EXEMPTION FOR GILT-EDGED SECURITIES AND QUALIFYING CORPORATE BONDS (Hansard, 9 July 1985)

§ The Chief Secretary to the Treasury (Mr. Peter Rees)
I beg to move, That the clause be read a Second time.

§ Mr. Speaker
With this, we may take Government amendments Nos. 43 and 44, 79 to 82 and 112 to 122.

§ Mr. Rees
The new clause amends section 67 of the Capital Gains Tax Act 1979. The amendments are consequential.
The purpose of this complex of provisions is to take gilt-edged securities and corporate bonds, which are defined in the 1979 Act, out of charge to capital gains tax. That will have the desirable consequence of simplifying the scope of the tax, but the main reason underlying the new clause is that there has been a certain asymmetry, because gilt-edged securities and corporate bonds have not been within the charge to capital gains tax if they have been held for more than 12 months, and it has been found increasingly that those who wish to take a loss on such securities have disposed of them within 12 months and those who wish to take a profit have disposed of them outside 12 months. If follows, therefore, that the Inland Revenue has been conceding losses for tax purposes, but has not been recovering capital gains tax on disposals.
The problem will be accentuated by bond washing and by the indexation provisions. The simplest, cleanest and best solution was thought to be to take gilt-edged securities and corporate bonds out of charge to tax after 2 July 1986 in respect of disposals. The postponement is necessary so that we do not alter the rights or expectations of those who have bought securities up to now.

§ Mr. Tim Smith (Beaconsfield)
It has been suggested in the financial press that the Treasury has done the impossible and abolished a tax while increasing the yield to the Inland Revenue. Can my right hon. and learned Friend confirm that an increase in yield will result from the abolition of the tax?

§ Mr. Rees
I wish that I could give precise figures. It is likely that there will be an increase in the number of transactions of various kinds and it is just possible that may increase the yield of capital gains tax. Certainly, there should not be a loss, because taxpayers have been more disposed to take their losses within 12 months and their gains outside 12 months. Therefore, the Inland Revenue has been conceding relief and not taking tax on disposals. My hon. Friend's analysis is correct, but I find it difficult to put a precise figure on the likely outcome.

§ Dr. Oonagh McDonald (Thurrock)
We are glad to welcome the new clause. I am sure that the Chief Secretary will cast his mind back to the Committee of the whole House when I referred to the abuse of creating artificial losses by transactions in high-coupon gilts. I mentioned "Gremlin Corner" in Taxation of 4 May which described this method.
The article stated: Another tax planning point is that it will be possible to create … an artificial allowable loss by purchasing a high-coupon gilt and selling it within the year (but after 27 February 1986). The Chief Secretary said that he would think about what I had said. I am glad that his thoughts have borne fruit, though they seem to have been some time in coming to fruition. It appeared from the Inland Revenue press release of 29 May that the Government were still thinking about the matter and it was not until 2 July that the changes were announced. I am not sure why that thought process took so long; perhaps the Chief Secretary will tell us.
The hon. Member for Beaconsfield mentioned the comments of the financial press. The Financial Times said: 912 The consequence, the Treasury estimates, will be a significant increase in the long-term yield from capital gains tax. In view of what the Chief Secretary said earlier, I am not sure why the Financial Times refers to Treasury estimates. However, I hope that there will be a significant increase in the long-term yield from capital gains tax". As the Chief Secretary knows, I am constantly anxious about the small amount of revenue that seems to be collected from capital gains tax. The yield has declined from 1 per cent. of total revenue in 1976–77 to an estimated 0.8 per cent. in the current year. I am glad that the Chief Secretary has stopped another form of abuse and we hope that the yield will be increased, though the right hon. and learned Gentleman seems unsure about the amount by which it will be increased.
The Financial Times said: The main victims of the abolition of the tax on gilts will be the insurance companies. They are the largest group of gilt investors, owning nearly 30 per cent. of outstanding stock. For every one of the last 16 years they have been able to cut their total capital gains tax … bill by generating capital losses on their holdings of gilts. If they are to be the main victims, the potential long-term gains should be quite high.
On the assumption that the Chief Secretary will collect more revenue, what does he propose to do with it? We shall have several suggestions to make during debates on other new clauses, particularly the one on work place nurseries. When the Chief Secretary has decided how much he will get, perhaps he will smile more kindly on our new clauses. The Opposition has many good causes, unlike the Government. I hope that the Chief Secretary will take this opportunity to provide the money that poor people desperately need.

§ Mr. Peter Rees
I shall respond briefly to explain why there was a delay. I will plead guilty to an even longer delay, because although we were enthralled by the possibilities of tax avoidance which the researches of the hon. Member for Thurrock (Dr. McDonald) had unearthed and which were disclosed in Committee, I had foreshadowed in my speech on Second Reading on 8 May the possibility of action. The hon. Lady will appreciate that these matters are of some complexity. We felt that it was right to try to devise the right solution, and we hit on this solution only after considering the possibilities. I hope that it commends itself to the House.
As to what we would do with increased revenue, I must tell the hon. Lady that we continue to adhere to the principle of Gladstonian finance. I say that to bring the alliance, or the sole Liberal Member present, alongside us on this matter. We pay the revenue into a central fund, and do not believe in the hypothecation of tax, although we could, if it were in order, have an interesting debate about whether we should.
Although many good causes will be advanced—I am sure that on reflection the hon. Lady would not claim a monopoly of good causes for the Opposition — I must respectfully decline to say to what particular good cause any or part of the general funds, which might be thought to represent this, may be devoted. We shall bear in mind any useful suggestions from either side of the House.

§ Mr. Tim Eggar (Enfield, North)
Will my right hon. and learned Friend comment on the corporate planning point and the abolition of CGT for that? Will he confirm 913 that this is a further measure which the Government are taking to reactivate the market, and that the Government remain committed to the reactivation of that market?

§ Mr. Rees
I hope that that will be a further attractive consequence of the measure. It was not the Government's principal motive, but my hon. Friend, with his usual sharpness of perception, was right to draw attention to it. We hope that the market for this kind of bond will loosen up. It is noteworthy that the markets and financial commentators generally have viewed the clause with a certain amount of approbation.