(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003) - Schedule 2
Finance Bill
1:30 pm
Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)
Welcome to the Chair, Mr. Cook. We said this morning how grateful we were for the licence given to us this afternoon. It was of enormous benefit to those of us who were able to join you at Gwyneth Dunwoody’s funeral.
Schedule 2 delivers the central elements of the capital gains tax reform programme that was announced in the 2007 pre-Budget report, with the changes taking effect from 6 April 2008. Taper relief operated by reducing the amount of a gain before it was charged to tax. That reduced the effective rate of tax paid on the gain in question. The amount of reduction depended on whether the asset being disposed of qualified as a business asset or a non-business asset, and the length of time for which the asset had been owned before its disposal.
The introduction of taper relief in 1998, as we have discussed, was an important part of the Government’s drive to promote investment and reward enterprise. A decade on, we have now delivered an unprecedented period of macro-stability and have established the United Kingdom as one of the best environments for business in the world. We believe therefore that it is now right to reform capital gains tax. The regime remains highly competitive, with a headline rate less than half that in force in 1997. Equally important, the change represents a major simplification of what had become one of the most complex parts of the code.
The reformed capital gains tax regime removes distortions and will be more sustainable and straightforward for taxpayers, helping everyone to plan for the future. Extending taper relief in the way that a number of hon. Members have suggested would not enable the major simplification that we have delivered. We believe that the 18 per cent. headline rate and the 10 per cent. special rate available through entrepreneurs relief represents one of the most simple and competitive regimes of any major economy. That compares very favourably with our competitors in the G7, based on the figures for those countries in 2007. Only Italy has a marginally lower rate of 17.2 per cent. The spread goes as far as the USA, where the rate is 35 per cent., and Japan, where it is 40 per cent. and in both countries capital gains are taxed as personal income. Our preferential CGT rates also bear comparison with international competitors.
I was asked a number of questions about indexation allowance, and we discussed it partly when considering the amendments. Because indexation allowance was frozen in 1998, only a minority of disposals still qualify. I was asked if I had an estimate of the number. The data published by Her Majesty’s Revenue and Customs show that about 17 per cent. of disposals are of assets that have been owned for longer than 10 years.
In a wide-ranging speech, but one which raised a number of sensible questions, the hon. Member for Fareham probed whether there was any way of predicting how the decline of costs would occur. He acknowledges that there is no question but that there will be a decline. I invite him to look at table A3.1 in the Red Book. We do not have a profile that predicts ahead because we do not carry out that type of prediction for future years for this type of measure.