HC Deb 27 April 1982 vol 22 cc736-73 4.15 pm
Mr. Jack Straw (Blackburn)

I beg to move amendment No. 18, in page 45, line 12, leave out subsection (1).

The Chairman

With this it will be convenient to take the following amendments:

  • No. 19, in page 45, line 22, leave out subsection (1A).
  • No. 20, in page 45, line 24, leave out subsection (1B).

Mr. Straw

No one yet knows what will be the long-term costs to the Government arising from the Falklands crisis. As the crisis arose from the bungling and ineptitude of the Government, the costs in political terms for those responsible are likely to be very great. There will also be the financial costs, which the British taxpayer will have to bear in one way or another.

Whatever the long-term costs and consequences for the Conservative Party and the Government arising from the crisis, there are, sadly, many short-term advantages for them. One is the media concentration on the crisis, which has acted as a convenient smokescreen behind which the Government are able to carry on almost unnoticed their principal task of securing a fundamental shift of power and wealth in favour of the already rich and powerful and away from the 90 per cent. of the population who have to work for a living or who would like to do so if they were given the chance.

It is not only in respect of the movement of Britain's forces that a news blackout operates. The Government have not needed a "D" notice to black out concentration on what they have been doing to capital taxation and tax handouts to the rich. That has already been done for them. I invite the Committee to study examples of what the Government have done under the smokescreen provided for them by the Falklands crisis. Last week the Secretary of State for Employment—that semi-house—trained polecat, as my right hon. Friend the Leader of the Opposition so eloquently described him—announced additional punitive measures in the Employment Bill to enable strikers to be instantly dismissed with no warning or recourse to justice.

There was another example last night of the Government and their supporters confirming one of the meanest, nastiest and, in our judgment, least defensible of all the decisions that they have made—their denial to the unemployed of the restoration of the 5 per cent. abatement of benefit promised when taxation was introduced.

Another example occurs this evening to show that the Falklands crisis acts as a smokescreen for the Government. No one should be in any doubt that the Government are abolishing, through clauses 65 and 71, capital taxation as we have known it. The system of capital taxation that has stood for 17 years is being ended. I pray in aid of that assertion the Financial Times whose writer on capital gains tax said on 13 March: However, with the raising of the annual slice of exempted gains to;£5,000—a figure which itself is to be indexed in future—it is clear that for most investors CGT will cease to be a relevant factor in planning their future investment strategy". The reality, simply from the proposal in clause 65, is that capital gains tax, in the words of the Financial Times, will cease to be a relevant factor in planning people's future investment strategy. The first full-year cost of the proposals in clauses 65 and 71, according to the Red Book, taking account of what the Government are doing in terms of the threshold, in terms of benefits to trusts and in terms of the indexation of the tax itself, is a cool £260 million from a tax yielding only £600 million. Even in the first full year of the operation of these changes virtually half the yield of the taxes is wiped out.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

I am trying to follow the point that the hon. Gentleman is making.

Mr. George Foulkes (South Ayrshire)

It must be difficult for the hon. Gentleman.

Mr. Beaumont-Dark

We must all try together, must we not? There has been talk about capital gains tax evasion, or avoidance virtually. What I thought the Government were trying to do in this case was to do away with capital confiscation. If we consider what has happened to the retail price index since, say, 1965, we see that it has gone up about 500 per cent., so the money that is paid out is only illusory. Surely it is fair to do away with capital confiscation and have a genuine capital gains tax.

Mr. Straw

I understand the point that the hon. Gentleman is making. Indeed, it is the one that lies behind the Government's proposals in both clauses 65 and 71. I shall answer the hon. Gentleman's point about whether capital gains tax has indeed been a confiscatory tax when we deal with clause 71. I say only for his consideration in the meanwhile that if capital gains tax were as confiscatory a tax as he suggests, is it not strange that the yield of capital gains tax in the most inflationary period that we have known between 1973 and this year has lagged vastly behind the rise in prices? The yield this year is £540 million. If the yield had kept pace with inflation it would have been £1,123 million. There has been substantial built-in protection against inflation within the operation of the tax, if not within its conception. That is the reality, and we can debate that at great length on clause 71.

Let me return to clause 65 and the amendments. I was saying that the first full-year cost of these changes in clauses 65 and 71 would be £260 million, virtually half the yield of the tax. What we are not clear about is what the final full-year cost of the changes will be. We are not clear about that, either because the Government themselves are unclear about it, or because they are clear but are unwilling to tell us. Certainly the Government have been unable to provide any significant and reliable estimates about the end full-year cost of the changes. When the Minister replies to the debate and to the debates on clause 71, I hope that he will provide the Committee with detailed estimates—albeit on a range of possible assumptions—about the likely final full-year cost of the changes that the Government are making.

The Red Book speaks in euphemistic terms of these costs being substantial. Taking account of answers that have been given to the House on other occasions, our guess is that the yields are likely to be curtailed drastically and that over a period of five to 10 years capital gains tax will to all intents and purposes cease to exist as a significant tax.

Clause 65 seeks to do two things. First, it seeks to increase the exemption threshold from £3,000 to £5,000. Secondly, having increased the threshold below which people are exempt altogether from any charge to capital gains tax in any one year, it proposes to index the £5,000 amount in line with the retail prices index. The cost of this single change is £60 million in a full year. The coincidence that this sum of £60 million is exactly the sum that the Government have refused to give back to the unemployed by restoring the 5 per cent. abatement will not be lost on my right hon. and hon. Friends.

Mr. D. N. Campbell-Savours (Workington)

It is a disgrace.

Mr. Straw

It is indeed, as my hon. Friend says, a disgrace.

The Government will seek to justify the changes in two ways. First, they will say that this is the first increase since 1980–81, when the floor was increased to £3,000 from its previous level of £1,000 and certain tapering provisions were related to it. Secondly, the Minister may seek to argue, as the Chancellor sought to do in the Budget debate, that the increase in the thresholds provides a quid pro quo for the failure of the Government within the new scheme of indexation to allow the indexation of gains that accrued up to 6 April 1982.

Indeed, when the Chancellor made his Budget speech he said exactly that: Because we have not found it possible to extend the new scheme to cover past gains, I propose also that the exempt slice should be increased to £5,000. That is the best solution to the problem of the past"— let hon. Members note that— and will simplify administration both for the taxpayer and the Revenue. He went on to say: For the future, I intend that this threshold too should be statutorily indexed."—[Official Report, 9 March 1982; Vol. 19, c. 755.] I shall deal in turn with those two justifications for the change. First, there is the question whether the general indexation of thresholds should apply to the threshold of capital gains tax. Despite this being the year of the index, as the hon. Member for Croydon, South (Sir W. Clark) has found to his discomfort, the Conservative Party has never applied the rule of indexation of thresholds with any consistency.

The Conservative Party opposed the introduction of capital gains tax in 1965 and the right hon. Member for Sidcup (Mr. Heath) led the opposition on the Floor of the House. What is significant about the Conservative Party's position is that when the right hon. Member for Sidcup came into Government in 1970 no changes of any significance were introduced to the system of capital gains tax which he and so many others in the Conservative Party had opposed in 1965. There were no changes apart from the abolition of the short-term capital gains tax and its rolling up into the long-term system. There was no change to the thresholds, and the system of the alternative charge to tax which took the place of the thresholds stayed throughout those four years without a single change being made, so far as I have been able to ascertain, by the right hon. Member for Sidcup or his Government.

It was only in the 1977–78 Budget that a threshold was formally introduced. At that stage the threshold was £1,000, with various tapering provisions up to £5,000. If, as we believe, the £1,000 threshold introduced in 1977–78 was a sensible floor for administrative and other reasons, there can be no justification for a 500 per cent. increase in the threshold in the four years that have elapsed since, when in that period prices could not have increased by more than 70 per cent.

It is important to stress that the case for thresholds for capital gains tax is different from the case for thresholds for income tax. In respect of income tax the case for thresholds is one of equity and the need to make income tax as progressive as possible. In other words, those with the lowest incomes should pay least and those with the smallest incomes should pay nothing. That cannot apply in respect of those who have a charge to capital gains tax, because it must be possible to count on the fingers of one hand the number of people whose sole source of cash is capital gains and who have no other income. Almost all those with capital gains of more than £1,000 have substantial incomes. All but perhaps a few of those about whom we are talking already have substantial incomes. Therefore, the case in equity for exempting some of their capital gains, as though it were the floor of their income, does not arise.

4.30 pm

To the extent that those people do not have high incomes, the case is made for taxing capital gains as income. That is the concept in the United States, although it applies with certain changes. A flat rate to the charge is applied where it suits the taxpayer, but the concept is a fundamental part of the United States taxation system.

Sir William Clark (Croydon, South)

The incidence of capital gains tax in the United States is far different from ours, because there are so many exemptions and the threshold is so high. Does the hon. Gentleman not agree that capital gains tax as we have had it has been a tax on inflation and on thrift?

Mr. Straw

I do not agree with either proposition. We shall deal with the reality of capital gains tax as it has operated when we debate clause 71. I have already said that the yield on capital gains tax is half the real value that it was in 1973. If the tax were indeed a tax on inflation it would at the very least have kept level with inflation, but it is half during the period of the highest inflation that we have known for 50 years.

I do not suggest that in the United States there is a higher capital gains tax charge than in this country. I prayed in aid the United States example to emphasise that the concept is that capital gains coming into tax are treated as income. When we reach clause 71 I shall suggest that if there is concern on the Conservative Benches about some people who do not have high incomes, but who have high capital gains, the way to deal with them in equity is to tax their gains as income, just as the Conservative Government did when they introduced the short-term capital gains tax in the 1962 Budget.

I make that first point to make it clear that the case for thresholds in capital gains tax is different from the case for thresholds in personal taxation. The case for thresholds in a capital gains tax is twofold. First, there is some administrative convenience in setting a floor below which it is uneconomic to try to bring the gains into charge. Secondly, thresholds were seen as a rough-and-ready offset for inflationary gains. The central part of our objection to the increase in the thresholds is that thresholds and the indexation of capital gains will provide relief against inflation twice over.

If one indexes capital gains so that only real gains are taxed, what is the case for a threshold, other than a minimum level for convenience? The Chancellor himself seems to have accepted the logic of that point when he justified the increase in thresholds specifically in respect of that part of gains which he could not index. His whole justification for increasing the threshold was in respect of past gains which he could not index.

The right hon. and learned Gentleman said: Because we have not found it possible to extend the new scheme to cover past gains, I propose also that the exempt slice should be increased to £5,000. That is the best solution to the problems of the past".—[Official Report, 9 March 1982; Vol. 19, c. 755.] If that is the justification—and I understand at least its intellectual coherence,—why is the exemption to be indexed by reference to post-1982 inflation? What is it to do with post-1982 inflation if it is to cover the gains of the past? Why is it available as an offset, not just against gains that arise before 1982, but gains that arise after 1982?

Sir William Clark

The hon. Gentleman is supporting our future amendments.

Mr. Straw

I am glad to have the hon. Gentleman's support. I look forward to his coming into the Lobby with the Opposition when we vote on amendment No. 18. He can back his words with action.

Mr. Campbell-Savours

Is it not significant that those Conservative hon. Members who are demanding more money by seeking support for their amendments are not those who were here yesterday when we discussed the 5 per cent. abatement for the unemployed? It is disgraceful.

Mr. Straw

I accept what my hon. Friend says. The Conservative hon. Members who were absent yesterday, when we discussed an issue of far more importance to many more millions of people, will have to explain themselves.

If the justification for the increase is that it is to cover past gains that cannot be indexed, why is it to be available for gains that can be indexed, and why is the exemption limit itself to be indexed according to post-1982 inflation?

It does not take a moment's examination to realise that the proposal to increase the thresholds is not justified. Having tried to deal with our objections and our suggestion, the Minister may fall back on the suggestion that indexation is a general policy of the Government However, indexation is not a general policy, but a selective and specific device that the Government introduce, avoid or abandon as it suits them. They introduce indexation for gilt-edged stocks, capital gains tax and capital transfer tax—taxes on the rich. They avoid indexation on taxes for everybody else by refusing to index thresholds last year, and they avoid indexation of benefits for the unemployed by cutting the real value through the abolition of the earnings-related supplement and by the cut in benefit by 5 per cent. They abandon indexation altogether in respect of other aspects of the tax system.

If indexation is a principle that the Government wish to apply consistently, why have they not indexed the £25,000 limit on mortgage interest? They have remained remarkably silent about the £25,000 limit. It has not been touched while the Government have been in power. Their position is selective.

The Government have abandoned indexation altogether when it comes to public expenditure. Not only have they gone to cash planning, but they have refused even to provide indices which give an indication of what that cash planning means in real terms. If they start to preach general principles on indexation, we shall have to ask them to refer that to the trade unions representing the nurses and other National Health Service workers, who are asking for no more than the Government are giving to wealthy capital taxpayers, which is to index their incomes.

Mr. Mendes-France said that to govern was to choose. The Government have chosen to give away £60 million by the clause, on top of at least another £200 million that they will give away by introducing general indexation into capital taxation. That is not justified by any general principle or by any rules of fairness, nor does the proposal have any intellectual coherence, even within the Government's own scheme, and we shall oppose it.

Sir William Clark

The hon. Member for Blackburn (Mr. Straw) moved the amendment with his usual clarity and felicity, but he was unable to refrain from bringing class into the issue. I share his regret that the Government have not indexed mortgage interest relief and have failed to increase the £25,000 limit. I am delighted to know that he will support such an increase when we discuss the matter in Standing Committee. Undoubtedly an amendment will be tabled that will seek to increase the limit.

The Government have gone some way in the indexation of revenue in the national account. Of course, this is a matter of priorities. The Government have selected certain items and said "This is an injustice. Consequently we shall try to alleviate it."

As I said in an intervention in the speech of the hon. Member for Blackburn, I am convinced that capital gains tax is a tax against wealth creation. It is a tax on inflation and on thrift. The hon. Gentleman made great play of the fact that the return for the Revenue has not kept pace with inflation. In the gilt market, which comprises a good deal of capital gains tax, holdings are exempt after one year. It is obvious that there has been a move from equities to gilts to avoid capital gains tax. That is the reason for the product from capital gains tax not keeping pace with inflation.

I remind the hon. Member for Blackburn that between 1965 and 1982 the rate of inflation has gone up by about 430 per cent. The clause does not seek to index-link inflation. If someone purchased two or three blocks of shares in 1965 for £2,000 and if inflation increased by 430 per cent., those shares, without increasing in real value, will be worth £8,600. The threshold will have increased by £5,000, but a person with a small investment of £2,000, for example, will still pay tax of about £3,600.

If Labour Members wish to be fair, I am sure that they will accept that capital gains tax is unfair. I am delighted that another step has been taken to reduce a great injustice. Insufficient attention has been paid to the effect that the tax has had on thrift. I hope that my hon. Friend the Financial Secretary to the Treasury will resist the amendment. Many of my right hon. and hon. Friends do not think that the Government have done enough, and we shall be pressing for more to be done, to encourage the creation of wealth. There should be no hindrance to the creation of wealth, because wealth will create the jobs that the country needs.

Mr. Richard Wainwright (Colne Valley)

I cannot be the only hon. Member whose reaction was gloom and disappointment when the hon. Member for Blackburn (Mr. Straw) quoted with apparent approval a statement in the Financial Times to the effect that if the measures in this clause are accepted the ordinary investor might as well forget about capital gains tax. That came from a member of the party of growth, the party that will inject into the economy a new dynamic, and the party that has at last forsworn some of its cruder nationalisation proposals. Some members of that party are prepared to help the mixed economy.

I had hoped that if ever we had to suffer a Labour Government led by those now on the Opposition Front Bench they would bring the compensation of some more Racal-type companies that would forge ahead and bring a modest capital reward to their shareholders. Apparently that will not be so. It seems that we can forget about real capital gains under Labour. As the Government are doing something at last about the iniquity of taxing mere inflation gains, the tax could well be forgotten, according to the hon. Member for Blackburn. That is not my view because I do not regard a Labour Government as inevitable. We are discussing an issue that is real and important.

4.45 pm

The introduction of a Finance Bill always involves the awkward question of priorities. Those in Opposition parties and Back Benchers generally are in a fearful plight because of the age-old and, I think, outmoded convention that we cannot propose increases in taxation. It is a charter for irresponsibility of which I have taken advantage in my time. When sceptical Yorkshire constituents of mine, having listened to my great plans for the future of the infrastructure of Britain, ask "'Owt pay for it, lad?", I have to say "I am awfully sorry but we are not allowed to propose from our Benches in the House of Commons the raising of taxes". I thereby get off the hook in a way that is unjustifiably easy. That is crazy.

There is another convention. The Government have adopted the childish ploy—they did so last year and I am sorry that they did not learn their lesson—of calculating the total cost of all the various proposals of the Opposition parties. The Financial Secretary to the Treasury said last week that that would be done clause by clause. The Government will then present the Tory press with an enormous multi-million pound bill at the end of our proceedings. That convention is absurd and not one that I would admit to for a moment.

Certain important priorities have been dismissed already in Committee by the Government, including that of getting some degree of civilisation into our income tax thresholds. We are confronted with the problem that the Government have already dismissed the most important priority of all in the Finance Bill. Should we from an Opposition stance go on to press for other but much lighter priorities? For what it is worth, I say that we must continue to do so within our judgment of what the economy can stand. That is how I regard the amendments.

It is true that the Government's approach to indexation is thoroughly messy and unworthy of a British Government with such a well-staffed Treasury. I am glad that the Select Committee on the Treasury and Civil Service is about to consider making an inquiry into indexation in the hope of making some proposals to the Government on how a reasonably coherent and respectable approach can be devised. It seems, for example, to be taken for granted by the Government that all indexation must be based on the retail price index. That presents the great danger of applying the standards of chalk to matters of cheese. I hope that some thought will be given to appropriate indices for certain taxes.

My party has been on record for years as being in favour of the full indexation of the tax system. Since the early 1970s we have not been impressed by the argument that to do so is to give way to inflation. We believe that it is merely realism and fairness. However, that only amounts to indexation being the automatic norm, subject always, and quite often in practice, to the will of the House. We are not saying that all exemptions, allowances and rates at a certain moment are dead right for all times and must thereafter be indexed without any change or challenge.

However, there is an overwhelming case for the rather messy measure of indexation which the Government are at last introducing. The present allowances are out of date. Although this would not have been a high priority for us if we had been in a position to write the Finance Bill, we believe that the Labour Party's amendments should be opposed on the basis that even a shoddy, sporadic and unsystematic indexation is better than none at all.

Mr. Campbell-Savours

The debate is important to all Labour Members. The clause illustrates the Government's determination in this place, irrespective of the national situation, to represent their friends exclusively and to ensure that money that is rightfully the property of those who are not privileged is given to the better off in society. It is a disgraceful clause.

Sir William

Clark: How can the hon. Gentleman say that money is given when it is merely the reduction of a payment?

Mr. Campbell-Savours

The hon. Gentleman will be well aware that yesterday's amendment on the abatement would have required £60 million from the Treasury. That money is being conceded in this clause. It is grossly unjust and it militates not just against the interests of those whom Labour Members represent, but of those whom all political parties should seek to represent.

The Financial Secretary to the Treasury (Mr. Nicholas Ridley)

The cost to the PSBR this year is zero. The cost that the hon. Gentleman has mentioned will not build up for more than two years.

Mr. Campbell-Savours

Is the hon. Gentleman suggesting that the indexation measures that he is introducing will have no effect on Treasury receipts in the coming years? Let us not qualify it by "this year" or "that year". Legislative change is taking place, as a result of which money will be made available to the better off in society. Inevitably, a reduced amount of capital gains tax will be paid, because the indexation of capital gains tax and the raising of the threshold from £3,000 to £5,000 will mean that people will be able to pay a lesser amount of money to the Treasury.

An article in Financial Weekly in 1980 pointed to the dramatic decline that would take place as a result of t he reductions in capital gains tax that had been introduced in successive Budgets. It said: At a moment when the Chancellor is telling the nation that it must carry on with its strict monetarist diet of bread and water…he would be announcing that the wealthiest section of it could not merely carry on eating its cake, but have a dollop of cream on top as well…the uproar would surely not be confined to the Left. Conservatives are not deeply devoted to equality, but neither—unless they have entirely forgotten the principles of Disraeli—are they deeply devoted to widening social divisions. And Conservative MPs undoubtedly number more of the unemployed and of the low-paid among their constituents than they do payers of these capital taxes. This and other clauses on capital transfer tax and capital gains tax have generated the belief in Britain that the Government believe in a two-nation society. The British people want a one-nation Government who believe that such concessions should not be made. Every Government, irrespective of their political colour, should set out to protect the under-privileged in society even if they feel that they are elected by the privileged. This Government, more than any other that I can remember, have set out to protect exclusively their own. That is disgraceful.

Mr. D. A. Trippier (Rossendale)

What rubbish.

Mr. Campbell-Savours

The hon. Gentleman would do well to consult the under-privileged in his constituency.

Mr. Trippier

I do.

Mr. Campbell-Savours

I wonder whether the hon. Gentleman has ever told his constituents at his surgeries that he believes that they should not get increases in State benefits and that the increases should be paid to the better off in society. I bet that he has never put it that way. In failing to do so he pursues and further promotes the idea that prevails throughout my constituency and the Northern region that the unemployed have been forgotten.

The hon. Gentleman represents an industrial valley in Lancashire. Does he tell his constituents that he walks into the Lobby slavishly in pursuit of Government policy, and against their interests, to provide additional money for the better off in society?

Mr. Trippier

Before the hon. Gentleman bursts a blood vessel, may I ask whether, as a Socialist Member of Parliament, he is in favour of wider share ownership? Is he aware that many people employed by such companies as ICI come under the terms of reference referred to by my hon. Friend the Member for Croydon, South (Sir W. Clark)? Is he further aware that many trade unions in Britain which hold shares will also be affected by this legislation? Its effect is not confined to the rich. Is he aware also that there are many pensioners in Britain who have saved over a long period of time? No one seems to have answered the point made by my hon. Friend the Member for Croydon, South that this is a tax on thrift. Is the hon. Gentleman against thrift?

Mr. campbell-Savours

It is a Budget judgment. I and my hon. Friends maintain that the interests of the unemployed in Britain who will have their unemployment benefits taxed from July this year are more important than the interests represented by the groups to which the hon. Gentleman has referred. If the hon. Gentleman were to direct himself to the real priorities in society he would look after the under-privileged, those who have no work, not those who are able to benefit by company share schemes.

Mr. Trippier

The hon. Gentleman might write to the TUC recommending that it sells all its shares, which are in a sizeable portfolio which is published annually.

Mr. Campbell-Savours

I shall do more than write. I shall produce for the House an "Investment and Tax Planning Bulletin, No. 7", dated March 1981, by Pilling Trippier Financial Planning Services Ltd., 14 St. Anne's Square, Manchester M2 7HT. If I am not mistaken, the hon. Gentleman is a director of that company. I presume that that investment and tax planning guide is distributed to the customers of the hon. Gentleman's company. There is a reference in that guide to the action to be considered before 5 April 1981 relating to capital gains tax.

It is interesting to note what the hon. Gentleman's company had to say about capital gains tax. In conditions where our people have insufficient resources to meet their daily needs, it said: You can save up to £900 by action before 5 April. You can deal with capital gains of up to £3,000 in the current tax year without incurring a tax liability. In other words, those people can remove money from the hands of those in need and by manipulating their financial affairs—through the advice of Messrs. Pilling Trippier—pcan save a few pounds.

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The document went on to say: If you wish to retain assets then a 'bed and breakfast' transaction can enable you to do this and still save the tax. We all know that in capital gains tax law a bed and breakfast transaction means that someone sells his holdings the day before the end of the financial year, realises the capital gain within that financial year and buys them back the following year, so gaining money from the Exchequer that would otherwise go to the unemployed.

In a business prospectus the hon. Member for Rossendale (Mr. Trippier) advised his constituents in the Rossendale Valley, and whoever wished to subscribe to that monstrous document and nonsense, that they should do that. Those who suffer are those who are not in a position to protect themselves. They do not have a trade union, or friends in the Treasury, unlike the hon. Gentleman and his hon. Friends.

Sir William Clark

I hope that the Opposition Front Bench does not agree with the hon. Gentleman's remarks. If an hon. Member, in his professional career outside the House, points out to all and sundry the law of the land and says that, for example, the exemption limit is £3,000, it is not normal practice either in the House or in Committee for an hon. Gentleman to make such a disgraceful attack on him. In all honesty, the hon. Member for Workington (Mr. Campbell-Savours) should apologise to my hon. Friend the Member for Rossendale (Mr. Trippier).

Mr. Campbell-Savours

The hon. Gentleman may say that I made a disgraceful attack, but he will be pleased to know that if the hon. Member for Rossendale had not been in the Chamber I would not have referred to his company, but only to the contents of the leaflet. I am told that it is the custom that if an hon. Member is in his place in the Chamber, another hon. Member does not need to give him notice that he intends to refer to one of his interests. Therefore, I believe that my remarks were in order and I see no reason to apologise. I have only quoted from a document put out by a company with which he has some relationship.

I have seen several reports in the national media that refer to such gains as paper gains, or as gains that are not real if inflation is taken into account. If paper gains are being taxed, we must expect the revenue to rise with the rate of inflation.

Sir William Clark


Mr. Campbell-Savours

Perhaps the hon. Gentleman will tell me why that is not the case.

Sir William Clark

The total receipts from capital gains tax do not necessarily have to rise in line with the rate of inflation for the simple reason that there are certain securities in the capital market—gilt-edged securities—that do not bear capital gains tax. Obviously, if there is a shift from the equity to the gilt market, the totality of the capital gains tax—as a result of the preferential treatment given to the gilts market by successive Governments—could not possibly keep pace with inflation.

Mr. Campbell-Savours

Does that account for the fact that the yield from capital gains tax is half the level of the rate of inflation? The statistical evidence does not show that. Therefore, that is not a good reason for justifying the dramatic fall in the amount of money received by the Exchequer from capital gains tax.

Mr. Beaumont-Dark

The hon. Gentleman must bear in mind that capital gains tax is meant to be what it says it is. When a gain is made it is taxed. If the hon. Gentleman were to check these figures as well as he has checked his other figures he would see that the index of ordinary stocks has risen by less that half the rate of inflation. Therefore, if the capital market is growing at a much slower rate than the rate of inflation, how can the hon. Gentleman expect to get so much profit from it unless he increases capital gains tax? I am not being clever. I have only spoken common sense, which might help the hon. Gentleman sometimes.

Mr. Campbell-Savours

Perhaps the hon. Gentleman has provided the solution—to increase the rate of capital gains tax. We are interested in the gross receipts to the Revenue and in the proportion of receipts that arise from capital gains tax. If things are built into the system—as the hon. Member for Croydon, South (Sir W. Clark) suggested—that reduce, in certain areas, the amount of money that can be raised from capital gains, the Government must respond by imposing new forms of capital taxation to make up for the money lost to the Exchequer. If they do not do that, the unemployed will pay.

Conservative Members may disagree, but it is significant that those Conservative Members who wish to discuss this amendment to secure additional resources for their friends were not in the Chamber yesterday when we discussed the plight of the unemployed and the 5 per cent. abatement. Perhaps the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) would like to intervene to tell me why he did not speak on yesterday's amendment dealing with the 5 per cent. abatement. Will he tell us?

Mr. Beaumont-Dark

I was under the impression, Mr. Godman Irvine, that you were in charge of the debate, not the hon. Member for Workington (Mr. Campbell-Savours). I listened to much of yesterday's debate, but I did not feel that it was absolutely necessary to take part in it. Indeed, we would benefit if the hon. Gentleman took less part in this debate, so that we could all hear some common sense instead of his nonsense.

Mr. Campbell-Savours

I can understand the hon. Gentleman's embarrassment when some of us bring out the truth about capital gains tax.

Mr. Trippier

We are bothered about the hon. Gentleman's embarrassment in being unable to answer the questions asked by myself and by my hon. Friend the Member for Croydon, South (Sir W. Clark). Is the hon. Gentleman against thrift?

Mr. Campbell-Savours

From his experience of the Rossendale Valley and his knowledge of me, the hon. Gentleman should know that I am not against thrift.

In a written question last October, the Financial Secretary was asked whether he would consider indexation that took account of inflation. I believe that that has been done in this Budget. His reply to such proposals was that they would result in an unwelcome increase in the cost of administration—for taxpayers as well as for the Revenue—while drastically reducing the yield."—[Official Report, 22 October 1981; Vol. 10, c. 168.] That was his reply. Perhaps the Financial Secretary will intervene to tell me that that was not what he said at the Dispatch Box last October in reply to a question on the effect of indexation on taxpayers and on the Revenue. Indeed, I hope that the Financial Secretary will address himself to that point. What did he mean by while drastically reducing the yield."? Is he saying that one day capital gains tax will no longer exist and there will be nothing to pay, or that the cost of collection is greater than the possible benefit to the Treasury?

Gross imbalances are now developing in Britain between capital transfer and capital gains tax and the benefit to the Exchequer, and the income tax and direct taxation paid by the constituents of all hon. Members. I have always believed that capital penal taxation should be far higher than it was even under the Labour Government. If we wish to restore initiative and incentive, we must use a completely different argument from that deployed by some Conservative Members.

To reduce laziness in business, industry and management one must give management the conditions in which it will want to make an additional effort. To do that, capital taxes must be increased and more emphasis placed on reducing direct taxation. That is where the real incentive lies. No incentive is derived from reducing capital taxation. That only breeds laziness and the sense of "Well, why bother? I am well-off. It does not matter." That is the problem with British industry. People accumulate a little nest egg, settle themselves down and think that they need not make any additional effort. That is clear from the way in which they invest their capital.

I end by referring to the views expressed in 1964 by Mr. Samuel Brittan. He must have been a young man then, and perhaps wiser than he is today, although I understand that he is a wise economist. He said: Is it conceivable that, if a new tax system were being designed for Britain, income would be taxed so heavily and effectively and capital hardly at all? That is what has happened. It is a disgrace. I hope that my right hon. and hon. Friends will join me in the Lobby with defections from the Conservative Benches. Of course we shall never get them, but we live in hope. I hope that Conservative hon. Members will show their constituents that they sympathise with the unemployed and that such feelings are not the monopoly of Labour Members.

Mr. Beaumont-Dark

There are still times when one is surprised by what one hears. When I listened to the hon. Member for Workington (Mr. Campbell-Savours)—

Mr. Campbell-Savours

The truth hurts.

Mr. Beaumont-Dark

The truth can hurt if it is the truth. I cannot believe that penal taxation is the only way to encourage enterprise, that there is no need to create wealth, or that successful people tend to be slothful because the very essence of being successful and wealthy promotes the feeling that they do not need to work.

The hon. Gentleman should look at the problems that we face and the reasons why we need this benefit to capital. He should look at the companies that create the most employment and are the best hope for the people of this country. I agree that vast fortunes have been made, but successful companies, in a capital sense, are Racal, Sainsburys, Plessey, Tarmac, and Guest Keen and Nettlefold. Some of the great companies are run and largely owned by wealthy families. They have become wealthy because they have built successful companies. Surely it is not Labour Party policy that penal taxation is the way to encourage enterprise. If we wish to give more to the unemployed or to those who are on low pay, we shoud not crush the wealthy; we should encourage the creation of wealth. It is arrant nonsense to say that making concessions on capital taxes is taking money that rightly belongs to others. The whole idea of capital gains tax, and of this clause, is not to enable people to avoid paying taxes, but to prevent them from having their capital confiscated. There has been capital confiscation.

5.15 pm

The hon. Member for Workington tends to forget that people create wealth from income on which they pay their due taxes. The taxation system does not mean that wealthy people do not pay taxes. They pay huge taxes. I hope that, as the debate proceeds, we shall hear more practical suggestions from the Opposition Benches than the suggestion that penal taxation will encourage enterprise and that capital confiscation is the only way forward. No wonder people are loth to return a Socialist Government.

We do not wish to grind people down, but nor do we believe that people should have all the concessions that can be given. As the hon. Member for Colne Valley (Mr. Wainwright) said, sometimes difficult decisions have to be taken. The hon. Member for Workington may be under the impression that no one should earn more than £15,000 a year. If so, concessions will not create anything. People must be encouraged to strive. We must encourage people to be successful and to take risks. That is the purpose of this and other clauses.

The impression given by the hon. Member for Workington and his hon. Friend the Member for Blackburn (Mr. Straw) was that only a few people with surplus cash actually invest it. I deal in investments. More than 3,000 clients of my company are not wealthy people, but they have invested small amounts of money hoping that when they retire they can do something useful with it. They want to look after themselves, possibly buy a cottage in the country, or look after their families. Why should Socialists consider that criminal? People who save do not deprive others of money. The more we encourage people to save, the more good will be done in this country.

Mr. John Maxton (Glasgow, Cathcart)

The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) made a remarkable case against my hon. Friend the Member for Workington (Mr. Campbell-Savours), but my hon. Friend made a remarkably good case against the clear class basis of the legislation. The whole of the Government's tax strategy has been directed towards allowing—to use a less harsh term—the wealthy to keep more of their income and at the same time hammering those who are much worse off.

The Opposition believe that that is done for one simple purpose—to benefit and put cash into the pockets of those who support the Conservative Party and pay its bills. The Government argue that the legislation is based on the economic strategy that allowing the wealthy to have more money will encourage them to invest it and create wealth. The hon. Member for Selly Oak said that if one releases money and puts more money into the pockets of the wealthy, they will invest it in productive industry and as a result we will have lower unemployment and more jobs. That is the Government's economic strategy.

Sir William Clark

The hon. Gentleman said that the legislation had been introduced to help those who support the Conservative Party. We must get the record straight. For every pound spent by the Conservative Party, about 80p comes from the doorstep and 20p from large donations. The complete reverse applies for the finances of the Labour Party. Institutions such as the trade unions provide 80p, and 20p comes from the doorstep.

Mr. Maxton

If I go too far into the financing of political parties, I think that you, Mr. Godman Irvine, will call me to order. The hon. Gentleman forgets that the bulk of Labour Party finance comes from ordinary members at local constituency level paying their dues.

Sir William Clark

What about the trade unions?

Mr. Maxton

The trade unions, too, are made up of ordinary working people paying their dues.

Conservative Members argue that giving money to the wealthy releases capital for investment so that jobs and wealth are created and industry becomes more productive, but the Government have been doing that for three years. They have been giving more money to the wealthy by constantly reducing taxation for the better off, presumably releasing capital for investment by the wealthy or non-wealthy people to whom the hon. Member for Selly Oak referred. But where is that capital investment? Where are the new jobs and the improvement in productivity that the Government seek as a result of tax cuts? They do not exist. If the Government give people extra money to invest, the recipients will put it where they can make the most profit, and one can scarcely blame them for that. They do not invest in productive industry in this country. They may invest abroad. They may buy a painting or some other work of fine art. They may buy a second house or other property. Certainly, in the main, they have not invested in productive industry in this country in the past three years, although large sums of money have been given to the wealthy for that purpose.

Mr. John Browne (Winchester)

The hon. Gentleman where the productivity and the jobs were. Is he aware that under the Conservative Government productivity has increased dramatically and that 100,000 jobs are now being created every week? To me, that shows that these things are indeed happening. The net figure is different, of course, but these are genuine new jobs rather than false jobs being created.

The hon. Gentleman also said that people were now free to invest outside the United Kingdom. As the report produced by his right hon. Friend the Member for Huyton (Sir H. Wilson) made clear, there is a shortage not of capital but of investment opportunities. We are trying to create those opportunities.

Mr. Maxton

The hon. Member made a remarkable little speech in that intervention. Of course 100,000 people may find jobs each week, but they are not new jobs. That is the difference. There is movement between jobs, but 100,000 new jobs are certainly not being created every week. I wish that they were, because we should then very soon get rid of unemployment.

Mr. Straw

In six months or so.

Mr. Maxton

My hon. Friend is a much quicker mathematician than I am. I accept his figure.

In reality, the investment is not taking place and there are more than 3 million unemployed people. Indeed, we all know that that is an unrealistic figure and that the true total is far greater. That is largely the result of the Government's economic policy. Money is being given to the wealthy on the completely phoney argument that it will be used for investment, but it is not being used for investment and there is increasing unemployment and lower productivity. That is the Government's record. At the same time, the wealthy are becoming wealthier.

Sir William Clark

No. That is rubbish.

Mr. Maxton

The hon. Gentleman says that that is not true, but people are paying less tax, so they are becoming wealthier. That is obvious. I do not think that even the hon. Gentleman, disputatious though he is, would suggest that if he sells some of his many shareholdings next year and pays less capital gains tax than he would have paid this year he is not better off. He cannot argue that. Of course he would be better off. He would have more money in his pocket.

I am glad that the hon. Member for Croydon, South (Sir W. Clark) made those comments, because on the index linking of pensions he takes the opposite view. In last week's debate on public expenditure, he made a ferocious attack on the indexation of pensions and public expenditure. Yet today, when his wealthy friends stand to benefit, he suddenly supports indexation. I find that double standard difficult to take.

Sir William Clark

If the hon. Gentleman looks up the Official Report he will see that I did not take part in that debate.

Mr. Maxton

I may have mentioned the wrong debate—perhaps the hon. Gentleman will tell me in which debate it was—but certainly he recently condemned the indexation of pensions. Yet he now supports the indexation of incomes for another group of people.

Mr. Campbell-Savours

It was on the Second Reading of the Bill.

Mr. Maxton

I am grateful to my hon. Friend. Certainly the hon. Gentleman made such an attack recently.

In a sense, we are dealing with tax-free income. With regard to unemployment and sickness benefit, the Government say that all income should be taxed. I believe that all hon. Members agree on that. According to the Financial Times of 13 March, the clause will be of great benefit to those who receive regular annual income from bonds and unit trusts. The profit is made by selling units and comes back to the holder of the bond. It is used as income and not as capital gains in the strict sense of the term. If the Financial Times is correct, people will now be able to receive not tax-free capital gains but tax-free income. Yet that is against the very principle that the Government sought to impose through the taxation of unemployment and sickness benefit.

Again, the wealthier members of society will receive the benefit. It is all very well for the hon. Member for Rossendale (Mr. Trippier) to say that many ordinary people sell properties and shares and make capital gains, but I should think that remarkably few of the people whom I represent make capital gains of more than £3,000 per year.

Mr. Trippier

I understood that Labour Members were very close to the trade union movement. Many trade unions own large numbers of shares and make gains far greater than £3,000 per year. As my hon. Friend the Member for Croydon, South (Sir W. Clark) said, much of the money contributed by the trade union movement to the Labour Party is raised through shares.

5.30 pm
Mr. Maxton

If a trade union passed money from its investment funds to the Labour Party, it would be breaking the law. The money of the Labour Party comes from the contributions of members. No trade union is allowed to pass any other money but that to the Labour Party. I take the hon. Gentleman's point about trade unions having investments, but I am saying that they should be taxed on any income from those investments. Unlike Conservative Members, who believe that they should speak for the financial benefit of their personal friends—and some trade union members are my personal friends-1 believe that if people make high incomes out of such yields they should be taxed on them. That is the principle in which the Labour Party believes, and if such a recipient happens to be a trade union, it should be taxed. I do not think that the hon. Gentleman's point is valid.

Conservative Members keep using the phrase "We wish to encourage thrift." They want to encourage thrift so that the money can be used for investment. To some extent—wrongly—they always think in terms of capital gains tax in relation to shareholding. But CGT is not just about shareholdings. A large amount of investment, with people making money out of CGT, has nothing to do with the creation of wealth and the investment in share capital in order to create that wealth.

There is, for example, the whole question of the second-home owner, who will be one of the beneficiaries of this provision. The property investor will also be a beneficiary. Some second-home owners have perfectly legitimate reasons for owning that property, but at the same time it has been the rule that people should get tax benefit only on the property in which they live, that they should not be able to get tax benefit on the second property. That principle is to some extent being broken by this provision, because any inflationary gain made from owning a second house will now not be taxed. The tax will come in only where a person makes a real gain. Because, in the property market, most properties only keep pace with inflation, it means that most people will now not pay capital gains tax on a second property. They do not pay it on the first property anyway.

There is also the fact that capital gains tax is also about investment in art and other investment purely for financial gain—for example, buying gold coins, Krugerrands, and so on, which again have nothing to do with the production of wealth. No extra jobs are created. It is pure speculation. Yet now, as a result of the Government's proposal, a large amount of the profit being made by people out of such investment will not be taxed. That is grossly unfair, particularly at a time when it is the poor who are paying increasingly more in taxation.

I raised that aspect last week through the case of a widow in my constituency earning £59 a week and paying £9 in taxation. That is grossly unfair in any terms, but it is even more so when one puts it against the sort of benefit going to the very wealthy in our society.

Conservative Members keep saying that we must have indexation. But we must always bear in mind that the retail prices index has much more relevance to those on lower incomes than to those on higher incomes. If we take 10 per cent. from my poor woman on £59 per week, that is to her very much more in real terms than is 10 per cent. from someone earning £25,000, £30,000, £50,000 or £60,000 a year. Most people on low incomes spend the bulk of their money on essentials, and many of those essentials have soared in price for the very poor over the past few years. If we had an "essentials" retail prices index as opposed to a total retail prices index, we should arrive at different figures. For example, public transport costs have gone up very much more than the cost of living, as have rents. These are the prices that hit the very poor.

Once one gets beyond a certain income level one is able to make a large number of choices in terms of spending one's income, and that makes an enormous difference in terms of the retail prices index. We must bear that factor in mind. That is where the indexation to the retail prices index that is proposed is a disgrace, and I shall have great pleasure in voting for the amendment.

Mr. John Browne

I strongly support the general approach of my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) and I shall not add to it and waste further time.

I am opposed to capital gains tax in principle, because at present it offers to the Government a relatively small yield of less than 1 per cent. of the revenue, it wastes a lot of the productive time of people from all walks of life and in some of the professions in dealing with it—the brokers, accountants and so on—time which could otherwise be used to increase the productivity of British industry and achieve an increased growth rate in our gross domestic product. It also has high administrative costs, very few of which achieve anything in terms of our national well-being. My most serious criticism of a capital tax of this nature is that it reduces the incentive to invest in British industry.

Mr. Campbell-Savours

The hon. Gentleman says that it reduces the incentive to invest in British industry. Why is it that, in reducing the take of capital taxation, investment, according to a reply yesterday by the Secretary of State for Industry, fell from £4,439 million in 1979 to £4,157 million in 1980 and to £3,602 million in 1981? The hon. Member for Leek (Mr. Knox) asked: Does my right hon. Friend agree that those figures provide wide evidence of a worrying decline in investment in manufacturing industry?"—[Official Report, 26 April 1982; Vol. 22, c. 602.] This is after three years of reducing capital taxation.

Mr. Browne

I am delighted to answer that question. I was going to point out that capital gains tax is not the only influence on investment. Of itself, it reduces the incentive to invest. The hon. Gentleman points out that in a time of reducing capital gains tax, or capital taxes, investment has dropped. As I tried to illustrate to the hon. Member for Glasgow, Cathcart (Mr. Maxton), the biggest disincentive to investment is lack of investment opportunities. That is the critical problem. It is not the subject of this amendment, so I shall not waste the time of the Committee by talking about it too much. The amendment deals only with the subsidiary factor of capital gains tax. This only adds fuel to the disincentive.

Mr. Maxton

Perhaps the hon. Member for Winchester (Mr. Browne) will tell us what part of the Government's economic strategy will create these new investment possibilities for the investor.

Mr. Browne

The Government have introduced 72 new measures specifically designed to boost investment in new and small businesses. I make no bones about my support for them. My only criticism is that the measures are not dynamic enough and that they are too complex. I have said that many times. However, to say that the Government have done nothing is ridiculous.

Capital gains tax is a disincentive to investment in British industry. The discriminatory benefits that gilt-edged security investments enjoy add further to this disincentive to invest in British industry in terms of equity. Therefore, I am opposed to capital gains tax in general for those basic reasons.

However, capital gains tax that does not take account of inflation is confiscation for that inflation amount, and, therefore, daylight robbery. I am opposed to that. Therefore, I welcome the clause. I particularly welcome the increase in the exemption threshold, because that is correct. It alleviates the burden of capital gains tax.

I accept the indexing of capital gains tax and welcome it. However, I welcome it with mixed feelings, because, as my hon. Friend knows, I am strongly opposed to indexation as a basic philosophy.

Mr. Maxton


Mr. Browne

I am trying to explain.

Mr. Maxton

The hon. Gentleman believes in it only when it suits him.

Mr. Browne

No. I believe that the Government are wrong in doing this. They are trying to select indexation on one side and not on the other. It is impossible to have fairly balanced indexation unless everything is indexed. However, if that were to happen, we would never stop inflation. That is why the Government should be rolling back indexation, not extending it. I am very sorry to see that they are not rolling back indexation, but if we are to have indexation—

Mr. Maxton

Vote against.

Mr. Browne

—if we are to have indexation at all, then one of the crying needs is in capital gains tax. I regret that it does not go back to 1965 and that it means even more complication in the calculations of capital gains. Calculating this complex taxation will increase further the dead time and the dead expenditure that otherwise could be used for the benefit of the nation.

As I have said before, and on Second Reading, I am strongly opposed to indexation, because it is a sweet pill to offer to people to make inflation easier to live with. It is the greatest financial con trick of the lot—an even greater financial con trick than inflation itself.

Mr. Campbell-Savours

Does the hon. Gentleman accept that there is very little difference between a person on supplementary benefit who, to use the words of the hon. Member for Aberdeen, South (Mr. Sproat), is "scrounging" and the person who, by taking advantage of the capital gains tax laws, is able, under bed and breakfast operations, to arrange his financial affairs so that he extracts from the Exchequer a similar amount of money with a similar amount of effort? What is the difference?

Mr. Browne

I am not quite clear as to the hon. Gentleman's question.

Mr. Trippier

I should like to help the hon. Member for Workington (Mr. Campbell-Savours) as he appears not to understand the bed and breakfast system.

Mr. Campbell-Savours

It is in the prospectus.

Mr. Trippier

The hon. Gentleman should read it more carefully. I am grateful for the free advertising that he has given to it. None the less, that information was accurate.

The hon. Gentleman should remember that if bed and breakfasting were to take place, establishing a profit under £3,000, which was the position before the last Budget, no revenue would have been paid to the Treasury in any event. On the other hand, if the bed and breakfasting operation was shown to establish a loss, that does not matter, because there would be a loss in any event. Therefore, again no money would go to the Treasury.

Mr. Browne

I do not quite understand the logic of the point of the hon. Member for Workington, but I can comment on what he said about bed and breakfast. Capital gains have to be triggered, as do capital losses. It is a legitimate exercise that one should be able to trigger a loss as well as a gain. However, I do not see the connection with supplementary benefit, because in the former case all that is avoided is the unnecessary payment of tax. One is not extracting from the Exchequer; one is avoiding paying unnecessary tax.

5.45 pm

The Government are wrong in accepting the extension of indexation because its effect is to build inflation into our economy. Already, the equivalent of 38 per cent. of Government expenditure is effectively index-linked. That was the level of indexation last year, and now we are increasing it. How can we hope to reduce inflation in the long term? I find it extremely worrying to be extending the principle of indexation.

By reducing the support at grass roots level for any Government who may come in with tough policies to reduce inflation, we are doing something very dangerous. A party with tough anti-inflation policies will not be elected, because once a person has an index-linked salary, tax threshold, pension and capital gain, he does not feel the ill effects of inflation. We will all be isolated from the ravages of inflation, so there will be no need or will to vote for a Government who will act against inflation with tough economic policies. An anti-inflationary policy is a hard enough bullet to bite anyway. Nobody will be willing to bite it in future.

The most serious charge I level against the Government is that by extending indexation they are building inflation into our economy. I support the Government on this amendment, because, if we are to have indexation, it should be applied to capital gains tax. However, I warn my hon. Friends that I believe that indexation as a principle is wrong. We should be moving to roll it back, rather than to extend it. Therefore, as the Bill progresses, I shall need to be convinced that these policies are correct.

Mr. Maxton

Will the hon. Gentleman vote against the clause stand part?

Mr. Browne

My intention is to vote with the Government on the clause. As I said, if there is to be indexation, I support, and should indeed call for, indexation for capital gains tax. Otherwise, such a tax is confiscation and daylight robbery.

Mr. Maxton

Vote against Third Reading.

Mr. Browne

Third Reading is my problem.

This Budget will be remembered as the Budget of indexation. That is something that I will have a hard job understanding and supporting.

Mr. John Home Robertson (Berwick and East Lothian)

The hon. Member for Winchester (Mr. Browne) is the kind of Tory rebel that we have come to know and love. If he goes on in this way, he will end up as a Parliamentary Private Secretary. He said at the beginning of his speech that he did not agree with the principle of capital taxation. That point encapsulates the difference between the Conservative Party and the Labour Party. The hon. Gentleman is prepared to say that he will do away with capital taxation altogether—in other words, to assist the wealthy—when only yesterday he went through the Lobby to increase the burden on the unemployed and low-paid.

Mr. John Browne

I did not say that I wished to assist the wealthy. However, I believe that it is a genuine incentive for them to invest in the country, which increases jobs and so on, if the Government take less from them. We can take income tax, but we should not take from their capital.

Mr. Home Robertson

The hon. Gentleman has made his point abundantly clear. He wants to leave more money in the pockets of those who are already well off. We all understand that that is what the Conservative Party stands for.

The group of amendments that we are debating would do away with the proposed increase and indexation of the annual exempt amounts for capital gains tax purposes. We are entitled to an explanation from the Minister of exactly why the Government propose that form of indexation of and tax relief on capital taxation in the first place. Is it the Government's intention simply to cut taxation for wealthy people who want to realise their wealth? If that is so, the Government should be thoroughly ashamed of themselves for introducing such a form of tax releif in a Finance Bill in which they intend to bring unemployment benefit into the tax net for more or less the first time.

On the other hand, I wonder whether it is the Government's intention to make a serious attempt to approve and refine what is at present a crude lax mechanism, which is intended to redistribute wealth. To my mind, that is a thoroughly worthwhile objective. It is extremely doubtful whether the Government want to improve or refine the mechanism for redistributing wealth. In the unlikely event of that being so, the Government would deserve credit, but if that is their purpose they have chosen a ham-fisted and indiscriminate way of going about it.

In fairness to all concerned it must be said that capital gains tax can be a singularly arbitrary imposition on people who cannot afford to pay it under certain circumstances. It can be damaging to small businesses. We all know of people wishing to raise funds by selling property to invest in machinery in their businesses, only to find that the tax man takes an inordinate share of the proceeds of such a sale. Almost every hon. Member must have come across the widow in his constituency whose husband had invested his savings in property and who finds out she has been drawn into the tax net.

My hon. Friend the Member for Blackburn (Mr. Straw) said that wealthy people paid capital tax. He is right. Those are the only people who are intended to pay capital tax. I am sure that all Opposition Members agree that that is justifiable. All of us should take on board the fact that some poor people also fall into that trap. I refer to the people who may be on low incomes or fixed incomes who have savings, perhaps in the form of property, which are subject to capital transfer tax and capital gains tax. That is not a simple matter. It is brazen nonsense for the Government to introduce such tax relief for the wealthy. Those are the people for whom the relief is intended. The hon. Member for Winchester made that clear.

Mr. Straw

I accept what my hon. Friend said. I tried to make that clear. In general, I believe that my hon. Friend accepts that those who come into charge on capital gains tax and who have gains above the exemption limits are likely to have fairly substantial incomes. In so far as they do not, the argument can be made for gains to be treated as income and brought into charge as income, so that the system becomes fair. For example, if a widow has a low income but is living off capital gains, if the gain were charged to income she would be charged tax at a lower rate than under the capital gains tax rate.

Mr. Home Robertson

I accept the point that my hon. Friend is trying to make. That illustrates the fact that the taxation policy of the Labour Party is intended to be fair to people, while it is abundantly clear that the policy of the Conservative Party is the opposite. It is brazen nonsense for the Government to offer such taxation relief to wealthy people, including people on substantial incomes, in the same Finance Bill in which they are bringing people receiving unemployment benefit into the tax net.

Mr. Trippier

I shall endeavour to make a brief contribution, having listened carefully to the debate.

I am amazed by some of the things that Opposition Members have said. In certain respects I wondered whether they were speaking on behalf of the Labour Party. I was surprised that the hon. Member for Blackburn (Mr. Straw), who is a neighbouring Member of Parliament and a reasonable man in every way, was so political about what I thought he would not normally object to. I remember that the Labour Government indexed capital gains tax. They did not increase the rate of the capital gains tax. Therefore, they did not wish to create a disincentive to savers or discourage thrift in any way. Listening to Opposition Back Bench Members, one would have thought that the Labour Government had sought to increase substantially the capital gains tax rate, which they did not. Therefore, I wondered whether we could try to bring into the debate a modicum of reasonableness because I believe that the vast majority of Opposition Members accept that people should be allowed the freedom to invest their money and to save by doing just that.

So far capital gains tax has been a levy on illusory gains. I welcome the acceptance inherent in the Budget proposals that such a levy is totally unfair. I also welcome the raising of the exemption limit to £5,000 of net gains in any one year and the principle underlying the proposal that in future years the limit will be indexed in line with the retail price index.

In his Budget speech my right hon. and learned Friend the Chancellor of the Exchequer rightly drew attention to the fact that the changes in capital gains tax are not designed just to help investors. When selling a share, investors have a variety of motives, but frequently the money realised from the sale of one shareholding is used to buy another. That is of immense benefit to industry.

If one wanted a good example of that, one could recall the number of rights issues now coming out from companies requiring more cash. Shareholders can contribute. Opposition Members need to be reminded that we are talking about wider share ownership. The benefits that employees of ICI can draw can be considerable. They are accumulated over a number of years. When the time comes for those people to choose to sell the shares—why should they not sell those shares?—they can be caught in the tax net.

However, there are serious problems with the proposals that my right hon. and learned Friend the Chancellor of the Exchequer has put forward. The measures do not implement what I believe to be the Chancellor of the Exchequer's intention, which is to index more effectively any future capital gains. The reason why the intention fails is that by enhancing the original purchase cost the effect will be unfairly spread.

It is difficult in such a debate to go into the details of what is a capital gains tax matter. To illustrate my point I shall take the example of two shareholders. One bought 5,000 shares at £1 each in 1970 and the second bought the same number of shares at £3 each in 1979. By March 1982 the price of those shares has risen to £4.20. I shall assume a further rise to £4.60 by April 1983. When the calculations that my right non. and learned Friend the Chancellor of the Exchequer has suggested are implemented, an unfair tax burden will be put on the investor who has had his shares longer. That cannot be the intention of my right hon. and learned Friend.

I strongly suggest that it might be much better for the Government to reconsider the matter in Committee and raise it again on Report. It might be more acceptable to many of my hon. Friends were my right hon. and learned Friend to introduce a new capital gains tax starting date of 6 April 1982.

6 pm

Mr. Ridley

We have debated two subjects. First, the exempt allowance and the indexation thereof on which there were some thoughtful and helpful contributions but which, otherwise, was another opportunity for the richer-getting-richer-and-the-poorer-getting-poorer brigade to make their usual noises. I should like to spend a short time on discussing capital taxes in general because the Committee has done that. It would be right for me to examine the overall picture.

The hon. Member for Blackburn (Mr. Straw), having ventured gently towards the Falkland Islands, came back to say that we were destroying the capital taxes. He then quoted figures for the capital gains tax in which he gave the yield as £650 million.

Mr. Straw

No—£600 million.

Mr. Ridley

Very well—£600 million. I misheard the hon. Gentleman.

The capital gains tax yield is expected to be £850 million. I do not want the hon. Gentleman to feel that it would be right, if that was his intention, to leave out the yield from companies because, in large measure although not entirely, the benefits of the measures in the Bill also apply to companies. Therefore, the capital gains tax yield must be regarded as £850 million.

Mr. Straw

I say in my defence that I quoted directly from table 23 in the Red Book, which gives the 1982–83 forecast as £600 million.

Mr. Ridley

I agree. As the hon. Gentleman knows, companies pay capital gains tax and the figures for companies are shown in the corporation tax yield. I was not seeking to catch him out. I was seeking to put the record straight.

It will be of interest to the Committee to examine the yield of capital taxes over the years. The hon. Member for Barking (Miss Richardson) tabled a question on 1 April. The answer to it appears in c. 376 of Hansard for 7 April. It gives the proportion of total Government revenue that has come from capital taxation of all sorts. Capital taxation as a percentage of total Government revenue was 3.7 per cent. in 1970; in 1971 it was 4 per cent.; in 1972 it was 4.4 per cent.; in 1973 it was 5–2 per cent.; and in 1974 it was 3.9 per cent.

Mr. Campbell-Savours

Too little.

Mr. Ridley

In 1975 it was 2.9 per cent.; in 1976 it was 2.6 per cent.; in 1977 it was 2.4 per cent.; in 1978 it was 2.1 per cent.; and in 1979 it was 2 per cent. Since my right hon. Friends have been in charge of these matters, the figures are 1.9 per cent. for 1980 and 2.2 per cent. for 1981.

It comes ill from the Opposition and particularly from the hon. Member for Workington (Mr. Campbell-Savours) to complain that the present Government or previous Tory Governments have been a little soft on capital taxes. I would understand it if my hon. Friends made the point that we had been a little too hard. It was the Labour Party which was soft on capital taxes in terms of yield. I do not criticise it too much for that. We have had wild debating from the hon. Members for Workington and Glasgow, Cathcart (Mr. Maxton)—"a little ray of sunshine" occurs to me as a description for the hon. Member for Workington. I suggest that the hon. Member gets his figures right and does his homework.

The hon. Gentleman also betrayed an appalling ignorance of bed and breakfasting. He seems to think that it was a terrible adulterous crime or some ghastly form of tax evasion. He showed that he did not understand it when he was asked to explain what it meant. We shall discuss bed and breakfasting later in the Bill. I wish we could facilitate it. All it means is that one wishes to take the opportunity to declare one's gain and account for one's tax before one actually has to do so. It could be described as a way of bringing forward a tax liability.

Mr. Maxton

If the Minister is correct in saying that this is a legitimate device, why was considerable suprise expressed in the financial world when the Chancellor of the Exchequer did not take any action against bed and breakfasting? It was thought that the Chancellor would take legislative action against the practice of bed and breakfasting.

Mr. Ridley

First, there are provisions about bed and breakfasting in the Bill which do not make it illegal or alter the possibilities of doing it. The provisions make it slightly more expensive because stamp duty and commission will have to be paid on bed and breakfasting. This is done because of the one-year rule and the need to find a satisfactory treatment of share pools. It is not correct to say that nothing has been done about it.

Secondly, I cannot understand why anyone would have wanted my right hon. and learned Friend the Chancellor to deal with it or would have expected him to. In many ways, the more bed and breakfasting that takes place, the greater the immediate revenue yield will be. If bed and breakfasting took place in excess of the exempt allowance, it would have that effect. Some of my hon. Friends, and particularly my hon. Friend the Member for Horsham and Crawley (Mr. Hordern), wish to bring forward a declaration on gains so that tax can be paid early and the slate can be wiped clean. We shall debate those matters in due course.

Mr. Campbell-Savours

Does any loss to the Exchequer arise from bed-and-breakfasting operations?

Mr. Ridley

There could be a gain to the Exchequer if people bed and breakfast in excess of their exempt allowance. It they do not bed and breakfast, there is no loss to the Exchequer. It is not a loss to the Exchequer. It is a matter of people availing themselves of their rights to switch investments which are losing or gaining and cancelling out the present net loss or gain. In addition, one can bed and breakfast to the extent of one's exempt allowance, but that is not a loss of revenue. One might say that having a personal allowance for income tax is a loss of revenue to the Exchequer, but I do not believe that anyone is in favour of abolishing personal allowances. Therefore, I do not accept that there is a loss.

The hon. Member for Blackburn asked about the eventual cost of the capital gains tax provisions. I believe that he meant the cost as a whole and not just in relation to clause 65. The cost depends entirely on inflation. If we have no success, if inflation become greatly worse and if we have the policies of the right hon. Member for Stepney and Poplar (Mr. Shore) and inflation reaches Argentine proportions, the loss of yield from the provisions will be enormous. On the other hand, if my right hon. and learned Friend the Chancellor guides our economic fortunes for another two or three Parliaments until, say, the end of the century, the loss of revenue will be practically zero. It would depend entirely on how many real gains were made. That depends on the extent to which business starts to take off and activity recovers and, later, the extent to which people cash in on their assets.

Mr. Straw

Did the Treasury or the Inland Revenue do any illustrative projections of the loss of yield on various inflation assumptions? I assume that the figure in the Red Book of £150 million as the full year cost for 1984–85 is based on some projections of the likely yields. Secondly, why did the Financial Secretary say in October 1981 that indexation of capital gains tax would reduce drastically the yield of the tax?

Mr. Ridley

We did estimates for three years ahead. For instance, the cost of this clause—the exempt allowance, the indexation thereof and raising it to £5,000—will be nil this year. It is likely to be £15 million in the next financial year and £60 million in a full year. However, we did not do projections beyond that because the cost of the rates of inflation and the activity in the economy would be very difficult to estimate.

Against that, I was astonished to read amendment No. 22 in the name of the official Opposition, which destroys uplift indexation allowance for the first year. I must tell the Opposition now, so that they can prepare their position for when we reach the amendment, that the cost of their amendment would be £80 million in a full year. Far from wishing to claw back the concessions that my right hon. and learned Friend suggested for capital gains tax, the Opposition apparently wish to add to them by a further £80 million. On the net tally, which the hon. Member for Colne Valley (Mr. Wainwright) dislikes so much, the Opposition are plus £60 million on this amendment and minus £80 million on the next, so we have another £20 million to add to the tally.

Mr. Richard Wainwright

Does the Financial Secretary realise that, in the way that the Finance Bill must go through the House, it is absurd to add up cumulatively the cost of all the proposals because most Opposition parties are fishing to get one or two proposals adopted and never dream of getting all their proposals through?

Mr. Ridley

I did not threaten to add up the alliance proposals. All that one needs to do is to add up the Labour Party's proposals and cut them in half, because the alliance is always in the middle.

The hon. Member for Blackburn's second question was why we said that this would drastically reduce the yield of the tax. It is true that indexation as from the date of the introduction of capital gains tax, or some form of basing the values of 6 April 1982, would be a way of relieving gains made before the Budget in past years. There are many ways of approaching the problem of how to relieve past gains, but that would be extremely expensive. It would drastically reduce the yield, as I said in that answer. That question was not about future indexation, but about indexation in general. The Labour Government's Green Paper talks about indexation not in terms of the future, as we are proposing, but in general. We did not feel that we could afford the cost. There are other reasons why we did not do that, but this is not the time to go into them. They will arise on a later amendment.

6.15 pm

My hon. Friend the Member for Rossendale (Mr. Trippier) gave the example of a person who invests now and a person who invested 10 years ago. He said that the indexation allowances would be on a different capital base in each case. I wish to deal with that point fully, but, again, there is an amendment on it which we shall discuss later.

The proposed amendment will cost £60 million in a full year and the numbers of people paying capital gains tax will fall. Last year it was estimated that about 200,000 people paid capital gains tax, falling this year to 175,000 and estimated next year to be 135,000. The Opposition are proposing that a further 65,000 should be kept in the capital gains net. By definition, that will mean those who make the smallest gains of under £5,000. If the Opposition wish to restrict the relief given by this clause, it is odd that they should concentrate the hardship on the smallest gains. That is not consistent with what they seem to be talking about.

Although I do not wish to labour the point, it is important to remember that the amendment would require 275 extra staff at the Inland Revenue in order to deal with the small gains. That is an important consideration for a Government who are devoted to cutting the size of the Inland Revenue.

The allowance will be indexed and we had quite a debate about indexation. The hon. Member for Come Valley wished to have clarification, but my hon. Friend the Member for Winchester (Mr. Browne) wished only to complain about indexation wherever it raised its ugly head. We did not consider it in that way. Whatever else we do, it seems sensible to index the levels of taxation thresholds. That does not mean that they are automatically pegged. We have not stuck to a single index threshold throughout the entire personal taxation system in this Budget, but we have on excise duty.

Before the House considers any threshold in any tax year it should examine it from the position of the indexed figure. The Government or Parliament may propose an upward or downward variation. If we start from that premise, it seems that if it is good for income tax and the allowances thereunder, it is increasingly good for thresholds in other taxes. It does not commit the House, but is a good basis from which to start. I would justify the exemption allowance being indexed on that ground.

I say to my hon. Friend the Member for Winchester that that is not digging inflation into the system with the determination that he seemed to suggest. We do not stick to the indexed figures every year.

Mr. Richard Wainwright

The hon. Gentleman's elucidation of the Government's attitude to indexation has been mildly interesting. What is the Government's programme in that respect? For instance, when will the corporation tax threshold be indexed?

Mr. Ridley

I do not know that one has a programme. This year, we have again in practice indexed the small company corporation tax relief. I am dealing with individual taxation. In corporation tax, it is the only threshold. There are no others in corporation tax and there should not be. Small company relief is the only one. I shall be happy to discuss the issue with the hon. Member for Blackburn when we debate corporation tax. I doubt whether it is right to index upper and lower limits for corporation tax or profits relief. As the hon. Member for Blackburn knows, the problem is whether to go for a slab or a slice system and the effect on the marginal disincentive of any extra profits. However, we should not debate that now.

The increase from £3,000 to £5,000, as my right hon. and learned Friend the Chancellor of the Exchequer said in his Budget Statement, is no more than a measure of rough justice for past gains. The Government have set their face firmly against trying to unravel the past of the tax because that would be extremely expensive, extremely complicated and unfair to those who have sold and realised gains and paid their tax as opposed to those who are still sitting on their gains.

For those reasons, none of our proposals contains any direct assistance to those whose gains were made before 6 April 1982. In recognition of that, my right hon. and learned Friend thought that it was right to increase the allowance from £3,000 to £5,000. That is not a huge increase, but I recognise the force of some of the arguments advanced by the hon. Member for Blackburn.

We are now changing the system of capital gains tax. We have broken the log-jam that the Labour Party was unable to break when it tried to do so during its stewardship of the Treasury. We found it difficult during the first two years of our stewardship. We want to change to a tax that makes a proper level of taxation on gains that are real, not paper, and that is thought to be fair and reasonable. We may not have got every aspect right at this stage. We face the problem of the huge build-up of past gains. They may stretch to billions of pounds that we are unable, for the reasons that I have given, to do anything about. In many people's eyes, the small increase in the exempt allowance to £5,000 will not seem an adequate recognition of the difficulties of the past.

The Committee must also consider the means of taxing real gains in a fully indexed tax when the past gains problem is behind us, downstream a few years and has been got progressively out of the system. Should we do so by a flat rate such as we have now or at income tax rates as the Opposition have suggested? We must ask also what part will exempt allowance play in any future tax of that type.

Sir William Clark

I understand that my hon. Friend said that one of the reasons why the Chancellor did not go in front of 1982 was that many people had realised assets before 1982 on which they had paid capital gains tax. My hon. Friend also said that if the Chancellor went back before 1982 there would be an inequity with regard to the payment of tax and between two taxpayers. It is an extraordinary philosophy when one thinks of what happened in the past when relieving or increasing tax.

What about the introduction of the development land tax? Those who sold land before the development land tax came into effect have paid no tax at all. Those who still held land or property paid as soon as the Government decided that there should be a tax. It is a strange philosophy that if the Government of the day want to change the tax structure we should go back to the time before that decision was made and say that those who have sold their assets before today will be unfairly treated as compared with those who sell them tomorrow.

Mr. Ridley

I am not sure that we have set ourselves against any form of retrospective taxation or relief for the three reasons that I gave. One of those reasons, to which my hon. Friend the Member for Croydon, South (Sir William Clark) referred, is not invalid. If we say that the past is past, we will not reopen it and we cannot compensate for what has happened in the past, all are treated equally, however unfair the treatment may be.

Sir William Clark

We all suffer the same misery.

Mr. Ridley

Yes, the misery of capital gains tax is equally shared. If, on the other hand, we say that we shall try to retrieve past gains from some of those who have made them in the 17 years of the operation of the tax but have not realised or paid them, the man who has paid perhaps a colossal sum, who might have held on if he knew that this would happen, might be represented in the Committee and move amendments that would be extremely difficult to resist. However, that is not the only reason. Cost is the main one and complexity another. It is for those reasons that we have decided not to do it.

Mr. Straw

The Financial Secretary said that he recognised the force of some of the Opposition's arguments. Does he accept that there is a logical inconsistency between justifying the increase in the exemption limit to £5,000 to take account of past gains but then to create a situation where that allowance can be offset against both past and future gains?

Mr. Ridley

The place of the £5,000 allowance in any system of capital gains tax, which is purely on true gains, not paper ones, is clearly a matter that the House will want to examine shortly.

I hope that I have come some way to meeting the case of the hon. Member for Blackburn. I hope that he will understand mine. I am being attacked by my hon. Friends for doing nothing, and for sticking to my point about doing nothing, about the past. The small increase from £3,000 to £5,000 must be seen in the context of our inability to tackle that problem. Once that problem is out of the way, we can re-examine the matter. For those reasons, I hope that the Committee will resist the amendment.

Mr. Robert Sheldon (Ashton-under-Lyne)

I start by drawing the attention of the Financial Secretary to the way in which amendments are tabled by the Opposition. He will know, because he has it in his brief, that there will be several arguments against the details of any amendment. Any Treasury Minister knows that he has two matters to look at on any amendment. In the top right hand corner of the brief that is provided for him he will see "Resist", and usually it will say that the amendment is "defective". Any sensible Financial Secretary or Treasury Minister will pay no attention to those words. The hon. Gentleman, who was a member of previous Finance Bill Committees, will not find any occasion on which I made use of that argument.

Sir William Clark

When the brief said "Resist", the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) resisted.

Mr. Sheldon

That was when I was prepared to listen to the arguments and to debate those arguments rather than to read the brief. My point was that I did not make use of the word "defective". I fully understand the limitation of the Opposition in drafting financial legislation that will stand up in a court of law. For the Opposition to waste time on these matters when we are here to discuss political matters is futile. One has to choose the issues. The issue that we have chosen is that to which the Minister must address his mind. If the Minister or the Committee comes to the conclusion that the issue chosen by the Opposition is right, sensible and acceptable, then the Minister, who knows nothing about these matters, will ask the Inland Revenue to draft legislation to put into effect the argument deployed by the Opposition and accepted by the Committee. That is the way these things happen. I hope that we shall not hear again the argument that was deployed by the Minister. It does not advance his cause.

6.30 pm

I am arguing the general point put forward by the hon. Member for Winchester (Mr. Browne) against indexation. The hon. Gentleman pointed to the complicated nature of the legislation and its effect, in particular, on the bed-and-breakfast clauses. I have never experienced an occasion when the main elements of important legislation were not understood by the financial, taxation or legal bodies of opinion that examined them. It took weeks, as the hon. Member for Horsham and Crawley (Mr. Hordern) rightly pointed out, before the implications were understood. This is an illustration of the complexity of the legislation and of the inability of the Treasury to inform Parliament, through written answers or other means, of what it had in mind. There is an obligation on the Treasury, when it comes forward with such important matters, to make sure that its intentions are clear. I hope that the Minister will put aside his brief and that he will attempt to understand the issues before coming back to the Committee. It was an act of dereliction that people were misled for such a long period.

That is not the only complication. There are the indexation provisions in schedule 9. The hon. Member for Rossendale (Mr. Trippier) referred to the problems of this rough and ready justice, as the Financial Secretary referred to it. It will be interesting to hear in Standing Committee why the Minister chose so complicated a method of dealing with a matter that is surely capable of greater refinement.

The capital gains tax was introduced by a Conservative Administration in 1962. It is interesting that a Conservative Administration started the tax and that a Conservative Administration will virtually kill it off. The tax was introduced to deal with the killings that were being made on the Stock Exchange as a result of the activities of a number of flamboyant operators. The measures in the Bill mean that the capital gains tax has, at best, an uncertain future and, at worst, is due for virtual demolition.

According to the Red Book, the indexation of capital gains will mean a reduction of revenue of £150 million. That is a vast sum of money. It also shows that increases in the thresholds for individuals and trusts will mean a reduction of a further £60 million in revenue and that relief for transfers out of settlement will reduce the yield by a further £45 million. The total amount is £255 million without taking account of note (g). There are those who say that, on first receiving the Red Book, one should go through the notes. There is much to be said for that argument. According to note (g), the eventual effect in respect of disposals is likely to be "substantial". No figures are quoted. I suggest that for the word "substantial" there should be substituted an ordinary word that everyone understands—"enormous". One has only to make a few calculations about possible future inflation to see that that is the likely outcome.

In this legislation, the threshold is being increased from £3,000 to £5,000, after which it will be indexed. The relationship between capital and income taxes is getting out of joint. That cannot be right. When the Conservative Party, on coming to power, retained the capital transfer tax, the Opposition thought that a bipartisan approach had been established and that these matters were properly subject to taxation. We knew that the amounts would vary depending on the views of different Governments. However, we thought that the principles and the structure would remain much the same.

We had hoped that, at a later stage, the loopholes disclosed in the tax system—income tax, corporation tax or capital taxation—would be closed, whichever party came to office. The Labour Government closed the capital tax loopholes; the Conservative Government opened them. However, both Governments were interested in closing the income tax loopholes. As my hon. Friend the Member for Workington (Mr. Campbell-Savours) pointed out, there has been no agreement on capital taxation. I do not believe that capital taxes have acted as a brake on expansion, as some hon. Members have claimed.

I know that the Government will be adding up the cost of the Opposition's amendments. We shall hear, long before the Committee stage is concluded, the old story of the profligacy of the Socialist Party and how it wastes money. If, however, the Government are prepared to accept some of our major amendments, we shall happily drop others. I give Treasury Ministers the undertaking that, if the Government are prepared to drop some of their clauses, we shall be happy to drop some of our amendments. The amendment now under discussion will assist, not reduce, the revenue. The party that formed the Government who effectively introduced capital gains tax in 1962 should not end it in the manner that is proposed by making it subject to indexation.

The problem is the manner in which people's investment decisions will be altered fundamentally as a result of the legislation. A person with £100,000 can invest in a second home, possibly in Spain, and can thereafter reckon that it will keep pace with inflation at perhaps 10 per cent. We are inflation proofing that type of investment. If, on the other hand, a person with £100,000 buys Government stock, there is no inflation proofing. Such a person will have to pay income tax of up to 75 per cent. on the return on that investment. There is a wide discrepancy between the return on money put into a second home and on money put into Government securities.

Capital gains tax was introduced to deal with the increase in personal wealth, whether that increase came from an increase in income or in capital. There cannot be an identity of taxation between the taxation of capital and the taxation of income, but at least both should be subject to tax. In a number of cases one has the choice of paying tax on the one or the other. The Government are creating a privileged kind of security that will distort the investment process in a way that I do not think Treasury Ministers fully comprehend.

Mr. Beaumont-Dark

If one puts £100,000 in a property, one pays no income tax, because there is no income, but tax will have to be paid on the capital gain when the property is sold. The £100,000 which is put into a Government security—a most laudable thing to do—will attract tax upon the income, as the right hon. Gentleman said. However, it is possible, as he knows, to make a handsome capital gain on many gilts. No tax is payable on such profit. The right hon. Gentleman pooh-poohs it. Many redemption stocks stand at under half their price, so it is possible to make £50,000 tax free.

Mr. Sheldon

The hon. Gentleman is too knowledgeable in these matters to believe that the ordinary person will make a fortune out of gilts, except in the limited sense that there might be small profits from buying stocks below their valuation. This is a minor matter. The hon. Gentleman knows, and I know, that the opportunities for capital gains on Government stock are limited. The possibilities for capital gains on second homes are much greater. Taking inflation at 10 per cent. a year, that will be free of any tax, whereas the inflationary element in Government securities is subject to taxation. It cannot be right that the inflationary element in Government stock should he taxed at up to 75 per cent. whereas the inflationary element relating to property is not taxed at all.

The Government are taxing income-producing assets much more than capital gains-producing assets. This is an anomaly as great as the taxing of inflationary gains. If the Government believe in indexation, why have they assumed that the 30 per cent. rate is immutable? Why has there been no discussion on it? The 30 per cent. rate, which has been held to be right at a time when inflationary gains are being taxed, cannot be right when inflationary gains are made free of tax.

Mr. Ridley

I want to get it clear. The right hon. Gentleman put his name to the Green Paper, published by the Labour Government, which explored the possibility of indexation or tapering. Is he now opposed to indexation?

Mr. Sheldon

The hon. Gentleman must surely know that the Inland Revenue Green Paper was put out for consultation. Various suggestions were made, but the rate of tax was not mentioned. Surely he cannot believe that a Labour Government would have taxation at 30 per cent. when capital gains were indexed. This was a matter for consultation and discussion.

I am saddened because we have had no discussion whatsoever on the rate of tax which should be chargeable under the new regime. The hon. Gentleman made no attempt to show why in equity the rates should be the same.

The hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Rossendale called capital gains tax a tax on thrift. I do not know what that means. We tax work. Many people who earn their money in very difficult circumstances are taxed, and rightly so. If people are able to save a certain amount of money, that represents an economic advantage that ought to be subject to the tax system. Taxation on thrift does not deal with increases in inherited thrift.

6.45 pm

When Conservative Members start getting pious about the problems of those with large sums of money, I doubt whether the feeling of emotion lasts as long as my journey to Ashton-under-Lyne. There I encounter people in much greater difficulties than many about whom we hear in this Chamber. We do not see such people here for obvious reasons, but we should always remember them and their problems.

The hon. Member for Winchester called this an indexation Budget. I think that it will become known as the indexation Budget, but I do not believe that the measures on indexation have been proposed because the Government have necessarily come to believe in indexation. They believe that in some matters indexation can help the better off and that therefore they should introduce indexation.

There is a broad division between both sides. We believe in not just rough justice, but justice for the unemployed. Unemployed benefit might have been indexed. The 5 per cent., of which the Government took no notice, might have been restored. The Labour Government implemented the indexation of personal allowances. We believe in the indexation of such matters. As we see in this legislation, the Conservative Government believe in the indexation of higher rates of tax, capital gains, capital gains tax thresholds and capital transfer tax. If the Government really believed in indexation as a whole, they should have examined the whole area of economic activity. Had they done so, they would have come to very different conclusions. We shall vote for the amendment as an illustration of the Government's wrong priorities in these important matters.

Question put, That the amendment be made:—

The Committee divided: Ayes 116, Noes 211.

Division No. 132 6.47 pm
Abse, Leo Cunningham, DrJ. (W'h'n)
Allaun, Frank Dalyell, Tam
Archer, RtHonPeter Davidson, Arthur
Atkinson, N.(H'gey,) Davies, Ifor (Gower)
Barnett, Rt Hon Joel (H'wd) Davis, Terry (B'ham, Stechf'd)
Bidwell, Sydney Deakins, Eric
Booth, RtHonAlbert Dean, Joseph (Leeds West)
Boothroyd, MissBetty Dixon, Donald
Bottomley, RtHonA.(M'b'ro) Dobson, Frank
Bray, Dr Jeremy Dormand, Jack
Brown, Hugh D. (Provan) Dubs, Alfred
Buchan, Norman Dunwoody, Hon Mrs G.
Callaghan, Jim (Midd't'n&P) Eadie, Alex
Campbell-Savours, Dale English, Michael
Carter-Jones, Lewis Evans, John (Newton)
Clark, Dr David (S Shields) Faulds, Andrew
Cocks, Rt Hon M. (B'stol S) Fitt, Gerard
Concannon, Rt Hon J. D. Flannery, Martin
Cook, Robin F. Fletcher, Ted (Darlington)
Craigen, J. M. (G'gow, M'hill) Foot, RtHonMichael
Cryer, Bob Foster, Derek
Cunliffe, Lawrence Foulkes, George
Cunningham, G. (IsligtonS) Freeson, Rt Hon Reginald
George, Bruce Parker, John
Hamilton, W. W. (C'trai Fife) Parry, Robert
Harrison, RtHonWalter Price, C. (Lewisham W)
Heffer, Eric S. Radice, Giles
Hogg, N. (EDunb't'nshire) Robertson, George
HomeRobertson., John Robinson, G. (Coventry NW)
Homewood, William Rooker, J. W.
Hooley, Frank Sheerman, Barry
Hoyle, Douglas Sheldon, Rt Hon R.
Jay, Rt Hon Douglas Shersby, Michael
John, Brynmor Shore, Rt Hon Peter
Jones, Rt Hon Alec (Rh'dda) Silkin, RtHonJ. (Depfford)
Lambie, David Silverman, Julius
Lamond, James Skinner, Dennis
Leighton, Ronald Snape, Peter
Lewis, Ron (Carlisle) Spearing, Nigel
Litherland, Robert Spriggs, Leslie
Lyon, Alexander(York) Stoddart, David
McCartney, Hugh Stott, Roger
McDonald, DrOonagh Strang, Gavin
McKay, Allen (Penistone) Straw, Jack
McWilliam, John Taylor, Mrs Ann (Bolton W)
Marshall, D(G'gowS'ton) Thomas, Dafydd (Merioneth)
Martin, M(G'gowS'burn) Thorne, Stan (Preston South)
Mason, Rt Hon Roy Tinn,James
Maxton,John Varley, Rt Hon Eric G.
Maynard, Miss Joan Weetch, Ken
Mikardo,Ian Welsh, Michael
Millan, RtHonBruce White, Frank R.
Mitchell, Austin(Grimsby) Wigley,Dafydd
Morris, Rt Hon A. (W'shawe) Williams, Rt Hon.A.(S'sea W)
Morris, Rt Hon C. (O'shaw) Winnick, David
Morton, George Woolmer, Kenneth
Moyle, Rt Hon Roland
Newens, Stanley Tellers for the Ayes:
O'Neill, Martin Mr. James Hamilton and
Palmer, Arthur Mr. Ioan Evans.
Adley, Robert Crouch, David
Aitken,Jonathan Dean, Paul (North Somerset)
Alexander, Richard Dickens, Geoffrey
Alison, Rt Hon Michael Dorrell, Stephen
Alton, David Dover, Denshore
Ancram, Michael Dunn, Robert (Dartford)
Aspinwall,Jack Edwards, Rt Hon N. (P'broke)
Atkins, Rt Hon H.(S'thorne) Eggar, Tim
Atkins, Robert (PrestonN) Elliott, SirWilliam
Banks, Robert Faith, Mrs Sheila
Beaumont-Dark, Anthony Fell, Sir Anthony
Beith, A.J. Fenner, Mrs Peggy
Bendall, Vivian Fisher, Sir Nigel
Benyon, Thomas(A'don) Fletcher, A. (Ed'nb'ghN)
Benyon, W. (Buckingham) Fletcher-Cooke, SirCharles
Berry, HonAnthony Fookes, Miss Janet
Bevan, David Gilroy Gardiner, George(Reigate)
Biffen, Rt Hon John Glyn, Dr Alan
Blackburn,John Goodhart, SirPhilip
Body, Richard Goodhew, SirVictor
Boscawen, HonRobert Goodlad, Alastair
Bradley, Tom Gow, Ian
Brinton, Tim Greenway, Harry
Brocklebank-Fowler, C. Griffiths, E.(B'ySt. Edm'ds)
Brooke, HonPeter Griffiths, Peter Portsm'thN)
Brown, Michael(Brigg&Sc'n) Grist, Ian
Browne,John(Winchester) Grylls, Michael
Bryan, Sir Paul Hamilton, Hon A.
Buchanan-Smith, Rt.Hon.A. Hamilton, Michael(Salisbury)
Budgen, Nick Haselhurst, Alan
Cadbury,Jocelyn Hawksley, Warren
Carlisle, John(Luton West) Hayhoe, Barney
Carlisle, Rt Hon M. (R'c'n) Heddle,John
Cartwright,John Hicks, Robert
Chapman, Sydney Higgins, Rt Hon Terence L.
Clark, Hon A. (Plym'th, S'n) Hogg, HonDouglas(Gr'th'm)
Clarke, Kenneth (Rushcliffe) Horam,John
Cockeram, Eric Hordern, Peter
Cope,John Howell, Rt Hon D.(G'ldf'd)
Cranborne, Viscount Howells, Geraint
Critchley,Julian Hoyle, Douglas
Hunt, David (Wirral) Renton, Tim
Hunt, John (Ravensbourne) Rhodes James, Robert
Hurd, Rt Hon Douglas RhysWilliams, SirBrandon
Johnston, Russell (Inverness) Ridley, HonNicholas
Jopling, RtHonMichael Ridsdale, SirJulian
Kaberry, SirDonald Rifkind, Malcolm
Kershaw, Sir Anthony Roberts, Wyn (Conway)
Lang, Ian Rodgers, RtHonWilliam
Latham, Michael Roper, John
Lawrence, Ivan Rossi, Hugh
Lee,John Rost, Peter
LeMarchant, Spencer Sainsbury, HonTimothy
Lennox-Boyd, Hon Mark Sandelson, Neville
Lester, Jim (Beeston) Shaw, Giles (Pudsey)
Lewis, Kenneth (Rutland) Shaw, Michael (Scarborough)
Lloyd, Ian (Havant & W'loo) Shelton, William(Streatham)
Lloyd, Peter (Fareham) Shepherd, Colin (Hereford)
Loveridge, John Shersby, Michael
Lyell, Nicholas Sims, Roger
Lyons, Edward (Bradf'dW) Smith, Cyril(Rochdale)
Mabon, Rt Hon Dr J. Dickson Smyth, Rev. W. M. (Belfast S)
McCrindle, Robert Speed, Keith
Macfarlane, Neil Speller,Tony
MacGregor,John Spence, John
MacKay, John (Argyll) Squire, Robin
Maclennan, Robert Stanbrook,Ivor
McNair-Wilson, M.(N'bury) Steel, Rt Hon David
McNair-Wilson, P. (NewF'st) Steen, Anthony
McQuarrie, Albert Stevens, Martin
Major, John Stewart, A. (ERenfrewshire)
Marland, Paul Stewart, Ian (Hitchin)
Mates, Michael Stradling Thomas, J.
Mather, Carol Taylor, Teddy (S'end E)
Maude, Rt Hon Sir Angus Tebbit, Rt Hon Norman
Mawby, Ray Temple-Morris, Peter
Mawhinney, DrBrian Thomas, Rt Hon Peter
Maxwell-Hyslop, Robin Thompson, Donald
Mellor, David Thorne, NeilC(IlfordSouth)
Meyer, Sir Anthony Thornton, Malcolm
Mills,Iain (Meriden) Townend, John (Bridlington)
Mills, Peter (WestDevon) Trippier, David
Mitchell, R. C. (Soton Itchen) van Straubenzee, Sir W.
Moate, Roger Viggers, Peter
Molyneaux,James Waddington, David
Morris, M. (N'hampton S) Wainwright, R.(ColneV)
Morrison, Hon C. (Devizes) Wakeham, John
Murphy, Christopher Walker, Rt Hon P.(W'cester)
Myles, David Walker, B. (Perth)
Neale, Gerrard Walker-Smith, Rt Hon Sir D.
Nelson, Anthony Waller, Gary
Neubert, Michael Walters, Dennis
Newton, Tony Ward, John
Normanton,Tom Warren, Kenneth
Onslow, Cranley Watson, John
Owen, Rt Hon Dr David Wellbeloved, James
Page, Richard (SW Herts) Wells, Bowen
Parris, Matthew Wells, John (Maidstone)
Patten, Christopher(Bath) Wheeler, John
Pattie, Geoffrey Wickenden, Keith
Percival, Sir Ian Wilkinson, John
Pollock, Alexander Williams, D. (Montgomery)
Powell, Rt Hon J.E. (S Down) Wolfson, Mark
Prentice, Rt Hon Reg
Price, SirDavid (Eastleigh) Tellers for the Noes:
Prior, Rt Hon James Mr. Selwyn Gummer and
Proctor, K. Harvey Mr. Tristan Garel-Jones.
Raison, Rt Hon Timothy

Question accordingly negatived.

Sir William Clark

I beg to move amendment No. 32, in page 45, line 14, leave out from '(a)' to end of line 16 and insert 'for "individual" in each place where it occurs, there shall be substituted "person" and'.

The Chairman

With this we may take the following amendments:

No. 33, in page 45, line 17, leave out from '(b)' to end of line 19 and insert 'for "£3,000", in each place where it occurs, there shall be substituted "the exempt amount for the year" and'. No. 34, in page 45, line 19, at end insert '(c) for "£5,000", where it occurs in subsection (5)(b), there shall be substituted "an amount equal to twice the exempt amount for the year".'.

Sir William Clark

I need not detain the Committee for long, because it is a simple amendment. I am sure that even Opposition hon. Members will be able to agree the justice of it. Amendments Nos. 33 and 34 are consequential.

As I read it, section 5 of the Capital Gains Tax Act 1979, as it refers to "an individual", means that companies are excluded. The amendment seeks to substitute "person" for "individual". I understand that, legally, a person means a company as well.

7 pm

I remind my hon. Friend the Financial Secretary to the Treasury that in his Budget Statement my right hon. and learned Friend the Chancellor of the Exchequer said: I propose, therefore, that, as from this April, gains, including those of companies, will, in principle, be calculated after taking account of inflation which occurs after that date."—[Official Report, 9 March; Vol. 19, c. 755.] If we are to have an exemption limit of £5,000, and if, as my right hon. and learned Friend said, we are to extend it to companies as well as to individuals, it is not a bad idea to have that spelt out in the Bill. My reading of clause 65 is that it does not include companies, which is diametrically opposite to what my right hon. and learned Friend said.

Mr. Ridley

I am grateful to my hon. Friend the Member for Croydon, South (Sir William Clark) for the clarity and brevity with which he moved the amendment. He suggested that my right hon. and learned Friend the Chancellor of the Exchequer sought to index gains for companies and had somehow forgotten to do so. That is not so. My right hon. and learned Friend did not forget. The gain will be indexed for companies. The indexation provisions in clause 65 relate to the £5,000 exempt allowance. Companies have never had an exempt allowance for capital gains tax purposes. That was not what my right hon. and learned Friend said he would do, and it was not our intention to allow that £5,000 allowance for companies.

The analogy is with income tax, where there is a personal allowance for each taxpayer. However, in corporation tax there is no exempt slice of profits or a similar tax-free allowance for corporation tax purposes. There is no reason why there should be, because no minimum standard of profit is necessary to maintain the life of a company.

Companies are chargeable to capital gains tax. They are charged at 30 per cent. of the capital gains tax rate. This is done by leaving out of account a fraction of the net chargeable gains after losses of the accounting period and charging the balance at 52 per cent. At present the fraction is eleven-twentysixths. I do not think that my hon. Friend would think it right, on reflection, further to help companies in respect of gains. They will benefit from the indexation provisions.

In the Budget we have provided massive help to companies in a series of different ways. My right hon. and learned Friend feels that what we have done will be of great help to companies and that it is not necessary to go any further in respect of capital gains tax. I think that my hon. Friend will agree that the exempt allowance of £5,000 would not be suitable for companies. They do not present the same staff problems in assessing the gain and they do not actually need an exempt slice in the same way as an individual, who should and does get it.

Sir William Clark

I am grateful to my hon. Friend. I understand that whether a company is paying tax at 40 per cent. on the lower rate, or 52 per cent. at the standard rate, the reduction of eleven-twentysixths brings down the charge on capital gains for the company to 30 per cent. However, can my hon. Friend assure me that in the computation of the capital gains on the sale of any asset by a company, the cost of that asset will be index-linked from April 1982 as it is for an individual? If he can give me that assurance, I shall willingly withdraw the amendment.

Mr. Ridley

I am happy to give my hon. Friend that assurance.

Sir William Clark

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sir William Clark

I beg to move amendment No. 35, in page 46, line 27, at end insert— '(4A)(a) Where in any year of assessment the taxable amount of an individual does not equal or exceed the exempt amount for the year in section 5 of the Capital Gains Tax Act 1979 so far as it relates to him, then the amount of the difference between the said taxable amount and the said exempt amount shall for the purposes specified in subsection (c) below be carried forward to the next following year of assessment and added to the amount which would, apart from this subsection, be the exempt amount for that next year in relation to that individual, and the total thereof shall be the exempt amount for that next following year for that individual. (b) Where in any year of assessment there is in relation to an individual an excess of the exempt amount for the year as calculated under subsection (a) above over the taxable amount of that individual for that year as ascertained for the purposes of section 5 of the Capital Gains Tax Act 1979, that excess shall for the purposes specified in subsection (c) below be carried forward to the next following year and paragraph (a) above shall apply to the said excess as if it were the amount of the difference referred to in the said paragraph (a). (c) Paragraphs (a) and (b) above apply only for the purpose of calculating capital gains tax payable in relation to disposals in any year of assessment of business assets as defined in section 126(1)(a) and (b) of the Capital Gains Tax Act 1979 and nothing in paragraphs (a) and (b) above and (d) below shall affect the calculation of capital gains tax payable in respect of disposals of assets other than business assets as hereinbefore described. (d) Subject to paragraph (c) above references to the exempt amount or a multiple or a fraction of the exempt amount in subsection (5)(b) of section 5 and in Schedule 1 of the Capital Gains Tax Act 1979 shall be construed as if the exempt amount herein referred to meant the exempt amount ascertained under paragraphs (a) and (b) above.'. This is a long but simple amendment. If the wording is not correct, I am sure that my hon. Friend will not criticise me. The £5,000 exemption limit is all right if an individual has liquid assets—for example, a portfolio of shares. If he has such assets he can make profits each year, or sell his assets and enjoy the £5,000 exemption limit. I am especially interested in family businesses. An individual's only asset may be in a family business, which may have been started and built up over 10 or 15 years. As there has been no sale the £5,000 exemption is lest. This puts an unfair burden on those who start businesses which are successful and which create jobs as opposed to those who invest in stocks and shares.

The purpose of the amendment is to ensure that when a family business that is in one person's hands is sold, having been started and built up over five, 10 or 15 years, the £5,000 exemption can be accumulated. That means that when the owner of the business sells it he will be able to enjoy the same exemption as that which is enjoyed by his counterpart.

Mr. Ridley

I am grateful to my hon. Friend for drawing attention to the great importance of not letting capital gains tax damage the family business. However, I suggest that the present arrangements are pretty generous. Business assets can be well sheltered under capital gains legislation. When business assets are sold and the proceeds are reinvested in further business assets, any gain can be rolled over and the tax charge deferred. When a person eventually sells his business on retirement, for example, gains of up to £50,000 are entirely exempt from tax. These concessions are of great value and they are specially designed to be so because of the importance that we attach to small businesses.

My hon. Friend suggested that the £5,000 allowance should be allowed to be accumulated forward. Incidentally, I am not making a drafting point. I merely say that his amendment as drafted goes beyond the normal definition of business assets and includes shares in a trading company.

The trouble with the proposal is that nowhere else in the capital gains legislation is it possible to carry forward these exempt allowances. In the same way, it is not possible to carry forward personal allowances in income tax. To make this change would be revolutionary and novel. It would be complicated and it would destroy one of the principles, to which we have always held, that an annual allowance is an annual allowance and cannot be carried forward. It would cost more money. We have put the money that is available to remodel capital gains tax into the right areas. Bearing in mind what I have said, I hope that my hon. Friend feels that his amendment need not be pressed.

Sir William Clark

I am fully aware of the retirement benefit for family businesses. However, I still think that the matter needs to be looked at again, perhaps not in this Finance Bill but in subsequent Finance Bills. There is an injustice between a person who is producing jobs in a business where he cannot sell off parts of his investment portfolio. I hope that my hon. Friend will assure me that the Chancellor's mind is not closed to what I am saying.

I do not wholly accept my hon. Friend's point that an annual allowance is an annual allowances and personal allowances are not carried forward. I appreciate that personal allowances are not carried forward. However, in many aspects of our taxation there is roll-over relief and in many cases one can defer tax. Stock relief is a good example. I would not go along the same road as my hon. Friend on that argument.

I appreciate that the Government have done an enormous amount for small businesses—the start-up scheme, the enterprise zones, retirement benefit and so on.

If my hon. Friend can assure me—as I am sure he will—that the Chancellor's mind will not be closed to this in future years, I shall withdraw my amendment.

Mr. Ridley

We want to ensure that the capital gains tax and the capital transfer tax to not damage any business, whether it be a one-man business, an unquoted company or a quoted company. We have a record of looking most sympathetically at the effects of these taxes on all sorts of businesses. We may have to review in the future the effects of this tax on all sorts of enterprises and businesses.

There has been a major change in the tax. We must debate it in this Chamber and upstairs. People must get used to it and understand it. We should let the new tax settle down. Then I give my hon. Friend the assurance that my right hon. and learned Friend the Chancellor of the Exchequer will be looking to ensure that the shoe is made to pinch less wherever there is prosperity in business.

Sir William Clark

In view of that assurance, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 65 ordered to stand part of the Bill.

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