§ '(1) This section shall apply where an insurance company so elects in relation to any qualifying assets disposed of after 5th April 1978; and for the purposes of this section—
- (a) an insurance company shall be any company falling within the meaning of that expression in section 323 of the Taxes Act and
- (b) "qualifying asset"means any asset—
- (i) to which subsection (1) of section 112 of the Finance Act 1972 applies not being an asset excluded therefrom by subsection (2) thereof and
- (ii) which the insurance company shows to the satisfaction of the inspector of taxes has both been acquired in connection with the issue of policies of insurance being policies in respect of which benefits have been paid on death of the life assured or on maturity surrender or partial surrender thereof prior to 6th April 1978 and been retained in connection with liabilities on other policies.
§ (2) Paragraph 2 of Schedule 7 to the Finance Act 1965 shall apply as if all qualifying assets of the same class held by the insurance company prior to 6th April 1978 were regarded as indistinguishable parts of one single asset (in this paragraph referred to as the old holding) being a separate asset for the purposes of Part III of the Finance Act 1965 from such qualifying assets of the same class as shall have been acquired after that date.
§ (3) It shall be assumed in relation to the qualifying assets so disposed of (being an asset forming part of the old holding) that it had on the happening of the event referred to in paragraph (b)(ii) of subsection (1) hereof being sold by the insurance company and immediately reacquired by it at its market value on that date and accordingly the amount of any gain on the disposal of such a qualifying asset shall be the aggregate of
- (a) the gain realised on the disposal deemed to have been made on the happening of such an event (in this paragraph referred to as the old gain) and
- (b) the gain over the period from that time to the date of the disposal (in this paragraph referred to as the new gain).
§ (4) The corporation tax charged in relation to the old gain shall be computed as if the disposal giving rise to the old gain had been made in the financial year 1977-78 and shall be reduced by such a credit as would have been applicable in accordance with section 112 of the Finance Act 1972 had the disposal been made in that year and the corporation tax charged in relaion to the new gain shall be reduced by the credit applicable in the year in which the disposal actually takes place.
§ (5) An election under this section shall be made by notice in writing to the inspector given within three years from the end of the accounting period in which the disposal is made.
- (a) acquires a qualifying asset as trading stock from the insurance company, the members so acquiring it shall be treated for purposes of paragraph 1 of Schedule 7 to the Finance Act 1965 as having acquired the asset otherwise than as trading stock in all respects as if the acquisition by the insurance company were its acquisition and immediately appropriated it for the purposes of the trade as trading stock and shall (in the absence of any election made under paragraph 1(3) thereof) have the same right to make an election under this section in relation to that qualifying asset as is given to the insurance company or
- (b) acquired a qualifying asset otherwise than as trading stock from the insurance company, the member so acquiring it shall be treated in all respects as if the acquisition by the insurance company were its acquisition and shall have the same right to make an election under this section in relation to that qualifying asset as is given to the insurance company.'.—[Mr. Ridley.]
§ Brought up, and read the First time.
§ Mr. Ridley
I beg to move, That the clause be read a Second time.
First, I ought to declare an interest as a director of a life assurance company, although I am in no sense liable to benefit from this new clause if it were adopted.
1379 The point is fairly complex, but I shall explain it as briefly as I can. I believe that there is an injustice here. The new policy for taxing capital gains, as set out in clause 36, meets with a similar matching rough justice in relation to the taxation of gains borne by unit trusts and investment trusts in that the amount to be paid in switching is reduced from 17 per cent. to 10 per cent. of the gain. That is acceptable, and there is no problem at all for unit trusts and investment trusts in simply reducing the amount of the tax that they pay, whereas the bond holder or unit holder will increase the amount that he pays from 13 per cent. to 20 per cent. if he realises his bond.
But in life assurance business many policies are linked to bonds, and the problem arises for the life assurance company which places the funds it has acquired from the saver into unit trusts or investment trusts of this sort. The problem is that, when paying out on a claim or a surrender to a policyholder, an insurance company does not, obviously, allocate certain units which it has purchased and sell them coincidentally with the time when it has to pay out to redeem policies. Instead, it pays out from its liquid funds, and when it has to do so it sells more investments in order to maintain its liquidity. So it can occur—indeed it will and has occurred—that although the policyholder will be expecting to have a reduced amount of capital taxes to pay, the insurance company will be lumbered with a much heavier amount of capital tax. It will, therefore, lose because the amount of tax which the insurance company will have to pay will be increased from 13 per cent. to 20 per cent., and it cannot in any sense pass this on to the existing policyholders.
This sum has, therefore, either to be borne out of the profits of the insurance companies, or it has to be passed on to future policyholders, thereby making the burden of one man's tax fall upon another. That cannot be what is required by the Government.
There seems, therefore, to be an injustice which we should seek to remedy. The new clause goes about it by allowing insurance companies to be deemed to have realised all their assets at the date of this year's Budget, the gain then being computed as though that part of the gain 1380 which had occurred before this year's Budget was taxed at the old rates, only that part of the gain occurring after the Budget being taxed at the new rates.
That would be a considerable alleviation for insurance companies of this sort and it would meet the point of the injustice, too. I know that it is easy to look upon clause 36 as though it was purely a relief in terms of capital gains tax, and, of course, it is a relief for any individual who qualifies under the clause, but the corresponding fact is that it adds a tax burden upon insurance companies which have not realised a gain before 5th April.
I hope that the Minister of State will look with favour on this case. I may be wrong, but I believe that the cost of the concession might be about £2 million. I have here details of one insurance company which seems to be liable to lose quite a lot—perhaps £300,000—simply as a result of a reduction in capital gains tax to the individual. That cannot be the Government's intention, and I feel sure that the Minister of State will wish to try to meet the point, complex though it may be.
§ Mr. Denzil Davies
As the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) rightly said, this is a complex subject. He raised it in Committee, not, I believe, directly on an amendment, and by his new clause he seeks to pursue the point further.
The new clause is moved for the benefit—I use that word in no derogatory sense—of life assurance companies which have invested the premiums of the life assured in unit and investment trusts.
As the hon. Gentleman said, we have provided a certain amount of relief in what was originally clause 35 for unit and investment trusts and their investors. The rate of charge on the gains of the trust is reduced to 10 per cent., but although it follows that the matching rate of credit must also be reduced to 10 per cent., we have allowed the existing rate of 17 per cent. to continue for disposals made before 6th April 1979. This gives investors an opportunity to realise their gains to get the benefit of the old rate of credit if they wish.
We believe that that is a simple and fair way of recognising that some part of the gain made by the investor will often 1381 have accrued during a period in which the trust was being assessed on its realised gains at the old higher rate. But there cannot be any exact matching between the amount of the gains made by the trusts, on the one hand, and their investors, on the other. An investor is given credit regardless of whether the trust has ever borne any tax on gains.
What the life offices want, and what the hon. Gentleman seeks to argue for them in his new clause, is that because life offices have paid out past policy holders, as I understand it, on the basis that the investments in unit trusts will, when disposed of, attract a certain tax liability, they should be compensated tor the fact that that liability may be greater than expected. In other words, when the investments were disposed of, they thought that they would eventually attract a certain tax liability and, unfortunately for them in this case, the tax liability has changed and may well be greater or, indeed, is likely to be greater.
That may be unfortunate for the life offices, but this is not unusual. Tax rates are changed. We are talking about an annual tax, in effect, which may be changed every year. To make this concession to the life offices would be going further than the Government would wish. We have given relief in this respect under the clause already in the Bill, and frankly, I could not recommend the House to go further on the ground that it just happens that the tax liability has changed. Businesses and individuals have to take into account in their investments the unfortunate fact that tax liabilities may change. For that reason, we could not accept the new clause.
§ 9.15 p.m.
§ Mr. Peter Rees
I am a little disappointed by that reply. It is obvious that, with his usual assiduity, My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) has uncovered an anomaly, not to say a hardship, which affects the life assurance industry and thus many of our fellow citizens. It is all very well for the Minister of State to wash his hands of this and say that there will be hardships arising from tax changes but it is the business of Government to consider the consequences of their actions.
1382 In this case, there has been some injustice to the life assurance industry and those who benefit from it. However, the point is complex. My hon. Friend has put the Government on notice. Although we have not received a satisfactory answer, I think that the Government appreciate that we may have to return to this matter. The Minister has been free with promises of what he will do in the next Finance Bill. If unfortunately another Finance Bill emanates from this Government, I have no doubt that my hon. Friend will be encouraged to seek to raise the matter again.
§ Mr. Ridley
No doubt, in response to my hon. and learned Friend the Member for Dover and Deal (Mr. Rees), the Minister will move such an amendment from this side to the next Finance Bill. He was clearly not happy with his brief. He merely said that he accepted that life assurance companies as taxpayers had been disadvantaged and made to pay much more tax than they had expected when they entered into certain contracts It has a sort of retrospective effect. It is right, as the right hon. Gentleman said, that if tax rates go up, business has to adjust to that in the future, but if tax rates go up affecting contracts taken out up to 10 or 15 years ago, that is not such a good thing.
I hope that the Minister will give the matter further thought. He has not given an acceptable answer. I dare say that he will be pursued by the life offices themselves for the unforthcoming and unhelpful nature of that answer. However, in the light of what my hon. and learned Friend said, I beg to ask leave to withdraw the motion.
§ Motion, and clause, by leave, withdrawn.