§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Dowd.]2.20 pm
§ Mr. Desmond Swayne (New Forest, West)
On 17 April, my constituent Mr. Conway wrote asking me to make representations on his behalf and that of others in a similar situation. He is 60, and his wife is 59. They run Candlesticks restaurant in Ringwood, where they employ about 10 people. They have run the business for 16 years, and have nursed it through two recessions. Mr. Conway and his wife plan to retire when he is 65, in 2003.
Like most small business people, the Conways do not have a pension plan in the sense that most of us would understand. As with many small business people, most of their savings are tied up in the business. In effect, the business is their pension plan. By selling it in 2003, they hope to gain enough capital to generate a modest income for their retirement.
Mr. and Mrs. Conway will also have to find somewhere to live. Again like many small business people who live over the shop. their principal asset is the premises from which their business is transacted, in which they also live. The capital gain that they hope to make by selling the business will have to generate not only an income for their retirement, but a capital sum that will allow them to buy somewhere else to live.
Existing tax arrangements are pretty favourable to people such as Mr. and Mrs. Conway. They hope to be able to realise a capital gain of some £250,000 in 2003, and existing arrangements would allow them to have that free of tax. For anyone over 50 who makes such a capital gain, the first £250,000 is tax free, and the next £750.000 is taxed at half the standard rate. Only when a business realises a capital gain in excess of £1 million does the full 40 per cent. rate apply.
Mr. and Mrs. Conway made their retirement plans on the basis of that known and predictable information. It is therefore a matter of some dismay to them that the rug may be pulled from under their feet—that the assumptions on which their plans were made may be swept away by proposals to change the basis on which capital gains tax is assessed. Under those proposals, if Mr. Conway put into effect his plan to retire in 2003, and achieved the £250,000 capital gain for which he hopes, he would be liable for a staggering £55,000 in tax.
Consequent on a decision to change the basis upon which capital gains tax is paid and to charge a flat rate, some people will benefit. Unfortunately, my constituent will not. To benefit from the new 10 per cent. rate that is a feature of the new proposals, he would have to retain his asset for a further 10 years. No credit is given for the fact that he has been running his business for the past 16 years. If he wanted to benefit from the new 10 per cent. rate and to cut his tax bill in 2003 from £55,000 to £25,000, which is still a staggering sum bearing it in mind that he would pay nothing under the existing arrangements, he would have to put off his retirement for a further five years, until 2008. It is most undesirable that business men and women who have made their plans should suddenly find themselves in that situation.
I have described the predicament of a restaurateur, but many small businesses will be affected. Given the rural nature of my constituency, it is not surprising that the 1005 National Farmers Union has contacted me to register its concern about the effect on farmers. What are people to do? They have a choice. They can reconcile themselves to much reduced circumstances in retirement or they can rush out and sell their businesses now. That is a most unattractive proposition because, as a result of the new regulations, people will be forced to make sales precipitately and the market will be flooded. In addition, many people will be tied into medium-term business plans and will be unable to sell. The proposals may cause a rush of such sales, bringing about the very short-termism that the Chancellor is determined to stamp out.
I understand that it would not be in order for me to specify legislative remedies and I would not attempt to do that, but the existing arrangements seem satisfactory and would relieve my constituents of the problem. If the Chancellor persists with his proposals he will receive advice from the Forum of Private Business, the National Farmers Union, the Chartered Institute of Taxation, The Mail on Sunday and many others on how to implement the proposals while ameliorating the impact on constituents such as mine.
I have drawn attention to the impact of the problem on my constituents, but I have a wider concern. The changes could be greatly regretted and there is the prospect of a significant transfer of income from the modestly-off to the wealthy. Under the proposals, anyone who makes a capital gain of £500,000 or less stands to be much worse off after the changes while those making a capital gain in excess of £500,000 will be significantly better off. The greater the capital gain, the better off people will be. That is extraordinary, given that the proposal comes from a party that spent 18 years in opposition complaining about the inequitable distribution of income and about how the poor were becoming poorer and the rich were growing richer. I never shared Labour's analysis: I did not believe that the poor were becoming poorer and the rich were growing richer, but these proposals might take us some way down that road.
When Mr. Conway, my constituent, came to see me at my surgery in New Milton, he said that he could not believe that the Government were seeking to penalise him in this way. He said that he believed that it must have been a mistake, an oversight or a question of officials having drawn up proposals that were not fully thought through. I hope that the Paymaster General will say that this is a listening Government and that they will take away the problem to which I have drawn attention and return with redress.
§ The Paymaster General (Mr. Geoffrey Robinson)
May I first make it clear to you, Mr. Deputy Speaker, to the House and to the hon. Member for New Forest, West (Mr. Swayne) that I am not the Minister who is responsible for these matters. Unfortunately, or, in some sense, fortunately, the Financial Secretary to the Treasury is in Brussels—
§ It being half-past Two o'clock, the motion for the Adjournment of the House lapsed, without Question put.
§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Dowd.]
I was extending apologies on behalf of the Financial Secretary to the hon. Gentleman. She is 1006 attending the first meeting of the European Union code of conduct group, in which 1 am sure the hon. Member has a considerable interest as well. I am sure, too, that he and the whole House will be interested to know that she has been elected chairman of that group and would like to congratulate her—as I congratulate the hon. Gentleman who has secured this debate and spoken with good skill, eloquence and feeling on behalf of his constituents.
I do not think that I can fully meet the hon. Gentleman's wishes, but he has aired the issue and he will be aware that the Financial Secretary will respond during the Standing Committee debates on the Finance Bill. I am not sure whether he is a member of that Committee, but it presents a further opportunity for him directly—or indirectly, through his colleagues—to press for the amendments that he has in mind.
I want to explain why we have decided to phase out retirement relief as part of the general reform of capital gains tax. To put this matter in its proper context, however, I first need to explain what the reform is about.
As the Financial Secretary explained on 29 April in the Committee debate on clause 119 of the Finance Bill, the Chancellor's Budget was designed to secure economic stability, encourage work, promote enterprise and create a fairer tax system. The key to attaining those objectives is the success of UK businesses. Providing the right fiscal framework for businesses to invest and grow is crucial to that success. The capital gains tax reform that was introduced in this year's Budget is designed with that objective in mind. At the heart of the reform is the introduction of the new taper relief, which from April this year replaces indexation relief.
I remind the House what the proposed new taper does. It reduces the percentage of gain chargeable to capital gains tax the longer an asset is held. The amount of the reduction depends on whether the asset disposed of is a business or a non-business asset. If the asset is a non-business asset, the taper reduces the gain by 5 per cent. for each year it has been held after three years. The maximum relief is obtained when the asset has been held for 10 years or more, when 60 per cent. of the gain remains chargeable.
The taper for business assets is more generous. It reduces the gain by 7.5 per cent. for each year after the first year. When the asset has been held for 10 years or more, only 25 per cent. of the gain will be chargeable. That means an equivalent tax rate of only 10 per cent. for the higher-rate taxpayer. The hon. Gentleman got all his figures right.
Business assets are broadly defined as those that have been used in a trade and shareholdings in a trading company in which the investor has a substantial interest. The present retirement relief is more restricted than the new taper relief: it depends on those selling being over 50 or retiring on ill-health grounds; it is subject to a lifetime limit; and there has to be a sale of the whole or part of the business, or the sale of assets within a period of the trade ceasing. All those are serious restrictions, which I urge the hon. Gentleman to consider in the round as well as in relation to the particular case of which he has spoken.
Unless those conditions are met, no relief is due. There is no relief for substantial holdings where the investor is not a full-time employee. The conditions for relief are complex and many disposals by people over 50 fail to 1007 qualify for relief. The relief gives rise to much litigation and high compliance costs. Retirement relief can all too often be selective and capricious.
The new business taper has none of those restrictions or complexities: it will be available to all businesses; the owner may be of any age; there is no lifetime limit; and there is no requirement that the business itself needs to be disposed of. The definition of a business asset is broader than that which applies to retirement relief and, unlike retirement relief, taper relief will be given for the appropriate period for which the relevant conditions have been satisfied, even though the conditions may not be satisfied at the time of the disposal.
§ Mr. Swayne
Why does 1998 have to be the year zero? Why can no credit be given for the fact that my constituent has held the assets and been running the business for 16 years?
§ Mr. Robinson
This year was the logical point from which to start. There may be a problem in the particular case to which the hon. Gentleman refers, but it would simply have been postponed. We are now giving an unprecedented five years for transition, which is a long time in the circumstances. If the hon. Gentleman thinks about it in the round, and if he or his constituent take further advice, he will appreciate that the five years will allow most businesses satisfactorily to reorganise their arrangements.
I might summarise the comparison of the two reliefs by saying that retirement relief is in many ways subjective, depending a great deal on the circumstances of the investor, whereas taper relief is a wholly objective relief, depending purely on the nature and length of holding of the investment.
The taper will be a positive encouragement for all small and medium businesses to invest for the longer term and it will provide a real incentive for all businesses to grow. Again, I ask the hon. Gentleman to think about that. The idea is to encourage growth and development. We are unashamedly in favour of those who can create big businesses and wealth coming within the new business taper. Taper relief, by contrast with retirement relief, is wide ranging and certain.
Removing retirement relief will also make capital gains tax fairer. We do not think it right that people with substantial gains should pay no tax at all. I say that quite frankly. We do not see the logic, fairness or correctness of that arrangement; it is simply not fair to the vast majority of taxpayers who do not have capital gains. 1008 This move is wholly consistent with other changes we are making to the CGT rules, all of which are designed to lead to a fairer system.
The sooner we can move to the new system, free of any special exemption, the sooner the benefits of the new system will fully emerge. That argues for withdrawing retirement relief as rapidly as possible. We have resisted that, and rightly. In fact, we have gone for a full five years because we recognise that people close to retirement will have been expecting a measure of exemption on their gains. For that reason, and to give those people time to plan and adapt to the revised circumstances, the Government have decided to phase out the relief over a period of five years, with no reduction in the present limits for the first year. I think that the hon. Gentleman took that point on board.
It has been suggested that the phase-out ought to be longer. Some have suggested 10 years rather than five to match the period over which the taper builds up to full benefit. We believe five years is very reasonable in all the circumstances.
With the one-year addition for assets held at Budget day, the taper will already provide a substantial reduction in the gain chargeable if the sale takes place around 2003, the time retirement relief is withdrawn.
Also, phasing out the relief over a 10-year rather than a five-year period would only delay further the very real benefits that the taper provides for all businesses. If the capital gains tax changes are to remain revenue neutral, the cost of continuing retirement relief for the extra period would have to be met by reducing the benefits of the taper during the phase-out period. Other taxpayers, including businesses, would suffer as a result. We do not think that that is right, and it is certainly not in the wider interests of British business. It would also leave a complex tax relief in the system for that much longer. If nothing else, retirement relief is extremely complex.
For those reasons, we believe that a five-year phase-out strikes the right balance between equity, complexity and the need to encourage entrepreneurship.
The Government's view is that the capital gains system is badly in need of reform. The current system fails to provide a sufficiently strong incentive for entrepreneurs to build up their businesses. The measures introduced in the Budget will do just that. The taper is a fundamental part of reform, providing a real incentive for investment and business growth. Retirement relief, by comparison, is too narrowly focused and fails to match up to those claims.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-one minutes to Three o 'clock.