§ I now turn to the taxation of savings and investment. In my 1984 Budget, I introduced a major reform of the taxation of savings and investment, designed to improve the direction and quality of both. Today I propose to carry this reform further forward. The Social Security Bill now before Parliament proposes important and far-reaching changes in pension provision, notably by encouraging the growth of personal pensions. Those changes—to which the Government attach the highest importance—have been warmly welcomed, both for the greater freedom they will give to existing pension scheme members and for the new scope they will offer to the millions of working people who are not in an occupational pension scheme.
In the light of these changes, I intend later this year to publish detailed proposals designed to give personal pensions the same favourable tax treatment as is currently enjoyed by retirement annuities. Publication of these proposals will enable there to be the widest possible consultation prior to legislation in next year's Finance Bill. Meanwhile, I can assure the House that, as I made clear last year, I have no plans to change that favourable tax treatment.
However, I do need to deal with the growing problem of the rules governing pension fund surpluses. The dramatic improvement in the financial climate compared with a decade ago, most notably as a result of the sharp fall in inflation, has seen a number of pension funds become heavily over-funded. This presents a double problem, both aspects of which the Inland Revenue is at present having to deal with through the exercise of its discretionary powers.
In the first place, excessive surpluses, even if they arise unintentionally, represent the misuse of a tax privilege which was intended to assist the provision of pensions, and for no other purpose. So the Inland Revenue requires from time to time that surpluses be diminished. However, at the same time, the Inland Revenue feels obliged to turn down many of the increasing number of requests from companies which, often for good reasons, wish to take refunds from their pension fund into the company itself.
The absence of clear rules on how surpluses should and may be dealt with, and the consequent reliance that has to be placed on the exercise by the Inland Revenue of its discretion, have created considerable uncertainty and have unnecessarily constrained trustees' freedom of action. Therefore, I propose to replace these discretionary arrangements with clear and objective statutory provisions.
In future, the amount of any surplus in a fund will be determined for tax purposes in accordance with published guidelines, based on a secure funding method and prudent actuarial assumptions, as advised by the Government Actuary. Where a surplus is 5 per cent. or less of total 177 liabilities, no action will need to be taken. Where it is higher than that, action will be required to eliminate the excess.
It will be entirely a matter for the trustees and employers to decide whether the reduction is to be achieved by increasing benefits, or by reducing contributions, or by making a refund to the company. If, and only if, they choose to make a refund, the employer will be liable to tax at a rate of 40 per cent. of the amount refunded, so as broadly to recover the tax relief previously given. The effect of these new arrangements is likely to be a yield of £20 million in 1986–87 and £120 million in 1987–88.
Next, stamp duty. I have no change to propose in the stamp duty on houses and other property, which I reduced to 1 per cent. with a higher threshold in my 1984 Budget, but there is a formidable case this year for a further reduction in the rate of stamp duty on share transfers. The City of London is the pre-eminent financial centre of Europe. The massive £6 billion it contributes to our invisible earnings is but one measure of the resulting benefit to the British economy.
Competition in financial services nowadays is not continental, but global. The City revolution now under way, due to culminate in the ending of fixed commissions, the so-called big bang, on 27 October, is essential if London is to compete successfully against New York and Tokyo. If London cannot win a major share of the global securities market, its present world pre-eminence in other financial services will be threatened. Successful competition depends on a number of factors, but one of the most important is the level of dealing costs. The abolition of fixed commissions will certainly help, but with no tax at all on share transactions in New York, and roughly ½ per cent. in Tokyo, under the existing tax regime London will still be vulnerable.
I therefore propose to reduce stamp duty on share transactions from 1 per cent. to ½ per cent. as from the date of the big bang. It is right that the full cost of this should be met from within the financial sector itself and accordingly, I propose to bring into tax at the new ½ per cent. rate a range of financial transactions which are at present entirely free of stamp duty. These include transactions in loan stock other than short bonds and gilt-edged securities, transactions unwound within a single stock exchange account, letters of allotment, the purchase by a company of its own shares, and takeovers and mergers. There will also be a special rate of 5 per cent. on the conversion of United Kingdom shares into ADRs and other forms of depositary receipt. Some of these changes, including the new ADR charge, will take effect immediately: others will be delayed until the big bang.
This further halving of the stamp duty on equities should enable London to compete successfully in the worldwide securities market, and it will also provide a further fillip to wider share ownership in the United Kingdom. Just as we have made Britain a nation of home owners so it is the long-term ambition of this Government to make the British people a nation of share owners, too; to create a popular capitalism in which more and more men and women have a direct personal stake in British business and industry. Through the rapid growth of employee share schemes, and through the outstandingly successful privatisation programme, much progress has been made—but not enough. Nor, I fear, will we ever achieve our 178 goal as long as the tax system continues to discriminate so heavily in favour of institutional investment rather than direct share ownership.
Accordingly, I propose to introduce a radical new scheme to encourage direct investment in United Kingdom equities. Starting next January, any adult will be able to invest up to £200 a month, or £2,400 a year, in shares. These will be held in a special account which I am calling a personal equity plan. As long as the investment is kept in the plan for a relatively short minimum period of between one and two years, all reinvested dividends and all capital gains on disposals will be entirely free of tax. The longer the investment is kept in the plan, the more the tax relief will build up and the greater will be the benefits, and there will normally be no need for Inland Revenue to get involved at all.
Although the scheme will be open to everyone, it is specially designed to encourage smaller savers, and particularly those who may never previously have invested in equities in their lives. The plans will be simple and flexible to operate. Anyone who is legally able to deal in securities will be eligible to register as a plan manager, but the investor himself will own the shares and the rights that go with them, including voting rights. It will be for the investor to choose whether to make the investment decisions himself or to give the plan manager authority to act on his behalf. The cost of the scheme will be around £25 million in 1987–88, but will build up in later years as more plans are taken out.
This is a substantial, innovative and exciting new scheme. I am confident that, over time, it will bring about a dramatic extension of share ownership in Britain. Although wholly different in structure from the Loi Monory in France, I expect it to be every bit as successful in achieving its objective. I am sure the whole House will welcome this far-reaching package of measures to reform the taxation of savings and investment.