Indexation

Orders of the Day — Finance Bill – in the House of Commons at 10:45 pm on 10th July 1985.

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Amendment proposed: No. 164, in page 152, line 11, leave out 'following that'.—[Mr. Peter Rees.]

Mr. Deputy Speaker:

With this it will be convenient to take the following amendments:

Government amendments Nos. 165 to 167. No. 169, in page 159, line 11, leave out from 'a' to 'of' in line 13 and insert 'new holding, within the meaning of Part III of this Schedule rather than with securities forming part of a 1982 holding, within the meaning of Part II'. and Government Amendment No. 168.

Photo of Dr Oonagh McDonald Dr Oonagh McDonald , Thurrock

I am glad to have the opportunity to speak to amendment No. 164. I noticed that the Chief Secretary carefully avoided answering any of the questions which were raised on the last group of amendments, so some of the same questions have to be pressed on this group of amendments. This group—I refer particularly to Government amendments Nos. 164 to 168 — were tabled even later than the ones that we have already debated. They were tabled on Monday, 8 July — very late indeed—and they constitute a change in the Finance Bill as originally published. The amendments alter the arrangements that were made for the basis of indexation of capital gains tax. It shows that the Government changed their minds at a very late stage between publication of the original Bill and these amendments. Instead of basing the indexation of a group of shares or assets on the principle of first in, first out, the Government have substituted the principle of last in, first out, thus reducing the liability to capital gains tax.

11.45 pm

For example, under the original Finance Bill, shares were to be identified on a first in, first out, basis. The amendments change the rules to a last in, first out basis. Almost always this will benefit the taxpayer. If, to use again the example of Mr. Jones, he bought 1,000 ICI shares in 1975 at £5 each— £5,000 — and 1.000 ICI shares in 1983 at £10 each — £10,000 — and if he sold 1,000 ICI shares in 1985 at £12 each he gained £12,000. On the first in, first out basis he gains £12,000 less £5,000. The basis for tax liability is £7,000. On the last in, first out basis he gains £12,000, less £10,000. The basis for tax liability is therefore £2,000.

We want to know why the Government changed their mind. At the last moment did they decide to cave in to their City friends and change the basis? How much will this cost? How can the Government justify such a cost when they were unable last night to find the quite small amount of money that would be necessary to alter the tax regime that they now wish to impose upon the workplace nurseries?

The Chief Secretary to the Treasury is on record as saying that he is opposed to capital taxation. He has been unable to abolish it. Instead, the process of reducing it goes on year after year. This is another example, which was introduced at a very late stage. Both he and his right hon. Friends chip away at capital taxation until it is hardly worth collecting. Instead of death for capital taxation by a thousand cuts it is death by a thousand reliefs. I am sure that the Chief Secretary is pleased about that. The Opposition are not at all pleased about it.

We do not think that there should be this imbalance, which we have commented upon time and time again, between the burden of taxation on capital and the burden of taxation on taxpayers, especially those whose incomes are particularly low. The burden of taxation on those with below average incomes has increased during the last six years, while the burden of capital taxation has decreased. Capital gains tax has dropped to less than 1 per cent. of total revenue. One concession after another has been made. This set of concessions has been made at an extremely late stage. The result will be that only the rich will benefit. We want the Chief Secretary to tell us how many people are involved, how much it will cost and what justification can possibly be produced for caving in to the City.

Photo of Mr Anthony Beaumont-Dark Mr Anthony Beaumont-Dark , Birmingham, Selly Oak

The hon. Member for Thurrock (Dr. McDonald) accuses the Government of having caved in to their rich friends. I tabled an amendment on this matter and the hon. Lady may be right to say that the Government amendments, which I regard as being as satisfactory as mine, were tabled late in the day. The difficulty is that capital gains tax is so complicated that it takes time to work out the problems involved.

We are seeking to help not a few rich individuals, but the insurance companies, life offices, investment trusts and trade union pension funds in the City that all have large core holdings. If we had left the situation as it was, there would have been an aggregation of costs and profits and, under the FIFO method, £200,000 of capital gains tax could be paid when no overall capital gain had been made. Therefore, the funds of pension funds would have been diminished.

In addition, once an investment company had bought a holding it would never wish to deal in the share, because there would be a financial distortion. Surely it is good for the country that the change has been made. Eating up in tax the benefits going to trade union pension funds and others would have been a great folly. The country is not the net loser. The losers would have been the beneficiaries of funds; they are not a few rich individuals, but hundreds of thousands of people who get the benefit of expert advice.

The Government should be congratulated on seeing the wisdom of the argument, not criticised for changing what would have been a damaging provision.

Photo of Mr Peter Rees Mr Peter Rees , Dover

We have been congratulated by one side of the House and condemned by the other. It would be wearisome if I deployed at length the Government's views on capital taxation, but the hollowness of the case of the hon. Member for Thurrock (Dr. McDonald) was demonstrated when she talked of death by a thousand reliefs; I have never heard of anyone dying from an excess of reliefs.

We are people of warm hearts who are endeavouring to do justice in a complex matter. The hon. Member for Thurrock does not recognise that, with the impact of inflation over the years, capital gains tax has become, to a considerable extent, a capital levy. It has not been creaming off real profits. All too often, it has been cutting into the core holdings of institutions.

I emphasise that the change does not benefit what the hon. Member for Thurrock chooses to call the rich friends of the Tory party. It covers the institutions, through which many of our fellow countrymen who could never be described as rich save for themselves, their families and their old age.

The change was pressed on us between the Committee and Report stages. I do not apologise for the fact that we had to table the amendments rather late. They include complex provisions and it was necessary to work out the details and get them right. The justification for our proposals was clearly deployed by my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark).

The Bill originally included the first in, first out rule, which was the general identification rule from 1965 to 1982. We thought that as people were familiar with the admittedly slightly complex rule, it was worth perpetuating it in the new situation created by the indexation provisions in the Bill. However, it was represented very strongly to us at the end of the Committee debate that this would create a distortion in the operations not just of private individuals but of institutions. It would provide, so to speak, a clog on the market. People would be disinclined to have their stocks and shares turned over in the way that market circumstances would normally have dictated. We thought it right, therefore, to eliminate that distortion by introducing the last in, first out rule.

The hon. Member for Thurrock asked me perfectly properly how many people will be affected. I cannot tell her. [Interruption.] We all know the bonhomie of the hon. Member for Workington (Mr. Campbell-Savours). The hon. Gentleman might reflect on the utter impossibility of knowing the composition of the portfolios of the institutions of the country, let alone of individuals. If he and the hon. Member for Thurrock reflected for a moment, they would recognise the utter impossibility of my giving the numbers likely to be affected.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

What about last year's bond washing.

Photo of Mr Peter Rees Mr Peter Rees , Dover

I think that I would be out of order if I were to debate bond washing. The hon. Gentleman, who intervenes regularly from a sedentary position, might recognise that this year the Government have devoted considerable legislative time — with, I had hoped, the approval of the Opposition — to bringing bond washing with the charge to tax. I should have thought that the hon. Gentleman might recongise that fact, but maybe he has his own motives for contributing in his own particular way.

The hon. Member for Thurrock, again properly, asked me what the cost would be. Once more, it is impossible for me to say, but it is likely to be negligible. It is likely that there will be more disposals although, because of the indexation provisions and the application of the last in, first out rule, the charge on each disposal is likely to be less. However, as there will probably be a larger number of transactions, the ultimate overall quantum of capital gains tax should be about the same. I have to admit quite candidly that that it is absolute assumption. It is, I hope, an informed guess.

I apologise for not having dealt with that point in the last case. Again, it would have been impossible for me to put forward a figure because the basic data are not available — that is, the number of transactions which have been on the no gain, no loss basis which would have preceded the ultimate transaction, subject to capital gains tax. Much as I would have liked to give the figure, it would not have been realistic for me to do so.

In this case, as I said — and I am sure that the hon. Lady will understand how I have approached the problem — there is likely to be a greater turnover of the securities, but, admittedly, at a lesser charge to capital gains tax, to corporation tax or chargeable gains. None the less, I hope that the actual amount of revenue collected by Government would not be seriously affected. I therefore hope that the House will feel able to accept the amendments.

If I may deal briefly with amendment 164, which is of a slightly different quality, this is a technical amendment to bring the treatment of shares and other securities into line for the purposes of applying the 10-day rule. Due to slight drafting defects, some were on an 11-day basis and some on a 10-day basis, and the amendment is to harmonise them on a 10-day basis.

I hope that all the amendments will, therefore, find favour with the House.

Photo of Dr Oonagh McDonald Dr Oonagh McDonald , Thurrock

I should like to explain why the Opposition wish to call a vote on this amendment. The Chief Secretary says that these general identification rules have not been changed since 1965, yet inexplicably changes in the identification rules were introduced after the Bill was published on 8 July. The Chief Secretary has not told the House why that was done at such a late stage, from whom the representations came or how many individuals will be affected by the changes. The Inland Revenue, of course, knows how many individuals it deals with who have directly to pay capital gains tax. I take the Chief Secretary's point about the number of individuals who might indirectly be affected by the proposals.

Somewhat misleadingly, the Minister talked about institutions, but pension funds should be exempted. He said that the costs were negligible, but he does not know the cost of the changes.

The Government expect to gain £720 million from capital gains tax this year. The Opposition will watch closely to see how much the Government gain. Because of the lack of answers, the lateness of the changes and our belief that rich people are likely to benefit more than the many whom we represent, we intend to vote against the amendment.

12 midnight

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

I was surprised that the Government should introduce the amendment at such a late stage, but it is important to get the new arrangements for capital gains tax on to a sensible footing. The amendments fall into the same category as one which we discussed yesterday. Although a relief is being introduced, the revenue consequences might be neutral or even beneficial.

It has become clear that the market might become clogged up. Capital gains tax is only payable when an individual makes a disposal. On the basis of last in, first out, rather than first in, first out, there will be no inhibition, so the revenue effects will not be as dramatic as the hon. Member for Thurrock (Dr. McDonald) suggests.

The hon. Lady said that pension funds were exempt from capital gains tax. That is true, but the insurance companies were, understandably, particularly worried.

The revenue from the bond washing provisions is to be £300 million in a full year and insurance will have to stump up a large proportion of that.

The hon. Lady will know that the insurance companies will lose as a result of the change which the House approved yesterday — the abolition of the short-term capital gains tax on gilts — because they will no longer be able to set off their losses against their equity gains. It is right that the Government should examine, even at this late stage, the strong representations by insurance companies. I do not think that the effect will be as damaging as the hon. Lady suggests, so I support the changes.

Photo of Dr John Marek Dr John Marek , Wrexham

We should vote against the amendment, because we have not had time to study the proposals. The insurance companies should have made their representations earlier so that the proposals could be discussed properly in Committee. It is important to vote on the issue.

Question put, That the amendment be made:—

The House divided: Ayes 114, Noes 23.

Division No. 270][12.02 am
AYES
Alexander, RichardClark, Sir W. (Croydon S)
Amess, DavidClegg, Sir Walter
Ancram, MichaelCope, John
Ashby, DavidCorrie, John
Aspinwall, JackCurrie, Mrs Edwina
Atkins, Robert (South Ribble)Dorrell, Stephen
Atkinson, David (B'm'th E)Dover, Den
Baker, Nicholas (N Dorset)du Cann, Rt Hon Sir Edward
Baldry, TonyDurant, Tony
Batiste, SpencerEdwards, Rt Hon N. (P'broke)
Beaumont-Dark, AnthonyFenner, Mrs Peggy
Bellingham, HenryForman, Nigel
Boscawen, Hon RobertForth, Eric
Bottomley, PeterFraser, Peter (Angus East)
Bottomley, Mrs VirginiaFreeman, Roger
Bright, GrahamGale, Roger
Brittan, Rt Hon LeonGalley, Roy
Brooke, Hon PeterGardiner, George (Reigate)
Browne, JohnGarel-Jones, Tristan
Butcher, JohnGoodlad, Alastair
Butler, Hon AdamGow, Ian
Butterfill, JohnGregory, Conal
Carlisle, John (N Luton)Griffiths, Peter (Portsm'th N)
Chalker, Mrs LyndaGrist, Ian
Hamilton, Neil (Tatton)Robinson, Mark (N port W)
Havers, Rt Hon Sir MichaelRoe, Mrs Marion
Hawksley, WarrenShaw, Sir Michael (Scarb')
Hayhoe, Rt Hon BarneyShepherd, Colin (Hereford)
Henderson, BarrySmith, Tim (Beaconsfield)
Hirst, MichaelSoames, Hon Nicholas
Howarth, Alan (Stratf'd-on-A)Speller, Tony
Howarth, Gerald (Cannock)Spencer, Derek
Howell, Rt Hon D. (G'ldford)Stern, Michael
Hunt, David (Wirral)Stevens, Lewis (Nuneaton)
Jopling, Rt Hon MichaelStevens, Martin (Fulham)
Lang, IanStewart, Allan (Eastwood)
Lawson, Rt Hon NigelStewart, Andrew (Sherwood)
Lilley, PeterStewart, Ian (N Hertf'dshire)
Lloyd, Ian (Havant)Thompson, Donald (Calder V)
Lord, MichaelThompson, Patrick (N'ich N)
McCurley, Mrs AnnaThorne, Neil (Ilford S)
MacKay, John (Argyll & Bute)Tracey, Richard
Maclean, David JohnViggers, Peter
Major, JohnWakeham, Rt Hon John
Mather, CarolWaldegrave, Hon William
Maude, Hon FrancisWalden, George
Maxwell-Hyslop, RobinWalker, Cecil (Belfast N)
Merchant, PiersWard, John
Miller, Hal (B'grove)Wardle, C. (Bexhill)
Moore, JohnWarren, Kenneth
Murphy, ChristopherWheeler, John
Nicholson, J.Whitney, Raymond
Osborn, Sir JohnWilkinson, John
Pattie, GeoffreyWood, Timothy
Percival, Rt Hon Sir IanYoung, Sir George (Acton)
Powell, Rt Hon J. E. (S Down)
Proctor, K. HarveyTellers for the Ayes:
Rees, Rt Hon Peter (Dover)Mr. Tim Sainsbury and
Roberts, Wyn (Conwy)Mr. Michael Neubert.
NOES
Barron, KevinMcDonald, Dr Oonagh
Beith, A. J.McKay, Allen (Penistone)
Bermingham, GeraldMcWilliam, John
Blair, AnthonyMaxton, John
Bruce, MalcolmParry, Robert
Cocks, Rt Hon M. (Bristol S.)Penhaligon, David
Cook, Frank (Stockton North)Prescott, John
Cowans, HarryRandall, Stuart
Davis, Terry (B'ham, H'ge H'l)Ross, Stephen (Isle of Wight)
Dixon, Donald
Evans, John (St. Helens N)Tellers for the Noes:
Hogg, N. (C'nauld & Kilsyth)Mr. D. N. Campbell-Savours
Kirkwood, Archyand Dr. John Marek.
Litherland, Robert

Question accordingly agreed to.

Amendments made: No. 79, in page 152, leave out line 17 and insert— '(2) The following provisions of that section shall be omitted—

  1. (a) in subsection (1), the words "and section 89 below" and "section 89 below"; and
  2. (b) subsection (5A).'.

No. 80, in page 152, line 25, leave out from beginning to 'and' in line 26.

No. 81, in page 152, line 30, leave out 'In'.

No. 82, in page 152, line 31, leave out from beginning to end of line 4 on page 153 and insert `shall be omitted'.—[Mr. Peter Rees.]

Photo of Mr Peter Rees Mr Peter Rees , Dover 12:15 am, 10th July 1985

I beg to move amendment No. 134, in page 153, line 29, leave out `sub-paragraph (2)' and insert `sub-paragraphs (2) and (3)'.

Mr. Deputy Speaker:

With this it will be convenient to take Government amendments Nos. 135 and 136.

Photo of Mr Peter Rees Mr Peter Rees , Dover

The purpose of the amendments is to allow taxpayers a fresh opportunity to elect to pool quoted securities acquired before 6 April 1965 where they have not already done so. This should simplify the capital gains tax still further. I know that the hon. Member for Thurrock (Dr. McDonald) is interested in the questions of cost. The measure is unlikely to have any significance on tax liability. In most cases, the effect will be to spread the gains from pre-1965 securities over a greater number of disposals.

Amendment agreed to.

Amendments made: No. 135, in page 153, line 43, at end insert— '(3) If a person so elects, quoted securities, as defined in paragraph 8 of Schedule 5 to the Capital Gains Tax Act 1979 (assets held on 6th April 1965) which are covered by the election—

  1. (a) shall be treated as an accretion to an existing 1982 holding or, as the case may be, as constituting a new 1982 holding; and
  2. (b) shall be excluded from paragraph 2 of that Schedule (restriction of gain or loss by reference to actual cost);
and the relevant allowable expenditure (as defined in relation to a disposal to which section 86 of the Finance Act 1982 applies) which is attributable to that 1982 holding shall be adjusted or determined accordingly.(4) Paragraphs 4 to 8 of the said Schedule 5 (except paragraph 4(1) shall apply in relation to an election under sub-paragraph (3) above as they apply in relation to an election under paragraph 4 of that Schedule, but with the substitution for any reference to 19th March 1968 of a reference to 31st March 1985 in the case of holdings or disposals by companies and 5th April 1985 in any other case.'. No. 136, in page 154, line 3, leave out 'where paragraph 6(2) above applies' and insert 'if it comes into being by virtue of paragraph 6 above'.—[Mr. Peter Rees.]

Photo of Mr Peter Rees Mr Peter Rees , Dover

I beg to move amendment No. 83, in page 155, line 3, leave out '6th April 1985' and insert 'the 1985 date'.

Mr. Deputy Speaker:

With this it will be convenient to discuss Government amendments Nos. 84 to 89.

Photo of Mr Peter Rees Mr Peter Rees , Dover

These amendments make a number of technical drafting changes to the Bill. There is no change of substance.

Photo of Dr Oonagh McDonald Dr Oonagh McDonald , Thurrock

These amendments are rather more than technical changes. As we are aware, someone can buy a share option — the right to buy shares at a fixed price at some time in the future. The amendments provide an indexation allowance in addition. That will, of course, benefit financial dealers or rich individual investors. It benefits those who can adopt a highly speculative approach to buying shares. The Chief Secretary said that the cost is negligible. We are not convinced of that. He might like to reconsider that point and tell us what the cost will be and confirm that the provision will benefit the few people whom I have described.

Photo of Mr Peter Rees Mr Peter Rees , Dover

I cannot speculate about the wealth of the taxpayer whom the amendments might benefit. The hon. Member for Thurrock (Dr. McDonald) is correct when she says that they will enable expenditure upon acquiring a share to be indexed from the date upon which it is incurred, but that is the tenor of the provisions. I am afraid that that is as far as I can take the matter. I cannot calculate how much is involved because one has to make too many assumptions. The best evidence that I have is that it will be negligible. Amendment agreed to.

Amendments made: No. 84, in page 155, line 12, leave out `6th April 1985' and insert 'the 1985 date'.

No. 85, in page 156, line 20, leave out 'and shall at that time' and insert 'or, if it is earlier, when any of the qualifying expenditure is incurred and shall at the time it comes into being'. No. 86, in page 158, line 8, at end insert— '(3) Notwithstanding anything in sub-paragraphs (1) and (2) above, the provisions of this Part of this Schedule do not apply to shares in respect of which relief under Part I of Schedule 5 to the Finance Act 1983 (relief for investment in corporate trades) has been given and not withdrawn.'. No. 165, in page 158, line 17, leave out 'securities acquired' and insert `disposals of securities on or'. No. 166, in page 158, line 21, leave out '19(2)' and insert `19(3)'.

No. 87, in page 158, brie 26, after first 'and' insert `subsequently'.

No. 88, in page 158, line 32, leave out from 'then' to second 'the' in line 33 and insert 'subject to sub-paragraphs (1A) and (1B) below'. No. 89, in page 158, line 36, at end insert— `(1A) If, in a case falling within sub-paragraph (1) above, the number of securities acquired exceeds the number disposed of.—

  1. (a) the excess shall be regarded as forming part of an existing new holding or, as the case may be, as constituting a new holding; and
  2. (b) if the securities acquired were acquired at different times (within the ten days referred to in sub-paragraph (1) above) the securities disposed of shall be identified with securities acquired at an earlier time rather than with securities acquired at a later time.
(1B) If, in a case falling within sub-paragraph (1) above, the number of securities disposed of exceeds the number acquired, the excess shall be not identified in accordance with that sub-paragraph.'. No. 167, in page 159, leave out lines 2 to 9 and insert 'forming part of a new holding, within the meaning of Part III of this Schedule, rather than with other securities'. No. 168, in page 159, line 12, leave out from 'with' to end of line 13 and insert 'other securities and, subject to that, shall he identified with securities acquired at a later time rather than with securities acquired at an earlier time'. No. 133, in page 159, line 13 at end insert—