or different way of dealing with capital gains tax.I was the hon. Gentleman to whom the Chief Secretary referred. But he excused himself for doing nothing about it then by his final words—namely:What is at issue here is the capital gains tax system and not the capital transfer tax system."—[Official Report, Standing Committee A; 11th February, 1975, c. 1175–6.]However, we are now talking about the capital gains tax system. The right hon. Gentleman, having conceded that something needs to be done, that it is unfair, grotesque and penal when the two taxes are put together, does not come forward with anything to deal with the situation. That is astonishing when there are 41 new clauses on capital transfer tax, all of which he resisted 18 months ago. He has done nothing about the one thing on which he accepted that action was needed.
I hope that the right hon. Gentleman will accept new Clause 2. That is probably the simplest course for him to take. If, however, he feels that he would rather create something that bears his own inimitable signature, then I trust he will bring something forward on Report in the spirit of the other clauses in the capital transfer tax part of this Bill, and in the spirit of what were tantamount to the 1135 undertakings that he gave in Standing Committee in the early months of last year.
§ Mr. Joel Barnett
I deal first with new Clause 1, which was introduced by the hon. Member for Gloucestershire, South (Mr. Cope). As he rightly said, it is intended to have the effect of reducing the market value of the asset transferred, subject to certain conditions, by 30 per cent.
Although I do not go back on any of the words that I used that have been quoted by the hon. Member for Blaby (Mr. Lawson), the situation is not anything like as bad as Opposition hon. Members have suggested as regards capital gains tax as it affects the sale of businesses or the transfer of businesses in a lifetime. Of course, there is no question of capital gains tax on death. If we are talking about capital gains tax in a lifetime—
§ Mr. Lawson
Is the right hon. Gentleman assuring the Committee that it is not the intention of the Government to restore capital gains tax on disposal on death?
§ Mr. Barnett
I have no intention of making any such commitment tonight. I had only just started my remarks. I want to be brief as I know that Opposition Members want to come to a vote as soon as possible. [Interruption.] Maybe the right hon. Member for Yeovil (Mr. Peyton) wishes to stay for a long time. I have no objection to that as long as I am not here.
We are talking about the way that capital gains tax affects transfer in life. As I have said, it does not apply on death. On the lifetime transfer, there are already substantial reliefs. I am not saying that they are sufficient, but they are reliefs. For example, there is relief in respect of retirement, which exempts the first £20,000 worth of gains on disposal by an individual over 65 of a business he has had for 10 years or more. There are a number of other concessions available for capital gains tax, but I accept that there 1136 is a serious problem as regards the combined burden in some instances when capital gains tax and capital transfer tax operate together. I shall return to that when I have referred to new Clause 2 and some of the matters raised by the hon. Member for Basingstoke (Mr. Mitchell).
First, I deal with the point that the hon. Gentleman raised in his second speech, if I may put it in that way, before turning to his first speech. The hon. Gentleman sought to turn the substantial advantage under capital transfer tax, whereby spouses can transfer businesses, or any other assets, without payment of capital transfer tax—that is total, exemption, unlike estate duty—into a disadvantage. The hon. Gentleman is right to suggest that the yield from capital transfer tax in the early stages is lower than it would be at a later stage. The reason for that is the substantial advantage that we have introduced into capital transfer tax by the relief which will accrue largely to widows. We know that wives tend to live rather longer than husbands.
It is true that at the end of the day there will be a higher yield from capital transfer tax when the second spouse dies. That applies because of the substantial advantage that we have already given under capital transfer tax. We have no intention of giving the further relief which the hon. Gentleman seeks under consanguinity as the asset is passed on to heirs and so on. This is not our intention, and I do not apologise for that.
The next point the hon. Gentleman made his example of a company where the combined capital gains tax and capital transfer tax would be £140,000. I say again to the hon. Gentleman that, although I do not necessarily complain about it, when examples are given in this sphere they tend to be exaggerated examples. If one was talking of a company which was faced with a combination of capital gains tax and capital transfer tax of £140,000, having taken no measures prior to that, it is at least a strong possibility that under estate duty there would have been not just that liability but considerably more.
However, as I say, I accept that there is a problem of the combined effect of the two taxes. I think that there may well be a case to look at, as I said last year, on the other hand, I am bound 1137 to say also that there are two different taxes. Capital transfer tax is a replacement of estate duty. It is a tax on the passing of assets from one person to another, other than a spouse. Capital gains tax is a tax on an accumulation, a tax on a gain on a particular asset. The two things are separate. However, I recognise that because of the combined effect, in certain circumstances there can be a harsh effect.
§ Mr. Loveridge
Is not the essence of the case that my hon. Friends have been putting not so much the question of harshness as the question of the break-up of productive assets? My hon. Friend the Member for Basingstoke (Mr. Mitchell) referred to a lifetime gift of £300,000 costing £140,000. If a lifetime gift in that figure can be made only by placing such a burden of debt on the firm that it must close down, in practice the gift cannot be made. That is the essence of the case. Many of these firms are larger than that. They are the most productive of our firms. They have the very assets that the Chief Secretary asserts that he does not wish to break up. Will he consider that aspect?
§ Mr. Barnett
Clause 64 gives very considerable relief in order precisely to avoid a break-up of assets of the kind the hon. Gentleman describes. As I have already indicated, the hon. Member for Basingstoke exaggerates the effect on small businesses. I do not accept that there will be many examples of the kind that he gave to the Committee where there would be a tax liability of f140,000.
I come to the question of the combined effect. It is a question of striking the balance between equity and not wishing to have a break-up of productive assets. I am glad that the hon. Gentleman referred to this as the break-up of productive assets rather than allowing assets to be transferred from a family to the children, because it does not follow that the children will continue to manage the assets as well as the entrepreneur father did.
I accept that there is a danger of a break-up of assets occurring. That is to be avoided, if at all possible. On the other hand, one must be careful to ensure that there is a reasonable balance and that too much relief is not given in this 1138 direction although there is an inability to give capital gains tax relief in other areas.
I am prepared to consider what is said in Standing Committee and also to look again, without commitment, at the way capital gains tax comes into the balance of the total charge on lifetime gifts and on death.
There are considerable anomalies here. The hon. Member for Blaby fairly made the point of the difference between estate duty and the way that capital transfer tax and capital gains tax work. Under estate duty, capital gains tax never worked in conjunction with estate duty, whereas in the case of a lifetime transfer capital gains tax and capital transfer tax work together. I want to consider the whole of that, without commitment, but I promise that I shall do that. I shall consider also the further views of the Committee when we go upstairs. With that explanation, I hope that the hon. Member for Gloucestershire, South will not feel it necessary to press the new clause.
§ Mr. David Howell
This little debate is one more mournful reminder of the many inadequacies of the capital transfer tax, and the Chief Secretary realises them, and the interaction of capital gains tax with capital transfer tax that we have just been discussing is one example of the inadequacies. It is interesting to see how the Chief Secretary, who has given a lot of time and thought to this, as we move away from the era in which CTT had to be introduced in a hurry 18 months ago begins to apply his mind and see some of the absurdities in the tax that he was forced, for other reasons and under other pressures, to introduce in the first place.
We shall come back to this. CTT is already a bit of the past. It was part of the price paid for the last but one social contract—the one that gave us 25 per cent. inflation. Already it has become a monument to past adventures and past disasters. It is riddled with holes and with woodworm, and more cracks are appearing in the edifice every day. The CTT problem is a difficult one, and it is understandable and right that the Chief Secretary should be ready to look at it again.
1139 However, when we listened to what the "look" would amount to, we found it was a little fuzzy at the edges. It is not quite cooked. This takes us back to the familiar world of past CTT debates when Ministers suddenly realised that they were in a hopeless position and offered what was in their minds as a possible remedy. They are doing it again, but it is only a vague thought, induced by vague words such as "without commitment" and "taking into account the balance of the total charge of transfer both in life and on death" and other words which it was difficult to get down at this late hour. One of my hon. Friends says "And in relation to what is laid down on the instructions of the TUC."
It is difficult to reach my judgment on this matter. I must suggest to my hon. Friend that he should press the new clause. We are left with a situation in which CGT remains interacting and accumulating with CTT. The Chief Secretary and the Financial Secretary said last year, or at any rate hinted, that CGT would be reformed. The former Financial Secretary said that he did not like CGT. We waited for this year's Budget to see what the reform was, but we found it was nothing except minor concessions, so the heavy burden remains.
The right hon. Gentleman may say it is an exaggeration and dispute the figures quoted by my hon. Friend the Member for Basingstoke (Mr. Mitchell), but the
§ fact is that when one does the sum these are the figures that come out. These are the realities that face business people. When they transfer a business during their life time, these are the figures with which they have to deal on retirement. These are the facts which threaten the break-up of productive assets in the way that the old estate duty never did and the way that a sensible organised system of capital taxation should not do. As long as the Chief Secretary adheres to that position, so long are we right to press the new clauses and insist that we get some sense into our capital taxation again.
§ Motion and clause, by leave, withdrawn.