Capital Gains Tax (Hansard, 19 October 1982)

§ Lord Monson
My Lords, I beg leave to ask the first Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government how they justify the fact that whereas a single person with an annual income of £6,500, of which £5,000 is derived from capital gains and £1,500 from earnings or investment income, pays no tax whatsoever, another single person whose identical annual income is all earned must pay a total of £2,050.42 in income tax and national insurance contributions.

§ The Secretary of State for Trade (Lord Cockfield)
My Lords, the noble Lord has correctly illustrated the difference between the individual's capital gains tax threshold—namely, £5,000—and the single person's income tax allowance of £1,565. Unlike income accruing in a single year, the gain realised on the sale of an asset may have accrued over many years and represent no more than an inflationary gain. It is appropriate that differences of this kind should be reflected in the respective tax treatment.

§ Lord Monson
My Lords, I thank the noble Lord for that reply. Nevertheless, would he not agree that anyone with access to capital or to contacts should have little difficulty in making a fairly consistent £5,000 a year from short-term capital gains, by which I mean gains deriving from assets held for only a few 2 weeks or months? In view of this, should not personal allowances for wage and salary earners be raised to more or less the same level, bearing in mind that a marginal rate of tax and national insurance combined of 38¾ per cent. on every pound earned in excess of £31 a week for a single person is unusually high, both by historical standards, taking inflation into account, and by the standards of other industrialised nations?

§ Lord Cockfield
My Lords, the noble Lord clearly moves in different circles from the rest of your Lordships' House. A person who regularly makes £5,000 a year in short-term capital gains must be an unusual individual. Quite apart from that, the reason for the £5,000 exemption was to take out of the tax people showing small gains, many of which had accrued over a long period of time, and I should be surprised to find the noble Lord advocating that such people should be brought within the charge.

§ Lord Monson
My Lords, I beg leave to ask the second Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government how they justify the fact that an individual who paid £10,000 in January for a holiday cottage, the value of which has since remained static in real terms, will incur a capital gains tax liability of between £9,000 and £10,500 if he sells today.

§ Lord Cockfield
My Lords, holiday cottages are treated in the same way as other assets for capital gains tax purposes. We have now provided relief for future inflation and also increased the threshold to £5,000. These measures will over time make the tax fairer and less oppressive. We could not go back and provide what, in effect, would be retrospective relief for past inflation.

§ Lord Monson
My Lords, I thank the noble Lord for his reply and I appreciate the point that he is trying to make. But would he not agree that, while the capital gains tax concessions made in the 1982 Finance Act are fair and even generous in respect of assets acquired from 1982 onwards, particularly where short-term gains are concerned, they are of virtually no use to people who have held an asset for 10, 15 or 20 years? Is it not almost immoral to levy an extremely high tax upon bogus paper gains which may, in some cases, actually represent losses in real terms, purely because of the inflation of the past 12 years, for which Conservative Administrations have been almost as responsible as Labour ones?

§ Lord Cockfield
My Lords, the noble Lord will not be surprised if, once again, I do not find myself in agreement with him. The £5,000 exemption for capital gains tax purposes will be of benefit to all people with a modest amount of capital who have made gains, which may be inflationary or real gains, over many years past. One needs to look at the two measures together—the £5,000 exemption and the future protection against inflation—to get a true picture of what has been done. The cost of going back to 1965 and providing relief for inflation which occurred back to that date would be far too high to be tolerable.

§ Lord Monson
My Lords, would not the noble Lord agree that it would be better to levy a higher rate on genuine gains—shall we say 40 per cent.—and provide indexation for all past gains? The two would surely balance out and the whole thing would be very much fairer than it is at present.

§ Lord Cockfield
My Lords, if I understood the noble Lord aright, he was advocating a higher rate of tax on short-term gains. In fact, in the early days of the tax, gains made in less than 12 months were charged as ordinary income. This produced very little tax yield, the reason quite simply being that people hold the assets until the period of high charge has passed.

§ Lord Elwyn-Jones
My Lords, do not these exchanges indicate how fortunate the House is that it does not have to consider the details of Finance Bills?

§ Lord Cockfield
My Lords, I am most grateful to the noble and learned Lord for his very wise intervention.