AVOIDANCE OF DOUBLE TAXATION

HC Deb 14 July 1977 vol 935 cc873-913

'Where, on a capital transfer, a liability to capital gains tax also arises in respect of the same assets, the total tax payable shall be either the liability to capital transfer tax or the liability to capital gains tax, whichever is the greater.'—[Mr. David Howell.]

Brought up, and read the First time.

7.30 p.m.

Mr. David Howell

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Mr. Oscar Murton)

With this we may discuss the following:

New Clause 3—Capital transfer tax.

New Clause 4—Capital transfer tax—alteration of values.

New Clause 5—Capital transfer tax—rate of tax.

New Clause 19—Capital transfer tax: transfers not less than one year before death.

New Clause 35—Abolition of capital gains tax on gifts inter vivos.

Mr. Howell

New Clause 2 is addressed to an issue upon which, both in Committee and on the Floor of the House, there has been debate over the years. It is the interaction of capital gains tax and capital transfer tax, which together can involve a capital taxation burden out of all proportion even to the high rates of existing capital taxation.

My hon. Friends will be developing the point in the context of New Clause 2. I do not want to go into very much detail on that point. I shall concentrate on the issues raised in the other new clauses on capital transfer tax. The interaction of the various capital taxes—in this case capital transfer tax and capital gains tax—reminds us that in this country we have some of the highest rates of capital taxation, as, of course, we have some of the highest rates of personal taxation in the Western world.

When we are accused of being concerned with capital taxation to the exclusion of other things it is because of the extreme height of the rates and the extreme size of the burden and the damage that it does. I shall come in a moment to deal in some detail with its effect, particularly on jobs and family businesses.

With this very high capital tax combined with other taxes on wealth it is all the more bizarre that apparently the wealth tax is again a runner in the Government's mind and that it is to be one of the features of the Lib-Lab pact. We have heard now that it is the earnest intention of the Liberal Party, combined with the Labour Party, if they have half a chance, which I do not think they will have, to introduce a wealth tax. Why they should wish to do this is beyond my comprehension. It is utterly bizarre that they should wish to add a wealth tax to our existing gallery of capital wealth taxation. But they do.

It has also been suggested by one of the Liberal spokesmen that the Conservative Party supports a wealth tax. This is not so. We utterly reject the idea of a wealth tax and the proposition that we gave it support because some of our spokesmen devised a form of wealth tax within the terms of reference in the Select Committee report on a wealth tax is entirely false.

The terms of reference required those on that Committee to look into the different forms of wealth tax. Within those terms of reference some of my hon. and right hon. Friends made their suggestions, but we do not support the idea of a wealth tax. We note, however, in passing that the Lib-Lab pact supports such an idea and we are now threatened with it.

Mr. Pardoe

The hon. Member has put a most extraordinary interpretation on what took place in Ate Select Committee dealing with a wealth tax. There were nine Conservative Members on that Committee and eight out of those nine voted for my alternative report, which recommended a wealth tax at a threshold of£30,000. This would have supplanted the whole of investment income surcharge and all the top rates of income by 30 per cent. This is probably one of the main reasons why eight of the nine Conservatives supported it.

Is the hon. Member now saying that the eight of the nine Conservatives—I see that one of them, the hon. Member for Blaby (Mr. Lawson), is whispering in the hon. Member's ear—who supported it voted for nonsense, or were they good Conservatives voting for good Conservative sense?

Mr. Lawson

It might be useful to get the record straight. The report of the hon. Member for Cornwall, North (Mr. Pardoe) was never put to the Committee. What was put to the Committee was the amendment which proposed that, instead of accepting the report by the right hon. Member for Battersea, North (Mr. Jay), there should be put in its place the report of the hon. Member for Cornwall, North. Therefore, we supported that proposal on that particular Division as the lesser of two evils.

Mr. Howell

My hon. Friend has made the position perfectly clear. He has put it with more clarity and precision than I did. Obviously, the hon. and right hon. Members of the Conservative Party on that Committee were dealing all the time with the lesser of two evils. They argued that if a wealth tax was to come, if the terms of reference demanded it, they would rather have the one than the other. They also laid particular emphasis in the report on the need to recognise the special dangers inherent in introducing such a tax at a time of high inflation and economic crisis. That is certainly the case at the present time. This makes it all the more bizarre that the Liberal Party should believe that we ought to introduce a wealth tax.

I turn to the capital transfer tax and the amendments proposed. I would be the first to concede that up to now, since the birth of the capital transfer tax, a good deal of arguing across the Floor has taken place by way of assertion and counter-assertion. We on this side have said from the start that the capital transfer tax was a misleading device, that those who believed that it would lead to a greater spread of wealth would be disappointed, because it would lead to a narrow concentration of wealth in the hands of the State, a concentration of a kind that we reject totally.

We argued that it would be devastating to small businesses and that it would create more unemployment, more joblessness and would do great damage to farms and many other concerns. The Chief Secretary and maybe the Minister of State were there at the time, and the Financial Secretary argued in the report that that was not the Government's view and said that, anyway, there was no factual evidence to support that view. Obviously, at the inception of the tax that was correct and we had no evidence to support our views. Furthermore, in the light of the great political uncertainty and the belief of many that there could he changes in tax legislation, as I hope there will be, many people who have the chance to do so are minimising the changes in their affairs that would give rise to chargeable transfers.

So one would not expect this to have been a period during which the full impact of the capital transfer tax on the lines we predicted would be developed to the maximum. Nevertheless, we are now in a better position to assess the position reasonably objectively. I want to call in aid a number of non-political sources in discussing the impact of the capital transfer tax when people have been unable to avoid it, as when there have been deaths, or when people have found that they have had to make dispositions giving rise to capital transfer tax.

From some of the evidence that we have examined we can now see the dangerous effect of capital transfer tax, despite the fact that last year the Government moved over 40 new clauses in the Finance Bill in an attempt to put right or reduce the impact of some of the effects of the original proposals.

Where do we look for warning signs that what was predicted is actually happening? The first document that I should like to look at is an assessment by the senior research official of the London Graduate School of Business Studies, Mr. Raymond Ashton, which appeared in April of this year in the Banker entitled "CTT—Death knell of the small firm?" In it he set out in great detail to analyse a number of cases and to see whether his question mark was justified or whether it should be removed so that the question would become a supported fact. A great many cases were analysed in considerable financial detail and I do not intend to detain the House with all the figuring involved.

However, a large range of cases was investigated covering circumstances where the father had died and on death there had been a transfer of business to the son, where the father transferred the business to the son before death, where he transferred within the three-year period and died outside the three years, and so on. Mr. Ashton came to these conclusions about CTT two and a half years after the inception of the tax.

He said that the cases he had analysed showed that there is a very real danger that by the next generation there will be no sizeable private businesses left, as a result of the ravages of CTT and in some cases CGT". That was his main conclusion from a detailed expert analysis. He went on to conclude: The evidence presented in this paper supports the first hypothesis"— here going back to the beginning of his paper— that a father will be unable to transfer his business to future generations because of the onerous tax liabilities that will arise on transfer". He went on: Unless something is done to alleviate this tax burden many small businesses will have to be sold to bigger businesses or to the State. This is not a party document. It is not the hon. Member for Guildford making yet another of his speeches about CTT. This is an objective study by a research official whose credentials are respected in this sphere.

Mr. John Cronin (Loughborough)

I do not wish to be discourteous, but it seems that the hon. Gentleman is simply quoting an assertion by someone who has done research work. The hon. Gentleman, however, has not given us the argument which prompted this person to make these assertions.

Mr. Howell

I should be happy to provide the arguments, but it would delay the House somewhat if I went through the case studies that led to the conclusions. There are five detailed case studies here in which Mr. Ashton analyses what has happened in certain businesses and what would happen in businesses of a typical kind.

It would certainly be possible for the House to analyse the difficulties surrounding these companies, but I suppose the key difficulty which we should examine is the problem of paying tax out of income even when the instalments are spread out over eight years. This has always been a problem, and we are here faced apparently with a tax which falls unavoidably upon a business. Even with the 30 per cent. relief on business assets, however, it is not possible in certain circumstances and with a certain size of firm to pay it out of income.

Therefore, the problem arises of trying to sell a minority holding in a family business, and we know the difficulty that that leads to. These arguments are endless. It is correct to say that they apply only at certain levels and to firms of certain sizes, and it is possible to produce figures where this doomsday effect does not happen.

7.45 p.m.

I do not rest only on the conclusions reached by Mr. Ashton, however, whose article could be given any value that hon. Members wish to give it. I should like to turn from firms to farms and particularly to the little NEDC for agriculture, which recently carried out a study of the impact of taxation on the industry. Again, it reached conclusions which I suppose could be regarded as assertions, although considerable study of evidence was carried out.

The NEDC commands a fair amount of authority and those who sit on the agriculture little NEDC cannot be dismissed as insignificant or inexpert figures in agricultural matters. They came to a great many conclusions about the taxation of agriculture, but I wish to stick to the CTT conclusions which are on pages 21 to 23 of the report.

The report looks some way ahead, and while it foresees difficulties over the next five to 10 years it points out that certain steps can be taken. These should be such as to ensure that CTT and any residual estate duty do not represent a heavy burden on the industry in cash terms. That is good news, but then the report begins to look forward from five to 10 years. First, it says that even over the five to 10-year period there could be severe constraints on the expansion and development of the more substantial farming businesses and that this could jeopardise the targets projected in the Government's White Paper "Food from Our Own Resources".

For the longer term the little NEDC came to more devastating conclusions. For let estates it came to the conclusion that the principal effects of CTT are likely to be that

1. "(a) It will make it harder, if not impossible, for the landlord to fulfil the special function expected of him of providing cheap capital for his tenants;
2. (b) It will reduce his ability to introduce structural improvements;
3. (c) It will cause a falling off in standards of maintenance."

As for owner-occupied farms, the report talks in paragraph 341 of some loss of employment. It says that in aggregate some agricultural production is bound to suffer from a tax-induced reduction in farm size, and it concludes In this important sector, therefore, there is a demonstrable conflict between the Government's fiscal and agricultural objectives. I concede that we are still in the realm of stating opinions, but surely the Minister accepts that these opinions are beginning to harden and that evidence of very serious difficulty for small firms and an undermining of the Government's agricultural objectives is beginning to mount.

Perhaps my hon. Friends will be able to produce information of small firms which have had to be sold with workers being put on the dole queue. Our original propositions—that the tax would cause devastation to small businesses—seem to acquire more justification with experience. I do not think that the House needs to hear of detailed cases of firms that have been smashed up to realise what is happening.

The effect of CTT on business expansion and business planning is now very prominent. There can be few family-owned businesses that do not find the question of how to cope with CTT at the centre of their affairs. There can be very few who are not deterred from expanding just at a time when Government policy should be encouraging them to expand because larger manufacturing concerns are least able to offer the new jobs that our younger generation needs. It is often in the smaller firms and family businesses that new jobs are to be found. It is in this area, therefore, that the Government should be straining every sinew to assist business expansion. Capital transfer tax goes in the opposite direction. That is why we have had to put down new clauses suggesting that there should be further very substantial alleviation. New Clause 3, which is a fairly straightforward new clause for the lay reader, indicates our proposals for lower thresholds for the various rates. But I must tell hon. Members that so complicated is the mechanism of the capital transfer tax that, although this is an intelligible clause to the layman, it would, if it were to apply, create insuperable problems.

I must draw the attention of the House to New Clause 4. It is a most formidable piece of algebra which achieves the aims that we are trying to achieve—to reduce substantially the burden of capital transfer tax.

I should like to say a word about international comparisons, which can always be quite tricky. I began by saying that we had some of the highest capital taxes in the Western world. I have some figures which the Minister can perhaps confirm, because he has provided a number of useful international comparisons on rates of capital taxation in parliamentary Answers. From the document "Taxation in Western Europe", which is a CBI document, figures emerge to show that, with the exception of Sweden, the United Kingdom rate of taxation on transfers for close relatives—those within the family—are in all cases over twice as high as any other OECD country. We are way up in the stratosphere in these matters.

I do not know whether it is the Government's policy to think more in line with the rest of the Community or the OECD countries. I fear not, otherwise they would have made changes to the high marginal rates of personal income tax. But the fact remains that we cannot accept the argument of Labour Members who say that we are not an excessively highly taxed nation in this respect. Clearly and visibly we are and clearly and visibly this is damaging to our productive power and capacity. So long as we continue to damage the power and productive capacity of this nation by over-taxation, so long shall we keep our own people out of jobs, weaken our capacity to compete, and so long shall we limp along, ever postponing economic recovery.

Mr. Cronin

The hon. Member for Guildford (Mr. Howell) made a pleasant speech which could have been persuasive. But he seemed to rely on the House accepting authorities rather than arguments. I got the impression that his argument in favour of helping small busineses with regard to capital transfer tax was based on the assertions of a gentleman called Mr. Ashton of the London Graduate School of Business Studies.

I am sure that Mr. Ashton is an able and well-informed person. However, to say simply to the House that Mr. Ashton says that capital transfer tax is unsatisfactory, therefore it must be unsatisfactory, is not persuasive in my opinion. The hon. Gentleman attempted no kind of argument.

He also referred to the agricultural little NEDC which itself said that over the next five to 10 years there was no serious problem. In these days, when the economic situation changes so rapidly, it is looking very far ahead to make changes with regard to something that will happen in five or 10 years' time.

Perhaps Conservative Members will enlighten me as to what the argument is about small businesses. I appreciate that if a man builds up a small business and then leaves it to the son or heir, who has to pay a large capital transfer tax, that is of some personal hardship. But I do not understand the arugment that it impairs the industrial capacity or the employment of this country. I do not follow that at all. Surely the heir in question can simply sell off part of the business, or part of the shares, and the business carries on as before.

Mr. Peter Rees

That is, in fact, the kind of argument that was deployed during the Select Committee on a Wealth Tax, of which the hon. Gentleman was a member. Will the hon. Gentleman explain how one sells off a tranche of a small unquoted company or of a business that has not been incorporated? The hon. Gentleman is being a little bit cavalier about this problem. Since we know that he has great practical experience of business, perhaps he will explain how he would personally tackle a problem of this kind.

Mr. Cronin

That question is of a very general nature. Small businesses are sold every week. There is no great problem about this. I appreciate that there is hardship to the individual concerned, but the hardship is comparatively limited if the business is small. It is only when it is a large business that capital transfer tax really bites seriously.

It is all a question of what is a small and what is a large business. I would have thought that if one transferred the shares of a small business or sold part of them—this is a self-evident truth—the business could still continue if it was a profit-making, efficient business. Otherwise, I do not see what the argument is, apart from the question of the hardship for the heir who has, expectedly or unexpectedly, made some very large capital gains through the death of the father or testator.

The hon. Member for Guildford made a point about the effect of capital transfer tax on agriculture. Perhaps in the case of farms of a relatively small size there is a disincentive for the landlord making a capital improvement which may well be desirable. There may be some case for that. But I do not think that there is a case for any substantial remission of capital transfer tax for large farms. I am talking of farms with a capital value of several million pounds and with one owner. They are relatively common in this country.

I do not intend to speak for long because I do not want to delay progress and there is a spring tide of eloquence being dammed up on the Conservative Benches.

Mr. MacGregor

Does not the hon. Gentleman agree that the capital transfer tax liability will be such that quite a large part of those large farms will have to be sold off and there may often be difficulties in finding buyers? Is that desirable from an agricultural efficiency point of view?

Mr. Cronin

One frequently sees large estates being sold off, generally in small lots, and they are taken up greedily by the market. I do not think that there is any problem here.

Basically, Conservative Members are trying to protect the interests of very wealthy people. That is the main basis of their objections. I do not think that there is much point in pursuing these arguments, because there is a total differ- ence of philosophy between both sides of the House. Labour Members think in Socialist terms. We think it undesirable that certain people should have large concentrations of wealth in their hands. For that reason we do not see why capital transfer tax should be ameliorated so that it will affect only really wealthy people to a substantial extent.

Mr. Julian Ridsdale (Harwich)

Why does the hon. Gentleman want to hurt rich English people and to encourage rich Arab, Japanese and Germans to buy land instead?

8.0 p.m.

Mr. Cronin

I do not decry rich people at all. I have no objection to rich people. All I am saying is that we on the Government side want to arrange the taxation of capital in such a way that there will be fewer and fewer rich people and in such a way that we shall have a much more equal and a less divisive society.

The hon. Member for Harwich (Mr. Ridsdale) asked why one objected to rich people. I think that subconsciously he was supporting the very argument that I was trying to make in the sense that Conservative Members think in terms of helping rich people. It was that strong subconscious impulse, I believe, that brought the hon. Member to his feet.

Mr. Ridsdale

The policies of the Government are encouraging the Arabs, the Germans, and the Japanese to come in and compete where we cannot compete.

Mr. Cronin

There are no Germans or Arabs competing in this country in business. That is only in the hon. Gentleman's imagination. However, there is a total difference of philosophy between us, and I do not think that there is any point in pursuing it further. Nevertheless, I shall listen to the loquacity of Conservative Members with the greatest attention.

Mr. Peter Rees

I am sure that I do not represent the spring tide of eloquence. If anything, a certain autumnal melancholy has overtaken me, shot through with a momentary pleasure at the spectacle of the hon. Member for Loughborough (Mr. Cronin) representing himself as the sea-green incorruptible of the revolution. I hope that, if not inside this Chamber, at least outside it, we shall be able, to find a certain basis of philosophic agreement. But I do not want to tempt the hon. Gentleman to intervene again.

The hon. Gentleman reproved my hon. Friend the Member for Guildford (Mr. Howell) for presenting his case on authorities rather than arguments. If I may express a personal opinion, I thought that my hon. Friend presented the case for New Clause 2 with extreme eloquence backed by a wealth of rather impressive evidence. I should like to take up the challenge of the hon. Member for Loughborough and to present a case for New Clause 2 on argument rather than authority.

I am tempted to survey the whole field of taxation, particularly because the hon. Member for Cornwall, North (Mr. Pardoe) is sitting beside me, and I recall our happy days together in the Select Committee on a Wealth Tax. Since he was moved to intervene—at an ill-judged moment, I suspect—in the speech of my hon. Friend the Member for Guildford, I remind the hon. Gentleman that the Select Committee on a Wealth Tax had to start from the premise that there was to be a wealth tax. That was not a premise which I viewed with any pleasure then, or view with any pleasure now.

It was only starting from that premise that we were moved to consider the situation in which a wealth tax might just be bearable and the form in which it could be tolerated. I would certainly not encourage my hon. Friend the Member for Guildford, and I am sure that he will not succumb to that temptation when he reverses roles and is sitting on the opposite Front Bench, to introduce a wealth tax on top of the battery of capital taxes that we endure at this moment.

I remind the House and the hon. Member for Cornwall, North that, with capital gains tax, capital transfer tax, investment income surcharge, stamp duty and development land tax, as a country we are better equipped with capital taxes than any other save Sri Lanka. Even the Indian Government under their new regime are now moving away from these pressures on capital.

I turn now to the consequences to this country of our over-reliance on capital taxes. My hon. Friend the Member for Guildford cited one particularly telling statistic. I remind the House of another. Of all the countries in the European Community, we derive the highest proportion of our tax-take from capital taxes.

Mr. Hugh Jenkins (Putney)

No.

Mr. Rees

The hon. Member for Putney (Mr. Jenkins) says "No." Would he care to look at the statistics? If he finds that I am wrong, I shall stand corrected. The precise figure escapes me but it is about 3.5 per cent., and I do not think that any other European Community country gets within shouting distance of that figure.

Mr. Hugh Jenkins

As a member of the Select Committee on a Wealth Tax the hon. and learned Gentleman will recall that the Committee discovered that there were 14 countries that had wealth taxes of various forms of severity whereas this country as yet had none.

Mr. Rees

The hon. Gentleman cannot have been paying attention to my speech. It may be that my speech did not deserve his attention, but let me try again. What I was saying—if he will now grasp this rather simple point—is that the proportion of our tax-take in comparison with the other countries of the EEC which derives from capital taxation is higher than any other. In other words, by that simple test the burden of capital taxation here is higher than that in any other country in the European Community. The hon. Gentleman may care to digest that. If he would then like to put another point to me, I should be very happy, with your permission, Mr. Deputy Speaker, to give way to him.

I leave the whole field of capital taxation for a moment in order to come back to the new clause dealing with the interaction of capital gains tax and capital transfer tax. My mind is irresistibly taken back to those dark nights in February last year—perhaps it is now two years ago—when we were debating the capital transfer tax in Standing Committee. At quite a late stage in our proceedings a fundamental new concept was introduced by the Chief Secretary to the Treasury. After we had been two-thirds of the way through the Committee stage he announced that there was to be a lower rate for life-time transfers as compared with transfers at death.

I think that this could be defended on many grounds. First, it takes us back to estate duty, with which we are familiar and which has been much pilloried of late as an avoidable tax. It was not introduced on that basis, but I do not speculate on the motives of Sir William Harcourt. I think that the rationale, the principle, underlying this fundamental amendment introduced by the Chief Secretary was that he wished to stimulate the flow of lifetime transfers—to make it easier for owners of capital to transfer during their lifetime. He did not wish people to sit on capital until the moment of death and he thought that it was good that the young should be given a chance and that there should be a loosening of the position.

If that was not the reason, perhaps the Minister will suggest some other. But that is the way in which I saw it, and that is the way in which I still see it today. I believe that the intention was to encourage people to a limited degree to pay a due—we would call it an undue —proportion to the Chancellor of the Exchequer by transferring their wealth during their lifetime.

If that be the underlying principle, one has to consider what has happened. I shall not produce a wealth of case histories, but that principle has been countered by another factor. That is the incidence of inflation, over which the Chancellor of the Exchequer has presided with his usual ineffable complacency. The swingeing charge of capital gains tax in almost every case has discouraged people from taking advantage of the lower rates of capital transfer tax on lifetime transfers.

I am sorry that the hon. Member for Loughborough should have left the Chamber, because he will appreciate that the lower levels of capital transfer tax were put up to only a rather niggardly level, so we are probably talking of people who by present-day standards are not possessed of vas'. wealth. This new factor—the imposition of capital gains tax on what are largely inflationary gains—has certainly in my experience discouraged people from taking advantage of the lower rates imposed on lifetime transfers.

Basing my approach on argument rather than on authority and assertion, I hope that the Minister of State will be able to look kindly on New Clause 2, which seeks to remedy the position. I remind the Minister of State that it is true that over the past few days we have watched the dethronement of the Emperor Jones by his own Praetorian guard in the Isle of Man. It might not be fashionable to quote the sayings of the emperor and his court, but I seem to recall that from certain trade union luminaries have fallen the words "a strike of capital".

I should like the Minister of State and his right hon. and hon. Friends to reflect for a moment why there has been a strike of capital. I believe that one of the principal reasons has been the battery of taxes on capital in this country to which I have referred. If the Minister of State and his right hon. and hon. Friends are serious in wishing to stimulate investment in this country, investment by private capital with all the consequences for jobs that that must entail, he must consider New Clause 2 with perhaps rather more sympathy than he is disposed to at present.

Perhaps in the last despairing round of negotiations in which he may well be engaged with his friends, the leaders of the trade union movement, he might just be able to evoke a sympathetic response from them if he tells them "I am aware of the difficulties of your members. They are caused, at least in part, by the strike of capital to which you have referred. We shall ameliorate the situation with a farsighted move that has been proposed by the hon. Member for Guildford, namely, New Clause 2." Perhaps on that basis the Minister will be able to look with kindness on this very modest provision.

Mr. Grieve

The hon. Member for Loughborough (Mr. Cronin) has had a distinguished career both in medicine and in business and I found it astonishing to hear from him—and I am sorry that he is not in his place at the moment—observations which were either naive or disingenuous about the effects of the appalling penal levels of capital taxation which are imposed upon people who would at one time have been considered of modest means, who are running their own businesses or farming their own farms.

The fact is that inflation has put up the values of these farms and businesses so much that values which at one time would have seemed beyond the dreams of avarice are now quite modest in terms of purchasing power. The average farmer farming his own farm may well be sitting on an asset that has a substantial market value but gives him a very small return. He for his part is playing a vital role in British agriculture.

The danger that I apprehend, and that we are seeing before our eyes, arising from the penal levels of capital taxation and taxation on income, is that such moderate farmers—I am not speaking particularly of the small farmer but about men who are building up businesses to substantial proportions without going public and who are seeking to keep it in the family—will be prevented from doing so. The loss to this country of people such as this can hardly be measured. It is the generation that comes after us that will suffer from seeing people of initiative, endeavour, thrift—qualities which went to make the nation great—driven out of business.

8.15 p.m.

The hon. Member for Loughborough chided my hon. Friend the Member for Guildford (Mr. Howell) on his reliance on the statement of a very distinguished author in the economics field in an issue of The Banker. I wish briefly to support my hon. Friend and this new clause. I should support any new clause that sought to reduce the appalling burden of taxation on capital in this country. I shall seek to support my hon. Friend's arguments with a few statistics, but I shall try not to trouble the House for too long. I shall refer to statistics that are given in Hansard and that I hope will therefore not be challenged by any Labour Members, although that is unlikely because at present there are only three hon. Members on the Government Front Bench.

These figures emanate from the Treasury, from a reply to a Question that I tabled last February and that was answered in March. My Question was designed to find out precisely where capi tal taxation stood in this country on a death in comparison with such taxation in all the other countries of the EEC. I trust that I shall not be charged with making too wide a statement if I say that in the appalling crisis that has afflicted the Western world since the oil and petrol price rises we in Britain have done least to overcome the crisis. Some of our Continental neighbours have far outstripped us. In asking why this should be so, one cannot refrain from saying that one of the reasons, must be that we are a grossly overtaxed country, both in capital taxation and income taxation.

I asked the Chancellor of the Exchequer what taxes are payable, whether by way of inheritance or succession or comparable duties on the death of a deceased person, where the whole estate devolves upon his descendants in the direct line, in Belgium, Denmark, France, Ireland, Italy, Luxembourg, the Netherlands and West Germany, respectively, on estates, respectively, of£20,000£40,000,£50,000£100,00£200.000,£300,000,£500,000 and£1,000,000; and how the sums payable there compare with the duty payable on comparable estates in the same circumstances in the United Kingdom."—[Official Report, 16th March 1977; Vol. 928, c. 228]

It is interesting that the Chancellor chose to answer that Question by taking as the basis for comparison the circumstances in which the whole estate devolved to one son aged 30 with no children. The reason for this is not far to seek, because any other country in the Community—I cannot speak for Ireland, but I speak certainly of the countries of the Roman law—gives a substantial slice of the estate of the deceased person free of all duty to every child as well as to the widow.

Had the Chancellor taken as the basis for his comparison, for example, the circumstances in which an estate passed to four children, the comparison would have been even more unfavourable to this country. In France, for example, although I forget the precise figure, it is well over£10,000 that passes free to each child and to the widow. Where there is a widow and four children and an estate of£50,000, the estate is passed free of all duty.

I shall not recite all the figures, which can be found in Hansard for 16th March 1977, in columns 229 and 230. I shall quote only the cases of estates of£50,000,£100,000 and£1,000,000. Where the value of a deceased's estate is£50,000, that figure is now accounted for in many instances by the value of the dwelling house and the moderate savings put aside by the deceased. In the United Kingdom, in the circumstances that I have outlined, where only one son take; the whole estate, the executor has to pay£7,750. In other countries the heirs would pay the following sums: in Belgium,£2,404; in Denmark,£4,989; in France,£4,599; in Ireland, the Emerald Isle, nothing at all; in Italy,£1,447; in Luxembourg,£2,733; in the Netherlands,£5,498—the highest apart from the United Kingdom—and in West Germany, the most prosperous country of all,£1,275.

Where the value of the estate is£100,000, in the United Kingdom£28,250, more than a quarter, goes in duty. In Belgium it is£6,950; in Denmark,£13,022; in France,£14,599, although if there was a large family in France very little would be paid; in Ireland, nil; in Italy,£4,973; in Luxembourg,£6,230; in the Netherlands,£12,998, and in West Germany,£5,467. All those countries are far kinder when the deceased is much richer.

In the United Kingdom, if he left£1 million, more than one-half would go in duty—£589,750. In Belgium, the figure would be£158,106; in Denmark,£193,022; in France,£194,599; in Ireland,£387,500—there is an immense leap in Irish taxes on death—in Italy,£229,809; in Luxembourg, only£79,975; in the Netherlands, £65,636; and in Germany,£128,954.

I apologise for wearying the House with those figures, but they illustrate my point. They are there for all to see. We have absolutely penal rates of duty on death in this country, and they mean that families must look wildly round to realise assets to meet death duty demands. That inevitably militates against the ability of such families to build up their businesses, to maintain their farms, to invest their money, and to provide the life-blood of industry. That is why I support the clauses.

Mr. Wiggin

New Clause 2 is headed "Avoidance of double taxation". New Clause 35 has the same effect. The fact that there are two taxes on gifts between living people is undoubtedly creating serious difficulties in the administration of personal property. The anomalies may exasperate the taxpayer, but the serious aspect is that they place obstacles in the way of business men who are trying to achieve maximum efficiency for the benefit of the community as well as for themselves and their estates.

The Government seemed to accept that it was right to encourage people to hand over property, particularly businesses that would benefit from new and younger management. That appears to have been encouraged by the lower rate of capital transfer tax charged on lifetime gifts. But the benefit of that lower rate is often wiped out by the impact of capital gains tax, particularly on businesses, because the 30 per cent. business property relief applies not to capital gains tax but only the capital transfer tax.

Unhappily, the Minister was carried away by the expression on the face of my hon. Friend the Member for Blaby (Mr. Lawson) when answering the debate on the last amendment. Had he been able to deal with New Clause 37 he might have been able to explain why the Government could not make the proposed concession. I hope that he will take it on board that he did not deal with that point and will write to me about it, because I need a serious and sensible answer on New Clause 37.

The capital gains tax problem is particularly acute in respect of farms which have been owned for many years by the farmer. Perhaps he is getting old and decides that on the ground of agricultural efficiency he should hand over to his successor. He should not need to assess the potential capital gains tax burden, work out possible CGT reliefs, and weigh the CGT burden against the potential capital transfer tax saving on the lower rate for lifetime gifts before deciding whether he can afford to hand over now or to preserve a viable unit and hold on to it until a later stage. The Minister of Agriculture is keen to see young men coming into agriculture, but there is no doubt that elderly farmers are reluctant to hand over their farms, for the reasons I have given.

New Clause 2 deals with the problem in a slightly different way but it has the same effect as New Clause 35, because it gives the option. New Clause 35 proposes that there should be no capital gains tax. Common sense tells us and our experience demonstrates that the present dual taxation policy is discouraging lifetime gifts, particularly for a man who can afford only to give£15,000 in his lifetime thus saving no CTT but perhaps will bear a heavy CGT burden. New Clause 35 would enable that situation to be tackled and New Clause 2 would enable the farmer to make a choice.

The new clause is unlikely to be expensive to the Revenue. It would simplify the situation and must be beneficial to the operation of our highly complex capital taxes.

Mr. Tony Newton (Braintree)

I support what my right hon. and hon. Friends have said on New Clause 2 and urge the House to accept the proposal to remove duplication between capital gains and capital transfer taxes.

I have always thought that the capital transfer tax, viewed purely as a structure or framework, had considerable merit compared with the old estate duty system. That view is not shared by all my hon. Friends, but it is mine. What is wrong with CTT is that the rates are far too high and that the tax was spatchcocked into the tax system on top of an already mountainous heap of capital taxes without any attempt being made to reform the system as a whole. It is those two factors—excessive CTT rates, interacting with other taxes and particularly with CGT, itself made excessive by inflation—which constitute the intolerable feature, and not the notion of CTT in itself.

Whether Ministers are willing to acknowledge it or not there is no doubt that the burden of the two taxes taken together has been and is doing a great deal of damage to a large number of farms and small businesses. For that reason alone, I was practically terrified, certainly alarmed, to hear what the hon. Member for Loughborough (Mr. Cronin) said. I was not in the least surprised when the hon. Gentleman retreated from the House as rapidly as he could after his speech. It was almost unbelievable that he could be so unaware of the problems which might face small businesses and farms which could sell off part of themselves, as he put it, only at the cost of wrecking the business or making it non-viable or inefficient and gravely undermining employment, the improvement of which is supposed to be one of the main aims of the Government's policy. New Clause 2 would help to deal with the problem in a neat and simple way, and I hope that it will be accepted.

There are, however, other ways in which the burden of these taxes could be reduced quite modestly, and I want briefly to refer to New Clause 19. Its purpose is simple and straightforward and will be clear to anyone looking at it. It would reduce from three years before death to one year the disqualifying period for the application of the lifetime, as opposed to the death, rates of capital transfer tax.

I do not dispute the principle that a period of years must be involved. Clearly, if there are to be different rates for gifts made during life and on death, anyone who makes a gift knowing that he will die in the near future has to be regarded as being engaged in a form of tax evasion, and there must be rules to prevent that. But is three years the right period?

A balance has to be struck. No one wants to be unduly favourable to those avoiding a tax liability—and I use the word "avoiding" in the rather ghoulish sense in which I touched upon it just now. However, we all want to avoid placing excessive burdens on people who may give away their possessions without any thought that they will die fairly soon and without any thought of deliberately evading the burden of the death-time rates of capital transfer tax but whose action may cause their relatives to be faced with a substantial burden because of a purely accidental death occurring.

8.30 p.m.

A man may give away his business or part of it and then, perhaps at the age of 40 or 50, with no reason to expect that he will not live for another 20 years, get killed in a motor accident in the ensuing three years with a resulting substantial additional tax liability on his successors. The number of people who have any certainty of death more than a year before they die is very small in practice. But quite a considerable number are killed unexpectedly or die unexpectedly, either accidentally or otherwise. Therefore, much the greater risk in the law as it is at present is that of unfairness to those who get caught by the three-year rule, as it were, quite innocently.

I hope that Treasury Ministers will reconsider the period. It is not the same problem as it was with death duties. It is already a shorter period than it was with death duties. With the old estate duty, anyone dying outside the relevant time of seven years caused his successors to pay no tax. But here we are talking merely about a lower rate of tax by comparison with the death rate. There is a risk of unnecessary unfairness and unnecessary burdens in the three-year period.

From my researches, it appears that it was not very much discussed when the original Bill went through. I believe that there is a strong case for considering whether the period could not be reduced from three years to one year. By analogy, the case is strengthened in that the existing legislation already provides for the one-year survival period only in relation to the exemption of gifts to charities. If it is thought reasonable and acceptable in that case, that in itself suggests that Ministers may be being unnecessarily cautious in continuing to insist on a three-year period in the wider case. I hope that Ministers will look at this again.

Mr. Graham Page (Crosby)

We are debating five new clauses, each of which calls attention to the damage being done in one way or another by capital gains tax and capital transfer tax. It is quite clear that in each case to which attention is drawn in the new clauses the penal rates of capital taxation are damaging smaller businesses.

It has been asked more than once in this debate what is meant by "small business". It is shorthand not necessarily for the size of the business but for the unincorporated business or, if corporate, the private company. Those are the businesses which are hit severely by the capital gains tax and the capital transfer tax together. New Clause 2 and New Clause 35 endeavour to remedy this. One sees this especially in the devolution through the family and even more in the devolution from father to son which it seems in future may well become quite impossible.

The period five years to 10 years hence was mentioned by the hon. Member for Loughborough (Mr. Cronin). I believe that we ought to look five years to 10 years hence. In that period of time, if there are more than one or two transfers during lifetime or more than one or two deaths and the business devolves from one to another, what will be left of the business? The hon. Gentleman said he could not see that capital transfer tax had done any damage to businesses of this kind. It is not damage to that part of a going concern has to be sold off, because it is either that or the burdensome payment of capital taxes out of income over a period of years? That must be damaging to initiative in that sort of business.

The general impact of CTT must be a reduction of initiative and enterprise in that sort of business, a reduction in business efficiency and a reduction of the will to invest.

By adopting one or more of the five new clauses, we could reduce the impact of the tax on the small business. If we adopted New Clause 2 or New Clause 35 and abolished capital gains tax, or took our pick between CTT and CGT as in New Clause 2, that would reduce the burden to some extent.

To adopt the proposals in New Clause 19 that were so eloquently put by my hon. Friend the Member for Braintree (Mr. Newton)—particularly in relation to the example of accidental death within the three-year period—would relieve cases in which real hardship arises. During the period before an unexpected death there might be a transfer, and the transferee might have just settled down to working out how he will pay the lower rate of taxes. Then, suddenly, the whole rate is changed by the accident of death. Perhaps we could give better relief there by adopting the principle of New Clause 19.

Personally I would go for a straight reduction of the rates. Although it is very complicated, I would plump for New Clause 4. One can do this without disturbing the principle of these capital taxes to which the Government are so wedded. The reduction of rates would bring a certain amonut of relief. If I had to make a straight choice, I would opt for New Clause 4 and seek a fairly modest but effective reduction in the rates.

Mr. MacGregor

I do not wish to say much this evening because we have put all these arguments before during Committee and I thought that my hon. Friend the Member for Guildford (Mr. Howell) put the case impeccably. It was well argued and well documented.

One of the problems that we have at present—and no doubt the Minister of State will repeat what he has already said in Committee—is that we have no direct practical evidence of the effects of CTT two or three years from now. It is still a fairly early stage after the introduction of the tax and, although a lot of people are worrying and talking about it, the direct effects on farms and businesses have not yet come through. We have not yet seen the expected effects of farms and businesses being sold or of farming efficiency being hindered, because most people have not yet had to take an actual decision to sell. I hope that the Minister of State will not be deluded by this into thinking that there is not a real problem.

In talking to farmers and small business men it has struck me that in both cases they are worrying about future liability to CTT and about the combination of that and other capital taxes.

There is a particular problem with smaller growth businesses. After building up their businesses, many people feel that once they have reached a certain point there is really no incentive to go on making the business grow or employing any more people. Here it is not just a tax problem. It is the fact that they are moving into a different area of problems with industrial relations and labour legislation, as well as tax. When they look at these other difficulties and see that at the end of the day they will have this major tax problem and nothing to pass on to whomever they want to pass it on to from the additional growth that they will generate, they will ask "What is the point of generating the additional growth?" At a certain age and stage in business, they will start to coast and to drift. That cannot be sensible from the economic or employment point of view.

It is significant that a number of people who have built up businesses over the past 40 years say that it could not be done today because the capital aspect is one of the major disincentives. Indeed Lord Sieff, in a lecture about a year ago, made the point that because of taxation it would not now be possible to build up Marks and Spencer in the way that it was built up.

Farmers worry about the green pound and so on. In conversations with farmers who have family farms, I find that they come back to the point that, despite the reliefs that are given, capital taxation is their biggest concern. It is vital that the Minister takes this point on board before it is too late and the damage is done.

I have not yet finished reading the agriculture EDC report, to which reference was made earlier, but it is clear that it is an important and fairly devastating document on capital taxation. The Minister of State should tell us tonight—this is one of the few opportunities that we have to discuss this matter during the parliamentary year—what action the Treasury proposes to take, because the agriculture EDC report backs up what the farming community is beginning to say.

I agree with the general remarks made by my hon. Friend the Member for Braintree (Mr. Newton) about the concept of capital transfer tax and what is wrong with it. For the sake of getting stability into our taxation system, I should be happy to see the concept of capital transfer tax retained by a future Conservative Government, not least because if we changed it the next Labour Government would bring it back again.

There are three things very much wrong with CTT. My hon. Friend referred to two of them—that the rates of tax, particularly at the higher levels, and the double effect of capital taxation create business worries.

There is a third element, which the hon. Member for Loughborough (Mr. Cronin) completely ignored when he made his attack on so-called rich people. Capital transfer tax is particularly damaging to our productive working assets. A man who wants his business to carry on will want to transfer the productive working assets to his successor without having to sell off too much. The hon. Member for Loughborough, referring to large farms, said that there was still a market for them. What he failed to understand was that the farmer owning a large farm does not get a high income from it. He may have a large asset, but it is put to good productive use. We do not want such units split up so that their agricultural efficiency is lost. All the new clauses go some way towards removing the worst effects of the tax.

I should like to conclude by referring again to one or two advantages that I see in New Clause 35 over New Clause 2. I support New Clause 2 because it removes the double taxation element, but New Clause 35 bears upon situations with which New Clause 2 would not deal.

My hon. Friend the Member for Weston-super-Mare (Mr. Wiggin) referred to certain aspects but did not bring out the point that New Clause 35 has certain merits over New Clause 2 which are worth considering. New Clause 35 brings the combination of capital gains tax and capital transfer tax on lifetime gifts into line with the posit ion on death. I realise that, up to a certain point, there is a much lower rate of capital transfer tax on gifts made during life. That does not affect the basic argument.

8.45 p.m.

There are advantages in New Clause 35. It is obviously desirable for a farmer to start passing his farm over to his son earlier, not only to keep the farm intact but to ensure that his son becomes involved at the right time so that the elderly farmer does not have to hang on. The problem is not merely one of capital transfer tax but the fact that having to pay capital gains tax on an asset which has multiplied considerably in terms of capital gain may be a disincentive to the farmer to make the sensible move from the point of view of capital transfer tax and agricultural efficiency. New Clause 2 would not wholly overcome the problem, but New Clause would.

The other advantage of New Clause 35 would be for people owning smaller assets, such as elderly people who may wish to take advantage of the capital transfer tax exemptions up to£2,000 to pass over some of their assets to their children. Such people might be dissuaded from doing so because of the capital gains tax that they might have to pay. There might be a slightly irrational attitude involved because they do not want to pay capital gains tax and see assets go to the Government, or there might genuinely be a big capital gains tax bill. In either case, we should like to see a wider spread of ownership and see assets and savings passed on so that they can be used. If there are children, those assets might help to buy them houses.

However, if there is a capital gains tax liability as well as a capital transfer tax liability, some people might not take advantage of all the capital transfer tax exemptions. There might be no capital transfer tax to pay because of the£2,000a-year exemptions or because they do not reach the£15,000 limit. New Clause 2 indicates that capital gains tax would still be paid, but under New Clause 35 capital gains tax would not be paid and ultimately capital transfer tax liability would have to be paid, because once people had made use of the exemptions they would start piling up capital transfer tax liability.

If we want to see the passing on of modest assets and a wider spread of ownership at an earlier date, New Clause 35 has advantages that New Clause 2 does not have. However, all these new clauses are beneficial and I shall be happy to support any that it is felt we ought to press.

Mr. Wakeham

Capital transfer tax can be regarded as only one capital tax in a whole series of other taxes. My hon. Friends have concentrated on this point and on the effect that capital transfer tax has on the taxpayer. There are other people involved such as the employees of small businesses and their customers who are likely to be seriously affected by capital transfer tax as it bites deeper into the capital assets of our small businesses.

We are reaching not only the point where it will not only be impossible to build up a small business any more but it will be impossible to dispose of small businesses which have been built up. That point can be illustrated quite simply. A business that is making between£10,000 and£20,000 a year—which is a relatively small business but not one of the smallest—is bound to have assets of about£100,000. We are now reaching the position in which individuals will be incapable of finding£100,000 of capital to put into a business, and the few who will be capable of that will probably not be the most suitable or likely persons to want to put their money into running a small busness.

Not only will it he impossible to build up new businesses, but many people who have already built up their businesses will not be able to find individuals prepared to buy them and will be unable to dispose of them. Nobody will be able to raise enough capital, and such businesses would be too small to interest public companies in acquiring them and bringing them into major groups.

I see real problems arising for businesses in this category. Unless something is done about this taxation, I envisage that large numbers of these businesses, with capital of between£100,000 and£200,000, will have no alternative but to go into liquidation, not because they are failures but because they have been reasonable successes in doing a job. Surely no one wants this to happen to businesses and employers. Many of the employees of these firms—which in aggregate employ a substantial number of people—would be unhappy if they had to work for a major group. Many customers prefer dealing with small businesses because of their approach and the personal service that they offer.

Capital transfer tax has serious social consequences. We should consider the new clauses carefully, because they would go some way towards lessening the impact of the tax.

Mr. Lawson

I shall direct my brief remarks to New Clause 2 and the narrow point of the interaction between capital transfer tax and capital gains tax. My hon. Friends have eloquently and persuasively argued the case for the new clauses and my hon. Friend the Member for Guildford (Mr. Howell) was particularly persuasive in outlining the damage that capital transfer tax is doing to British farms and small businesses, but it seemed that the Minister was not wholly convinced. I think that the point at which the two taxes interact is likely to be common ground between us and that we shall be able to convince the Minister that great damage is being caused.

Capital transfer tax was introduced in 1975. Even as the smoke and dust cleared from the arena, we found the Chief Secretary recognising that there were transactions that, because they were lifetime disposals, attracted capital transfer tax and capital gains tax at the full value of the disposal. This produced a penal level of tax that was causing great damage.

The Chief Secretary gave the impression that a solution would be brought forward in last year's Budget. We looked for it, but it was not there. When we raised the matter in Committee—also on New Clause 2—we were defeated by only seven votes. The Liberal Party voted for the new clause, and it will be interesting to see what Liberal Members do tonight. They are not here at present, but we hope that they will pop up from wherever they are hiding. We hope that they will be consistent and will vote in the same Lobby as last year.

Although the Government did' not accept our new clause, the Chief Secretary said last year: I accept that there is a serious problem as regards the combined burden in some instances when capital gains tax and capital transfer tax operate together…I recognise that because of the combined effect, in certain circumstances there can be a harsh effect…I come to the question of the combined effect…I accept that there is a danger of a break-up of assets occurring. That is to be avoided, if at all possible."—[Official Report, 17th May 1976; Vol. 911, cc. 1135–37.] He said that he would listen to what was said in Committee and would try to bring something forward on Report. We expected him to produce an amendment on Report. But, again, he came forward on Report with nothing at all.

We raised the matter again on Report last year, and on 15th July we had with us the Minister of State, who is with us now. He said: My right hon. Friend"— he was referring to the Chief Secretary— said that he would like to consider, without commitment, the difficulties that can arise in certain circumstances because of the interaction of capital transfer tax and capital gains tax. The Government are doing this. We should like to hear the results of that consideration. We expected something in this year's Finance Bill as a result of that consideration, but we have seen nothing.

The Minister of State went on to say: I cannot say more than that, but we recognise that in some cases there could be a problem and injustice."—[Official Report, 15th July 1976; Vol. 915, c. 1092.] I should have thought that the Minister of State was not a man to see an injustice, recognise it and pass it by but would want to do something about it. We want to know, at this late stage in this year's Finance Bill, what he proposes to do about it. I can tell him that the best thing to do is to accept New Clause 2, and I hope he will do this.

There is a final reason—this was touched on by my hon. Friend the Member for Norfolk, South (Mr. MacGregor)—why the Minister should take this to heart. When capital transfer tax was originally introduced, it was brought in with the same rate of tax for lifetime transfers as for transfers on death. Later there was an amendment, which has become the law of the land, whereby there was a lower rate for lifetime transfers than for disposals on death. The Government explained that by saying that it was in the national interest that there should be disposals during the lifetime of the business man or whoever owned the assets, that it was not a good idea that he should hang on to the business long after he had lost the capacity to run it efficiently. It was their view that although the assets might not be broken up they might become worth less, and it was not in the national interest that should be so, and therefore they wanted to encourage lifetime disposals.

Because no capital gains tax is payable on disposals on death, whereas capital gains tax is payable on lifetime transfers, in many cases the effective rate of tax when the two are combined is higher for a lifetime transfer than for a disposal on death. The Government's own objective is being frustrated by the interaction of these two taxes. The only way in which the Government can achieve their own objective is to accept New Clause 2.

Mr. Denzil Davies

We have had a debate on a number of new clauses. The debate has not focused particularly on the details of each new clause but has been more general, relating to what is alleged to be the burden of capital transfer tax, especially on businesses and on farms and agricultural land.

Listening to the debate one might have forgotten that until a few years ago there was such a thing as estate duty and that there was and still is capital gains tax. Estate duty was charged on gifts within a period of seven years and capital gains tax was charged on the same gifts, but on listening to the debate one would have thought that that was not the situation. The problem in relation to small businesses existed with estate duty as it does with capital transfer tax.

Mr. Lawson indicated dissent.

Mr. Davies

It is no good the hon. Gentleman shaking his head. Estate duty was payable—

Mr. MacGregor

Does the Minister agree that the seven-year rule made a big difference to estate duty?

Mr. Davies

It made a big difference in many cases. It made estate duty an avoidable tax in many cases where the person who wanted to give away his assets had free assets in the sense that he was not the proprietor of the business. With a little experience in these matters—and perhaps the hon. and learned Member for Dover and Deal (Mr. Rees) will agree with me—I never thought that it was particularly easy for the owner of a small business who wanted to retain control of his business—quite rightly and naturally, because it was a business that he had built up—to avoid estate duty, in the sense that he had to give it away seven years before he died. In fact, that was difficult to deal with because the owner of the business naturally did not want to lose all control—and that was the only way of avoiding estate duty.

9.0 p.m.

I accept entirely therefore that in most cases where the owner had free assets there was no problem, except for the unlucky ones, in avoiding estate duty, but that did not apply to the small business man or the owner of shares or a controlling interest in a private company. The rates of CTT are much lower than those of estate duty.

Then there is the question of the yield. I accept that the yield cannot be based on the same asset values, but the yield from estate duty in 1973–74, which was the final full year, was £412 million. That was the amount taken out of the private sector, to put it in the language of the hon. Member for Guildford (Mr. Howell). The yield of CTT in 1977–78 will be£320 million.

Mr. Lawson

That is a phoney comparison.

Mr. Davies

It is not a phoney comparison. I qualified what I said by saying that we cannot make a complete comparison because of different asset values, but to say that the comparison is phoney is not correct. The yield from CTT in 1977–78—the amount taken out of the private sector by this nasty Government—is less than was taken out of the private sector by estate duty in 1973–74.

If capital transfer tax is such a crushing burden on the private sector, I wonder why the yield will be lower in the coming year than the yield from estate duty.

Mr. Peter Rees

A very simple explanation is that there is now immediate relief on transfer from husband to wife or husband to widow. Of course the Minister will take credit for that, but then he will appreciate that the yield will be increased when the widow dies.

Mr. Davies

I have learned in these debates that Conservative Members are very fond of simple explanations for all sorts of things. For instance, they have a simple explanation why investment is low: it is the high rate of taxation. Of course the exemption from tax on transfer between spouses is one reason, but that is part of the framework of the tax. I am saying that the rates of CTT on lifetime gifts—

Mr. Lawson indicated dissent.

Mr. Davies

It is no good the hon. Gentleman shaking his head. The rates of CTT are lower than the rates of estate duty.

If one considers the special problem of the small company and takes the 30 per cent. business relief, the rates compare even more favourably still. That is one reason—not the only one—why the yield for this year will be less than that in 1973. I am sorry if this shatters the illusions of Conservative Members, who spent hours in Committee late into the night trying to frighten British industry and small farmers and business men into believing that this was a crushing burden. It now surprises them perhaps to learn that the yield is lower, but that is a fact.

As for agriculture and small businesses, the rates on lifetime gifts and transfers are lower. The 30 per cent. business relief recognises the problem of the small private company which may find it difficult, or may be unwilling, to dispose of shares. The 50 per cent. reduction in the value of agricultural land recognises the special problems of agriculture and 30 per cent. business relief is given to agriculture on top of that in respect of other assets and that also recognises the problem. It has been extended to capital gains tax because of the special difficulties of agriculture and because of the fact that land has a high market value but a low productive yield.

We have gone a considerable way in those reliefs to recognise the difficulties of the small business sector, the small private company sectors and the agriculture sector. I refute what has been said by the Opposition about the burden of capital transfer tax.

Mr. Peter Rees

Is the Minister telling his hon. Friends below the Government Gangway, particularly the hon. Member for Liverpool, Walton (Mr. Heifer), that the burden of capital transfer tax over the years will be lower than the burden of estate duty—in other words, that it will be a milder rather than a heavier tax?

Mr. Davies

My hon. Friend knows very well what the figures are, and I am sure that he has studied these matters with as much concern as the hon. and learned Member for Dover and Deal. The point about capital transfer tax is that the burden is spread over more people. More people now pay capital transfer tax than paid the old estate duty, and certainly capital transfer tax is less easy to avoid. I am saying that the burden on small businesses and farms is less in the case of capital transfer tax than it was in the case of estate duty. [Interruption.] The hon. Member for Blaby (Mr. Lawson) should not mutter all the time. He has had a chance to make his speech.

I turn to New Clause 2, which is somewhat complicated. It is defective in many ways because it does not provide for losses in cases where gains are not taxed. Furthermore, it does not deal with the problem of capital transfer when a transfer is not subject to capital gains tax —it would have to be isolated or put to one side—and it does not seek to deal with parts of assets that might be charged to capital gains.

New Clause 35 goes much further than New Clause 2 since it seeks to exempt gifts completely. Lifetime gifts that could bear capital gains tax would be completely exempt in the same way as gifts arising under a will in an intestate succession.

The hon. and learned Member for Solihull (Mr. Grieve) gave a number of international comparisons drawn from various parliamentary answers. He pointed out that the rates in European countries were lower when the assets passed within a family.

Mr. Grieve

Much lower.

Mr. Davies

Indeed, much lower. However, the hon. and learned Gentleman did not mention an answer given to the hon. Member for Horsham and Crawley (Mr. Hordern), who elicited information about assets passing outside the family.

Mr. Grieve

Does the Minister not think it wholly right that the rate of duty in respect of assets passing within a family should be lower? That was the point I sought to make.

Mr. Davies

I am not sure that it is beneficial to the economy for capital to pass from father to son, from son to grandson, and thereon throughout the whole family. I am not sure whether that is conducive to the good of the whole economy. However, I know that many Opposition Members will not subscribe to that view. Certainly Continental systems are different. The figures given by the hon. and learned Gentleman were not misleading and were quite accurate, but they did not show the whole picture.

He pointed out that the rates were lowest in Italy and West Germany. The figures for Italy must have been just about the same, yet the tenor of his speech was that if we had this lower rate of estate duty or capital transfer tax. the British economy would revive. Taking Italy and West Germany, with the same kind of rates but certainly at a lower level, perhaps there is not that much correlation between capital transfer tax and the performance of the economy. But that is perhaps a small point.

Perhaps I may deal briefly with New Clause 4. New Clause 3 is fairly similar to New Clause 4.

Mr. Graham Page

I had hoped that the Minister would be dealing with the point raised by my hon. Friend the Member for Blaby (Mr. Lawson) about the undertakings given to consider the double taxation of capital gains tax and capital transfer tax.

Mr. Davies

I shall be coming to that matter shortly.

New Clause 4 is fairly similar to, though more complicated than, New Clause 3. The cost of New Clause 4 in a full year would be about£145 million, so if we deducted that from the£320 million yield from CTT we should be down to less than £200 million. I accept entirely that that is what Opposition Members want. They want little, if any, yield to conic from taxes on inheritance or gifts.

New Clause 4 also shows the difficulty of trying to index capital transfer taxes, because, as I understand the clause, all the donor's previous transfers are indexed by the same factor, regardless of the year in which they are made. In other words, there is no attempt to index according to the year in which a gift is made, but the same factor is used for different years and different transfers. That merely indicates the difficulty of trying to introduce a clause of this kind and trying to index capital transfer tax, as New Clause 4 seems to be trying to do.

New Clause 19, in the name of the hon. Member for Braintree (Mr. Newton), seeks to reduce the period from three years to one year—although extending the period is perhaps a better way of putting it. It seeks to extend lifetime benefits to a gift up to one year before death. The hon. Member spoke on his new clause very reasonably. He said that he did not see why one year should not replace three years. This is always a matter of drawing a line. It is a matter of choice. Three years was the original rule, although I accept that the estate duty position is different. One year was the original estate duty charity rule, and this was carried over in the capital transfer tax.

I make no commitment about this, but I shall look at it without commitment. Obviously, one is not wedded to the three-year period. I shall look at the matter without commitment to see whether there are any problems caused by the three years.

Finally, perhaps I may deal with the question whether the Government think that there is a problem here, because we have said in the past that there has been a problem. I think that the problem has been ameliorated to a considerable extent by the reliefs that we have given for agriculture and small businesses. On an earlier new clause, I said—[Interruption.] If the hon. Member for Blaby wishes to have an answer, he must now contain himself. He is now a Whip and must learn to contain himself.

I said on an earlier new clause that we would look at the capital gains tax tapering provisions and that we would look sympathetically at finding a way of introducing some kind of tapering into capital gains tax because we recognised that there was a problem. If we were able to find a practical way of helping to solve that problem, that would also go some way towards meeting the very point that the hon. Gentleman was raising in relation to the interaction between capital gains tax and capital transfer tax. The hon. Gentleman was saying that there were two lots of tax, both in the same transfer.

What I have said in relation to capital gains tax is that we shall look sympathetically at finding a scheme for some kind of tapering that would be beneficial to capital gains tax and beneficial in respect of the interaction between capital gains tax and capital transfer tax.

I am sure that that does not satisfy the hon. Gentleman, but that is our thinking at present. What I have said in relation to capital gains tax will be beneficial in respect of the relationship between these two taxes.

I have tried to deal with the points that have been raised. I could not recommend the new clauses to the House, partly because they would be expensive and partly because I do not believe that the burden of capital transfer tax is as great as has been made out by Opposition Members, who have sought to frighten British Industry and British farmers by making often hysterical speeches about capital transfer tax. I do not believe that what they have asserted is borne out by the facts.

9.15 p.m.

Mr. David Howell

The Minister has shown once again that he lives in two worlds at once. On the one hand, he believes with his hon. Friends below the Gangway that capital taxation, which destroys family businesses, is a good thing. On the other hand, he asserts that the present system is not destroying family businesses. Both these states of mind we utterly reject. I advise my hon. Friends to show our rejection now by voting for New Clause 2.

Question put, That the clause be read a Second time:—

The House divided: Ayes 218, Noes 253.

Division No. 196.]	AYES	[9.15 p.m.
Adley, Robert	Burden, F. A.	Farr, John
Altken, Jonathan	Butler, Adam (Bosworth)	Fell, Anthony
Alison, Michael	Chalker, Mrs Lynda	Fisher, Sir Nigel
Amery, Rt Hon Julian	Channon, Paul	Fletcher, Alex (Edinburgh, N)
Atkins, Rt Hon H. (Spelthorne)	Churchill, W. S.	Fletcher-Cooke, Charles
Awdry, Daniel	Clark, Alan (Plymouth, Sutton)	Fookes, Miss Janet
Bain, Mrs Margaret	Clark, William (Croydon S)	Forman, Nigel
Baker, Kenneth	Clarke, Kenneth (Rushcliffe)	Fowler, Norman (Sutton C'f'd)
Banks, Robert	Clegg, Walter	Fox, Marcus
Bell, Ronald	Cockcroft, John	Fraser, Rt Hon H. (Stafford & St)
Berry, Hon Anthony	Cooke, Robert (Bristol W)	Fry, Peter
Biffen, John	Cormack, Patrick	Gardiner, George (Reigate)
Biggs-Davison, John	Corrie, John	Gardner, Edward (S. Fylde)
Blaker, Peter	Costain, A. P.	Gilmour, Rt Hon Sir Ian (Chssham)
Body, Richard	Critchley, Julian	Gilmour, Sir John (East Fife)
Boscawen, Hon Robert	Crouch, David	Glyn, Dr Alan
Bottomley, Peter	Crowder, F. P.	Godber, Rt Hon Joseph
Bowden, A. (Brighton, Kemptown)	Dean, Paul (N Somerset)	Goodhew, Victor
Boyson, Or Rhodes (Brent)	Dodsworth, Geoffrey	Gow, Ian (Eastbourne)
Braine, Sir Bernard	Douglas-Hamilton, Lord James	Gower, Sir Raymond (Barry)
Brocklebank-Fowler, C.	du Cann, Rt Hon Edward	Grant, Anthony (Harrow C)
Brooke, Peter	Durant, Tony	Gray, Hamish
Brotherton, Michael	Dykes, Hugh	Grieve, Percy
Brown, Sir Edward (Bath)	Edwards, Nicholas (Pembroke)	Grist, Ian
Buchanan-Smith, A lick	Elliott, Sir William	Grylls, Michael
Buck, Antony	Emery, Peter	Hamilton, Michael (Salisbury)
Budgen, Nick	Eyre, Reginald	Hampson, Dr Keith
Bulmar, Esmond	Fakgrieve, Russell	Hannam, John
Haselhurst, Alan	Meyer, Sir Anthony	Sainsbury, Tim
Havers, Rt Hon Sir Michael	Miller, Hal (Bromsgrove)	Scott, Nicholas
Hawkins, Paul	Mills, Peter	Scott-Hopkins, James
Hayhoe, Barney	Miscampbell, Norman	Shaw, Giles (Pudsey)
Henderson, Douglas	Moate, Roger	Shaw, Michael (Scarborough)
Hicks, Robert	Monro, Hector	Shelton, William (Streatham)
Higglns, Terence L.	Moore, John (Croydon C)	Shepherd, Colin
Hodgson, Robin	More, Jasper (Ludlow)	Shersby, Michael
Holland, Philip	Morgan, Geraint	Silvester, Fred
Howe, Rt Hon Sir Geoffrey	Morgan-Giles, Rear-Admiral	Skeet, T. H. H.
Howell, David (Gulldford)	Morris, Michael (Northampton S)	Smith, Dudley (Warwick)
Howell, Ralph (North Norfolk)	Morrison, Charles (Devizes)	Smith, Timothy John (Ashfield)
Hunt, David (Wirral)	Mudd, David	Spence, John
Hunt, John (Bromley)	Neave, Airey	Spicer, Jim (W Dorset)
Hurd, Douglas	Neubert, Michael	Spicer, Michael (S Worcester)
Hutchison, Michael Clark	Newton, Tony	Sproat, lain
Irving, Charles (Cheltenham)	Normanton, Tom	Slainton, Keith
James, David	Nott, John	Stanley, John
Jessel, Toby	Onslow, Cranley	Stewarl, Ian (Hitchin)
Johnson Smith, G. (E Grinstead)	Oppenheim, Mrs Sally	Stokes, John
Jones, Arthur (Daventry)	Osborn, John	Stradling Thomas, J.
Kellett-Bowman, Mrs Elaine	Page, John (Harrow West)	Tapsell, Peter
Kimball, Marcus	Page, Rt Hon R. Graham (Crosby)	Taylor, R. (Croydon NW)
King, Evelyn (South Dorset)	Page, Richard (Workington)	Taylor, Teddy (Cathcart)
King, Tom (Bridgwater)	Parkinson, Cecil	Tebbit, Norman
Knox, David	Pattie, Geoffrey	Thatcher, Rt Hon Margaret
Lamont, Norman	Price, David (Eastleigh)	Thomas, Rt Hon P. (Hendon S)
Lawson, Nigel	Raison, Timothy	Thompson, George
Le Merchant, Spencer	Rathbone, Tim	Townsend, Cyril D.
Lewis, Kenneth (Rutland)	Rawlinson, Rt Hon Sir Peter	Trotter. Neville
Lloyd, Ian	Rees, Peter (Dover & Deal)	van Straubenzee, W. R.
Loveridge, John	Rees-Davies, W. R.	Viggers, Peter
Luce, Richard	Reid, George	Wakeham, John
McAdden, Sir Stephen	Renton, Rt Hon Sir D. (Hunts)	Walder, David (Clilheroe)
McCrindle, Robert	Renton, Tim (Mid-Sussex)	Walker-Smith, Rt Hon Sir Derek
Macfarlane, Neil	Rhodes James, R.	Wall, Patrick
MacGregor, John	Rhys Williams, Sir Brandon	Warren, Kenneth
Macmillan, Rt Hon M. (Farnham)	Ridley, Hon Nicholas	Weatherill, Bernard
McNair-Wilson, M. (Newbury)	Ridsdate, Julian	Welsh, Andrew
McNair-Wilson, P. (New Forest)	Rifkind, Malcolm	Wiggin, Jerry
Madel, David	Roberts, Michael (Cardiff NW)	Wigley. Dafydd
Marshall, Michael (Arundel)	Roberts, Wyn (Conway)	Wilson, Gordon (Dundee E)
Marten, Neil	Rodgers, Sir John (Sevenoaks)
Mather, Carol	Rossi, Hugh (Hornsey)	TELLERS FOR THE AYES:
Maude, Angus	Rost, Peter (SE Derbyshire)	Mr. Jim Lester and
Maxwell-Hyslop, Robin	Royle, Sir Anthony	Mr. Pefer Morrison.
NOES
Anderson, Donald	Corbett, Robin	Flannery, Martin
Archer, Rt Hon Peter	Cowans, Harry	Fletcher, Ted (Darlington)
Ashley, Jack	Cox, Thomas (Tooting)	Foot, Rt Hon Michael
Ashton, Joe	Crawshaw, Richard	Ford, Ben
Atkins, Ronald (Preston N)	Cronin, John	Forrester, John
Barnett, Guy (Greenwich)	Crowther, Stan (Rotherham)	Fraser, John (Lambeth, N'w'd)
Barnett, Rt Hon Joel (Heywood)	Cryer, Bob	Freeson, Reginald
Bates, Alf	Cunningham, G. (Islington S)	Freud, Clement
Bean, R. E.	Cunningham, Dr J. (Whiteh)	Garrett, John (Norwich S)
Benn, Rt Hon Anthony (Wedgwood)	Dalyell, Tam	Garrett, W. E. (Wallsend)
Bennelt, Andrew (Stockport N)	Davles, Bryan (Enfleld N)	George, Bruce
Bidwell, Sydney	Davies, Denzil (Llanelll)	Glnsburg, David
Bishop, Rt Hon Edward	Davies, Ifor (Gower)	Goldlng, John
Blenkinsop, Arthur	Davis, Clinton (Hackney C)	Gourlay, Harry
Boardman, H.	Deakins, Eric	Graham, Ted
Booth, Rt Hon Albert	Dean, Joseph (Leeds West)	Grant, George (Morpeth)
Boothroyd, Miss Betty	de Freitas, Rt Hon Sir Geoffrey	Grant, John (Islington C)
Bradley, Tom	Dell, Rt Hon Edmund	Grocott, Bruce
Bray, Dr Jeremy	Doig, Peter	Hardy, Peter
Brown, Hugh D. (Provan)	Dormand, J. D.	Harper, Joseph
Brown, Ronald (Hackney S)	Douglas-Mann, Bruce	Harrison, Rt Hon Walter
Buchan, Norman	Duffy, A. E. P.	Hattersley, Rt Hon Roy
Callaghan, Rt Hon J. (Cardiff SE)	Dunn, James A.	Hatton, Frank
Callaghan, Jim (Mlddleton & P)	Dunnett, Jack	Hayman, Mrs Helene
Campbell, Ian	Dunwoody, Mrs Gwyneth	Healey, Rt Hon Denis
Canavan, Dennis	Eadfe, Alex	Heffer, Eric S.
Cant, Ft. B.	Edge, Geoff	Hooley, Frank
Carmichael, Neil	Edwards, Robert (Wolv SE)	Hooson, Emlyn
Carter-Jones, Lewis	Ellis, John (Brigg & Scun)	Howell, Rt Hon Denis (B'ham, Sm H)
Cartwright, John	Ellis, Tom (Wrexham)	Howells, Geraint (Cardigan)
Castle, Rt Hon. Barbara	English. Michael	Hoyle, Doug (Nelson)
Clemitson, Ivor	Fvans. Fred (Caerphilly)	Huckfield, Les
Cocks, Rt Hon Michael	Evans, loan (Aberdare)	Hughes, Robert (Aberdeen N)
Cohen, Stanley	Evans, John (Newton)	Hughes, Roy (Newport)
Coleman, Donald	Ewing, Harry (Stirling)	Hunter, Adam
Cook, Robin F. (Edin C)	Fernyhough, Rt Hon E.	Irving, Rt Hon S. (Dartford)

Jackson, Miss Margaret (Lincoln)	Molloy, William	Small, William
Janner, Greville	Moonman, Eric	Smith, John (N Lanarkshire)
Jeger, Mrs Lena	Morris, Alfred (Wythenshawe)	Spearing, Nigel
Jenkins, Hugh (Putney)	Morris, Charles R. (Openshaw)	Spriggs, Leslie
John, Brynmor	Morris, Rt Hon J. (Aberavon)	Slallafd, A. W.
Johnson, James (Hull West)	Moyle, Roland	Steel, Rt Hon David
Johnson, Walter (Derby S)	Mulley, Rt Hon Frederick	Stewart, Rt Hon M. (Fulham)
Johnston, Russell (Inverness)	Newens, Stanley	Stoddaft, David
Jones, Alec (Rhondda)	Noble, Mike	Stott, Roger
Jones, Barry (East Flint)	Oakes, Gordon	Strang, Gavin
Jones, Dan (Burnley)	Ogden, Eric	Strauss, Rt Hon G. R.
Judd, Frank	O'Halloran, Michael	Summerskill, Hon Dr Shirley
Kaufman, Gerald	Orbach, Maurice	Swain, Thomas
Kelley, Richard	Orme, Rt Hon Stanley	Taylor, Mrs Ann (Bolton W)
Kerr, Russell	Ovenden, John	Thomas, Jeffrey (Abertillery)
Kilroy-Silk, Robert	Owen, Rt Hon Dr David	Thomas, Mike (Newcastle E)
Kinnock, Neil	Padley, Walter	Thomas, Ron (Bristol NW)
Lambie, David	Palmer, Arthur	Tierney, Sydney
Lamborn, Harry	Pardoe, John	Tomlinson, John
Lamond, James	Park, George	Tomney, Frank
Lee, John	Parry, Robert	Torney, Tom
Lestor, Miss Joan (Eton & Slough)	Pavitt, Laurie	Tuck, Raphael
Lever, Rt Hon Harold	Pendry, Tom	Urwin, T. W.
Lewis, Ron (Carlisle)	Penhaligon, David	Varley, Rt Bon Eric G.
Lomas, Kenneth	Perry, Ernest	Wainwright, Edwin (Dearne V)
Luard, Evan	Phipps, Dr Colin	Wainwright, Richard (Colne VI
Lyon, Alexander (York)	Prescott, John	Walker, Terry (Kingswood)
Lyons, Edward (Bradford W)	Price, C. (Lewisham W)	Ward, Michael
McCartney, Hugh	Price, William (Rugby)	Weetch, Ken
McDonald, Dr Oonagh	Richardson, Miss Jo	Weitzman, David
McEthone, Frank	Roberts, Albert (Normanton)	Wellbeloved, James
MacFarquhar, Roderick	Roberts, Gwilym (Cannock)	White, Frank R. (Bury)
McGuire, Michael (Ince)	Robinson, Geoffrey	White, James (Pollok)
MacKenzie, Rt Hon Gregor	Roderick, Caerwyn	Whirehead, Phillip
Maclennan, Robert	Rodgers, George (Chorley)	Whitlock, William
McNamara, Kevin	Rooker, J. W.	Willey, Rt Hon Frederick
Madden, Max	Rose, Paul B.	Williams, Rt Hon Alan (Swansea W)
Magee, Bryan	Ross, Stephen (Isle of Wight)	Williams, Alan Lee (Hornch'ch)
Mahon, Simon	Rowlands, Ted	Williams, Sir Thomas (Warrington)
Mallalieu, J. P. W.	Ryman, John	Wilson, Rt Hon Sir Harold (Huyton)
Marks, Kenneth	Sedgemore, Brian	Wilson, William (Coventry SE)
Marshall, Dr Edmund (Goole)	Selby, Harry	Wise, Mrs Audrey
Marshall, Jim (Leicester S)	Shaw, Arnold (llford South)	Woodall, Alec
Maynard, Miss Joan	Sheldon, Rt Hon Robert	Woof, Robert
Meacher, Michael	Shore, Rt Hon Peter	Young, David (Bolton E)
Mellish, Rt Hon Robert	Silkin, Rt Hon John (Deptford)
Mendelson, John	Silkin, Rt Hon S. C. (Dulwich)	TELLERS FOR THE NOES:
Millan, Rt Hon Bruce	Sillars, James	Mr. James Hamilton and
Miller, Mrs Millie (Ilford N)	Silverman, Julius	Mr. Peter Snare.
Mitchell, R. C. (Soton, Itchen)	Skinner, Dennis

Question accordingly negatived.