§ I turn now to a part of our tax system which is impeding the efficient working of capital markets and doing injustice to individuals and businesses alike: the capital taxes. There is room for wide differences of view about the principle of taxing capital. But there is no case whatever for maintaining a system of capital taxes which, by holding back business success and penalising personal endeavour, does serious economic and social damage.
§ In each of the last two Budgets we have taken significant steps to reduce such damage. I propose carrying this process a stage further today. The threshold for capital transfer tax will now be increased to £55,000. The rate bands which apply above the thresholds have remained virtually unaltered since the tax was introduced in 1975. It is time they were extended. Under the new 755 scale, details of which will appear in the Red Book, the top rate of tax will be reached at £2.5 million. In real terms, this is still not as high as the figure set by my predecessor when he introduced the tax in 1975. The lifetime scale will be improved to a similar extent. The cost this year will be £35 million and in a full year £85 million. I also propose that the indexation principles, already applied to income tax allowances, should in future apply as well to the CTT threshold and bands.
§ I should add that it is my intention that the Finance Bill should deal with the new regime for settled property. Draft clauses were published in December. The comments we have received will help us to clarify and improve the provisions. They have more than justified this exercise in open Government. I am grateful to all those who have contributed. There will also be a number of technical provisions related to the heritage. I have decided, in the light particularly of the reductions in the lifetime rates of charge that I made last year, not to alter the rate at which the periodic charge is payable.
§ I also propose that foreign currency accounts belonging to individuals who have no connection with the United Kingdom should not be caught by the CTT. It is important for London's position as the world's leading financial centre that this matter should be cleared up.
§ I now come to the incidence of capital gains tax on inflationary gains. This is a matter which has rightly given rise to a great deal of discontent. No one has yet succeeded in finding a solution to this problem. Innumerable proposals for full indexation, for tapering and other ingenious devices have been put forward. None, unfortunately, overcame all the practical difficulties. I cannot, however, allow this injustice to continue. It is intolerable for people to be permanently condemned to pay tax on gains that are apparent but not real—gains that exist only on paper.
§ 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. No relief will, however, be given in respect of the first year of ownership. The problem that we seek to solve is one which relates essentially to assets held for a period of years and it would not be appropriate to extend relief to assets bought and sold within a comparatively short period of time.
§ 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 and will simplify administration both for the taxpayer and the Revenue. For the future, I intend that this threshold too should be statutorily indexed.
§ There will be no revenue cost in the coming year. In 1983–84 the cost of these two measures will be £55 million. But this should not be looked at as a measure of the cost to the Exchequer. It is rather a measure of the tax which ought never to have been levied in the first place. This change is no more than simple justice, which should be welcomed on both sides of the House.
§ The benefit of these measures will be of substantial help to business as well as to the individual. They will significantly increase the attraction of equities to United Kingdom taxpayers. One result should be that companies can raise more equity at lower cost than would previously 756 have been possible. An increase in the scale of equity issues by companies will help to reduce their dependence on bank borrowing.
§ I also propose a number of other specific changes. In future, roll-over relief will be available on compulsory purchase and, completing our policy of avoiding a double charge to CGT and CTT on the one event, roll-over relief will also be available on assets coming out of trust. These proposals involve no cost this coming year and a cost of £11 million in 1983–84.
§ I believe that these changes, taken together, will be widely welcomed as a further major reform of the capital tax system.