Capital Gains: Indexation (Hansard, 24 June 1998)

§ Lord McIntosh of Haringey
No, my Lords.

§ Lord Bethell
My Lords, I am grateful to the Minister for that Answer. However, has he taken into account the fact that a saver can make a modest capital gain on an investment, but nevertheless find himself obliged to pay capital gains tax on what is a loss in real terms? Does the Minister consider that to be fair?

§ Lord McIntosh of Haringey
My Lords, what the Government have done—and they did so following the approval of Mr. Peter Lilley before publication of the Budget—is to replace indexation with a taper. The effect differs according to the extent to which we succeed in controlling inflation and promoting real growth. Nevertheless, the change will be of benefit to almost everyone.

§ Lord Marsh
My Lords, should not the Government's target be to try to encourage people to hold shareholdings long term rather than short term? Does not the system fly directly in the face of that?

§ Lord McIntosh of Haringey
My Lords, on the contrary; it is exactly the encouragement of holding shares in the longer term which is provided by the taper. The benefit increases with the length of the holding. I am sure that the noble Lord will be the first to acknowledge that this is a great extension of benefits for business assets; in other words, for those people who hold assets as individuals carrying on a trade or who hold a shareholding in particular in a small business as an employee. I hope that the noble Lord will agree that that is much to the benefit of enterprise.

§ Baroness Gardner of Parkes
My Lords, does the Minister agree that pensioners in particular will be 243 greatly disadvantaged by the new tapering relief because there will be no benefit for three years? Furthermore, in order to achieve maximum benefit one must hold the assets for a further 10 years. There is no retrospection, so many pensioners who have based their retirement on the basis of selling small capital amounts annually may not live long enough to benefit. Does not the Minister believe that the system is particularly harmful for pensioners?

§ Lord McIntosh of Haringey
My Lords, no, the rules are the same for pensioners as for anyone else. Far from there being retrospection, any assets which were held on 17th March, the date of the Budget, are counted as being held for the whole year before 5th April. Therefore, in effect, a bonus of almost a year is being given before the start of the new system.

§ Lord Barnett
My Lords, unusually, I find myself in total agreement with my noble friend. Will he confirm that those in receipt of small pensions who wish to realise a little gain each year will have no problem with the existing system as they will not pay the capital gains tax because of the amount of relief available?

§ Lord McIntosh of Haringey
My Lords, that is true, but questioning from the other side implied that we were abolishing the indexation. Of course, indexation from 1992 to 1998 still exists. It is frozen at that date as it is replaced by the tapering, but it is still there.

§ Lord Clark of Kempston
My Lords, in view of the fact that it is the responsibility of the Chancellor of the Exchequer to control inflation, would the Minister think it right that indexation should be abolished because it means that a taxpayer would be paying tax on inflation, which is the responsibility of the Chancellor? Surely that must be wrong.

§ Lord McIntosh of Haringey
My Lords, I do not believe that the noble Lord said quite what he meant to say. He actually said that indexation should be abolished, which is what we have done. We have frozen indexation. If the noble Lord reads Hansard I believe that he will find that he said the opposite of what he intended. The important point about the change that we have made is that it encourages enterprise and small businesses. It makes for a great deal of simplification in the calculation of capital gains tax liabilities.

§ Lord Mackay of Ardbrecknish
My Lords, in response to my noble friend Lord Bethell, the Minister prayed in aid my right honourable friend Peter Lilley. Will he therefore take on board one of the planks which Peter Lilley had in mind; namely, to reduce the tapering to zero after 10 years? Will he incorporate that in addition to the other aspects of Mr. Lilley's suggestion which he appears to favour?
Furthermore, will the Minister reconsider his answer to the noble Lord, Lord Marsh? Under this system, if a small businessman sells a shop, a small business of a modest size, in order to fund his retirement he will be 244 asked to pay more in capital gains tax, whereas a well-off person, perhaps making a large gain by selling a large business, will pay less. Are the Government content with that?

§ Lord McIntosh of Haringey
My Lords, in response to the noble Lord's first question, I can do no better than to quote from Peter Lilley's speech to the British Dyslexia Association before the Budget. He said: It would be far better to examine scrapping indexation and replacing it by a capital gains tax charge related to the time an asset has been held, declining to zero on assets held for, say, 10 years". That is the position which the Opposition took during the passage of the Finance Bill in another place. However, it appears extreme to this Government. It would be wildly expensive in revenue terms and it would benefit higher level taxpayers rather than those most in need.
As regards the noble Lord's question about small businesses, the contrary is the case. We have extended the applicability of the definition of "business assets" very widely in order to help in particular small businesses. The definition includes those who hold more than 25 per cent. of the shares in a company or those who are full-time employees and hold more than 5 per cent. To those, the benefits of the taper rather than indexation are very great indeed.

§ Lord Mackie of Benshie
My Lords, is the tapering figure fixed or can it be varied if the Government do not succeed in holding down inflation?

§ Lord McIntosh of Haringey
My Lords, the Finance Bill includes two fixed figures for taper; one for business assets and one for non-business assets. Any change would presumably require legislation.