§ First, the taxation of savings and investment. The proposals I am about to make should improve the direction and quality of both. And they will contribute further to the creation of a property-owning and share-owning democracy, in which more decisions are made by individuals rather than by institutions.
§ I start with stamp duty. This was doubled from its longstanding 1 per cent. by the post-war Labour Government in 1947, reduced by the Conservative Government in 1963, and once again doubled to 2 per cent. by Labour in the first Budget presented by the right hon. Member for Leeds, East (Mr. Healey) in 1974. I am sorry that he is not 293 in his place today. At its present level it is an impediment to mobility and incompatible with the forces of competition now at work in the City, following the withdrawal of the Stock Exchange case from the Restrictive Practices Court.
§ I therefore propose to halve the rate of stamp duty to 1 per cent. The new rate will apply straight away to Stock Exchange deals. It will also apply from today to other transactions where documents are stamped on or after 20 March.
§ For the home buyer, the new flat rate 1 per cent. stamp duty will start at £30,000. Below this level no duty will be payable. As a result of this £5,000 increase in the threshold, 90 per cent. of first-time home buyers will not have to pay stamp duty at all.
§ Reducing the rate of duty on share transfers will remove an important disincentive to investment in equities and increase the international competitiveness of our stock market. It should also help British companies to raise equity finance.
§ In addition, I have four proposals to encourage the issue of corporate bonds. I shall go ahead with the new arrangements for deep discount stock and the reliefs for companies issuing Eurobonds, and for convertible loan stock, which were announced but not enacted last year. And I propose to exempt from capital gains tax most corporate fixed interest securities provided they are held for more than a year. As such securities are already exempt from stamp duty, this means that the tax concessions for private sector borrowing in the corporate bond market will now be virtually the same as for Government borrowing in the gilt-edged market.
§ The reductions in stamp duty will cost £450 million in 1984–85, of which £160 million is the cost of the relief on share transfers and £290 million the cost of the relief on transfers of houses and other buildings and land.
§ Next, life assurance. The main effect of life assurance premium relief today is unduly to favour institutional rather than direct investment. It has also spawned a multiplicity of well-advertised tax management schemes and no fewer than 50 pages of legislation attempting to deal with its abuse. I therefore propose to withdraw the relief on all new contracts made after today. I stress that this change will apply only to new, or newly enhanced, policies, taken out after today. Existing policies will not be affected at all. The change is estimated to yield about £90 million in 1984–85.
§ I am also proposing to curtail the special—but unfortunately widely abused—privileges for what are known as "tax exempt" friendly societies, and bring them into line with the normal rules for friendly societies doing "mixed" business. However, the limits within which in future all friendly societies will be able to write assurance on a tax exempt basis will be increased from £500 to £750.
§ I have also reviewed the tax treatment of direct personal investment. The investment income surcharge is an unfair and anomalous tax on savings and on the rewards of successful enterprise. It hits the small business man who reaches retirement without the cushion of a company pension scheme and impedes the creation of farm tenancies. In the vast majority of cases it is a tax on savings made out of hard-earned and fully-taxed income. More 294 than half of those who pay the investment income surcharge are over 65, and of these half would otherwise by liable to tax at only the basic rate.
§ I have therefore decided that the investment income surcharge should be abolished. The cost in 1984–85 will by some £25 million, building up to around £350 million in a full year.
§ Finally, I propose to draw more closely together the tax treatment of depositors in banks and building societies. These institutions compete in the same market for personal deposits. I believe that they should be able to do so on more equal terms as far as tax is concerned. One source of unequal treatment has already been removed, with the recent change made on legal advice in the tax treatment of building societies' profits from gilt-edged securities. They are now treated in the same way as those of the banks have always been.
§ But the major source of unequal treatment, against which the banks in particular have frquently complained, is the special arrangement for interest paid by building societies. The societies pay tax at a special rate—the "composite rate"—on the interest paid to the depositor, who receives credit for income tax at the full basic rate.
§ This system, which has worked well for the past 90 years, has both an advantage and a disadvantage. The disadvantage is that a minority of depositors, who are below the income tax threshold, still pay tax at the composite rate. It has not, however, stopped many of them from using building societies because of the competitive rates these have offered. The advantage of the scheme is its extreme simplicity, particularly for the taxpayer; most taxpayers are spared the bother of paying tax on interest through PAYE or individual assessment, while the Revenue is spared the need to recruit up to 2,000 extra staff to collect the tax due on interest paid without deduction.
§ In common with my predecessors of all parties over the past 90 years, I am satisfied that the advantage of the composite rate arrangement outweighs the disadvantage. It follows that equal treatment of building societies and banks should be achieved, not by removing the composite rate from the societies but by extending it to the banks and other licensed deposit takers.
§ Non-taxpayers will still continue to be able to receive interest gross, should they wish to do so, by putting their money into appropriate national savings facilities. But the purpose of the move is not, of course, to attract savings into Government hands: as I have already announced, next year's target for national savings will be the same as this year's and last year's; and the total Government appetite for savings, which is measured by the size of the public sector borrowing requirement, is being significantly reduced.
§ The true purpose of the move is simple: fairer competition and simplicity itself. The great majority of individual bank customers will, when it comes to tax, be able to forget about bank interest altogether, for all the tax due on it will already have been paid. And it will be easier for people to compare the terms offered for their savings by banks and building societies.
§ The purpose of the change is not to raise additional revenue. The composite rate arrangement is designed to collect no more tax than would be due at the basic rate from all depositors under existing arrangements.
§ However, the Inland Revenue will be able to make staff savings of up to 1,000 civil servants. Moreover, this figure 295 takes no account of the substantial numbers of additional Inland Revenue staff who would have been required to operate the present system as the trend towards the payment of interest on current accounts develops.
§ Accordingly, I propose to extend the composite rate arrangements to interest received by United Kingdom-resident individuals from banks and other licensed deposit takers with effect from 1985–86. The composite rate will not apply either to non-residents or to the corporate sector. Arrangements will also be made to exclude from the scheme certificates of deposit and time deposits of £50,000 or more.
§ Taken together, the major proposals I have just announced on stamp duty, life assurance premium relief, the investment income surcharge, and the composite rate, coupled with other minor proposals, will provide a simpler and more straightforward tax system for savings and investment. They will remove biases which have discouraged the individual saver from investing directly in industry. They will reinforce the Government's policy of encouraging competition in the financial sector, as in the economy as a whole. And they are part of a package of measures designed to enable interest rates to fall and reduce the cost of borrowing.