HC Deb 19 March 1985 vol 75 cc790-2
Mr. Lawson

I now turn to taxation.

This Budget carries forward the theme of tax reform I set out last year; reform designed to make life a little simpler for the taxpayer; and above all reform designed to improve our economic performance over the longer term, on which the jobs of the future will depend.

In my Budget last year I announced a radical reform of the corporation tax system. This had been preceded by the Green Paper on corporation tax issued by my predecessor in 1982.

I am satisfied that the right way to proceed with major tax reform is to issue a Green Paper first, as a basis for full and informed discussion, followed by legislation when the results of that discussion have been fully digested.

I therefore propose to issue a Green Paper later this year on the reform of personal income tax.

The computerisation of PAYE makes this the right time to review the system of personal taxation. Most of the work will be complete by the end of 1987 and the full range of facilities will be available by 1989. The Green Paper will therefore discuss a range of options opened up by computerisation, from non-cumulation to closer integration between the tax and benefit systems, and including in particular a reform of the present system of personal allowances.

It is the Government's firm policy to reduce the burden of income tax, but we need to make sure that the reliefs we can afford are concentrated where they will do most good.

The present structure of personal income tax is far from satisfactory. Too many young people start paying tax at too low a level, and too many families find themselves in the poverty and unemployment traps. The system discriminates against the family in which the wife stays at home to look after the children. It denies to the partners in a marriage the independence and privacy in their tax affairs which they have a right to expect.

There is therefore a strong case for changing to a new system of personal allowances more suited to today's economic and social needs. Under this, everyone, man or woman, married or single, would have the same standard allowance; but if either a wife or a husband were unable to make full use of their allowance, the unused portion could be transferred, if they so wished, to their partner.

This reform would produce a more logical and straightforward system. Far more people could be taken out of the poverty and unemployment traps, and indeed taken out of tax altogether, for a given sum of overall tax relief than is possible under the present system. It would end the present discrimination against the family where the wife feels it right to stay at home, which increasingly nowadays means discrimination against the family with young children.

Husbands and wives would each be taxed separately on their own income irrespective of the income of the other. The aggregation for tax purposes of a wife's earned income and investment income with her husband's would end, thus removing what has become an increasing source of resentment among women.

The Green Paper will set out full details of the proposals I have just outlined, as a basis for public discussion. After an appropriate period for consultation, it would be possible to legislate in 1987 and have a system on these lines in place by the end of the decade.

There is also a case for changing the tax treatment of pension funds, as part of a thorough-going reform of the tax treatment of personal savings generally. Any fundamental reform of this kind would, in the same way, need to be preceded by the publication of a Green Paper.

The House will, I am sure, be interested to learn that I have no such Green Paper in mind.

Nor, indeed, despite the unparalleled pre-Budget agitation, do any of the detailed proposals in my Budget affect the tax-deductibility of pension fund contributions, the tax-free nature of pension fund income and capital gains, or the anomalous but much-loved tax-free lump sum.

Meanwhile, I have a number of other important proposals for tax reform to announce today, which will both simplify the system and encourage enterprise.

First, on Capital gains tax, last year I was unable to do anything about the acknowledged defects of this tax, notably its combination of unfairness and complexity, and undertook to come back to it this year. This I now do.

I have decided that the right way to reform capital gains tax is to build on the important change made by my predecessor three years ago when he introduced the 1982 indexation relief. That relief, valuable though it is, and increasingly valuable as it will become, suffers from three serious limitations.

First, indexation does not cover the first 12 months of the ownership of an asset. This provision was introduced to discourage the short-term conversion of income into capital, but it has made the tax very much more complicated for the taxpayer. I am now in a position to remedy this defect. Hon. Members will recall that I announced last month measures to put an end to the practice known as bond washing, the principal device for converting income into less heavily taxed capital gains. Having done that, I now propose to abolish the 12-month rule. So far as most disposals are concerned, this will take effect from 6 April. In the case of certain fixed interest securities, however, the rule will need to remain in being until the anti-bond-washing provisions take effect on 28 February 1986.

Second, the indexation does not at present extend to losses. I propose to remove this restriction.

Thirdly, the present indexation provision unfairly discriminates against those who acquired their assets prior to 1982. For them, the allowance is based not on the 1982 value of the asset but on its original cost. I now propose to remedy that injustice. The indexation allowance will henceforth be based on March 1982 values. Capital gains made prior to 1982 will still not be indexed, of course, but at least all purely inflationary gains made since that date will now be free of tax, irrespective of when the asset was acquired.

That three-pronged reform of capital gains tax will produce a fairer tax, make life simpler for the taxpayer, help the efficient working of the capital markets, relieve the burden on family businesses and encourage risk-taking and enterprise. Combined with the statutory indexation of the exempt amount, which will rise in 1985–86 to £5,900, these changes will remove some 15,000 taxpayers from liability altogether. Increasingly, the tax will be levied on real and not inflationary gains. With these reforms, I believe that the tax is now on a broadly acceptable and sustainable basis. The combined cost of the threefold reform I have announced is £155 million in a full year; but none of it falls in 1985–86.

I turn next to the stamp duties. Following widespread consultation, I have decided that the time has come to simplify and modernise these ancient duties. I propose in this Budget to sweep away 15 separate duties, including the contract note duty and the 1 per cent. duty on gifts. Altogether, the changes I am proposing should reduce by over 40 per cent. the number of documents which require to be stamped.

My final proposal for reform concerns development land tax. This is a particularly complex tax, which was introduced in response to the problem of soaring land values at a time of high inflation. Its chief practical effect is to discourage the bringing forward of land for development. This disincentive effect will grow as the gap widens between the 60 per cent. rate of development land tax and a corporation tax rate which is on the way down to 35 per cent.

I have therefore decided to abolish development land tax altogether, with immediate effect. At the same time, I propose to cancel all deferred charges under the tax. The net cost will be some £20 million in 1985–86 and £50 million in a full year. That compares, incidentally, with a collection cost of some £5 million a year. Development gains will, of course, continue to be subject to income tax, corporation tax and capital gains tax, in the same way as any other income or capital gains.

The abolition of development land tax will, I am sure, be especially welcomed by the building and construction industry. It will also remove no fewer than 200 pages of highly complex legislation from the statute book. This follows the abolition of the national insurance surcharge and the investment income surcharge in last year's Budget —three unwanted taxes swept away in two years.