Clause 8

Part of Finance (No. 3) Bill – in a Public Bill Committee at 6:15 pm on 10th May 2011.

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Photo of David Gauke David Gauke The Exchequer Secretary 6:15 pm, 10th May 2011

As we have heard, the clause makes a technical change to the procedure for indexing the capital gains tax annual exempt amount to ensure clarity in the process, particularly in circumstances when the inflation measure that is used to index the AEA is negative. The clause also confirms that the annual exempt amount for 2011-12 is £10,600.

The AEA is one of the tax allowances that are automatically indexed every year unless Parliament sets a different figure. Indexation works by reference to inflation over the 12 months to September in the previous tax year. In normal years, the Treasury makes an order to set out the exempt amount for the next tax year, following the rules for calculating the increased amount that are laid down in the Taxation of Chargeable Gains Act 1992, as the right hon. Member for Delyn knows. That is all that needs to happen for the amount to be indexed.

The 12 months to September 2009, however, were unusual, as inflation was negative. Indexation did not apply in that situation. The exempt amount for the following year, 2010-11, remained the same, and the Treasury made an order to that effect. However, detailed scrutiny of the rules suggested that that may not have been the correct procedure. The changes made by the clause will ensure that there is no doubt in future about what has to happen in such cases. If inflation is positive, the Treasury will continue to make orders, setting out the increased exempt amount for the following year, exactly as it does now. If inflation is zero or negative, the exempt amount for the previous year will be carried forward automatically to the following year. The Treasury will not be required to make an order confirming that there has been no change.

Clause 8 will not change how the increase in the exempt amount is calculated. It only puts right the way in which the indexed amount for the following tax year is fixed. Parliament will still be entitled to overrule indexation and set either a higher or lower figure. Members of the Committee will be aware that in the Budget we announced that indexation will in future be based on the consumer prices index, rather than the retail prices index, as the right hon. Gentleman pointed out. The clause will not make that change. The move to using the CPI will start from 2012-13 and will be included in next year’s Finance Bill. For the 2011-12 tax year, the clause sets the exempt amount at £10,600. That represents an increase from £10,100 in the preceding year, and the new figure is the normal indexation amount based on the RPI.

As for why we have not moved to indexation using the CPI this year, the answer is that we have decided to move to using the CPI for indexing rates and allowances  from April 2012 for all direct taxes, including capital gains tax. It is better for the CGT annual exempt amount to keep in step with the other changes.