Finance Bill

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Ruth Kelly: The chart speaks for itself and hon. Members can refer to it at their leisure.

The right hon. Member for Fylde asked about publishing an economic analysis of the impact of the provision. The Inland Revenue is committed to evaluating the impact of the taper relief reforms, but time has been too short to obtain concrete information to analyse. The Revenue continues to draw on the experience of a standing consultative review group of outside interests. It is consulted whenever practical on reforms to taper relief and other suggested changes.

On some of the more specific points raised, the hon. Member for Arundel and South Downs suggested that we should consider reducing capital gains relief to zero. The effective tax rate on gains for higher rate taxpayers is now 10 per cent. after two years. I would argue strongly that that not only provides a real incentive to invest in business and encourage share ownership by employees, but it is not clear that making the taper more generous would promote additional cost-effective activity and improved investment performance. I also believe that individuals who make and realise substantial gains should be liable to some tax on those gains.

The hon. Gentleman suggested that non-business assets can be contrived to have a gain of zero, but the indexation allowance applies only to April 1998, which is a matter of contention in the Committee. After that, it does not apply to business assets or non-business assets, so his point is neither practical nor significant.

Mr. Flight: I was simply saying that the issue is arbitrary. The arithmetic was correct. I was not proposing a zero rate in principle, but asking whether the Government had thought about giving people the option in the rare circumstances in which a long-standing business asset might be banished by the business taper relief.

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Ruth Kelly: The appropriate answer is that it would be very complex to have a system of election into indexation or taper relief as circumstances dictate. We are trying to incentivise behaviour, so we are looking to the future rather than the past.

That brings me to the argument that apportionment is wrong in principle. The hon. Member for Epsom and Ewell (Chris Grayling) referred to apportionment that follows from the need to have two tapers to distinguish productive investment from passive wealth. Time apportionment produces an accurate result when the value of an asset increases uniformly over time, and for many assets that will be a reasonable approximation. Apportionment is a simpler and cheaper system than a valuation-based approach. It is perfectly fair that an asset that has not been a business asset throughout the relevant period of ownership should be treated less generously than one that has. The whole point of a more generous business asset taper is to provide for a lower charge on the gain that accrued while the asset was indeed a business asset. Therefore, it would be unfair to make other poorer taxpayers pay an extra £200 million in tax to end apportionment for no obvious economic or social benefit.

12.45 pm

The hon. Member for Arundel and South Downs suggested that employee shareholdings should remain business assets after retirement. We give employees business asset taper relief on their shareholdings because they align their interests with those of the company and have an incentive to work more productively. We cannot benefit from increased productivity if they have left work. It is neither unfair nor contrary to the aim of business asset taper relief to give it only for the time that the relevant conditions of a business asset taper are satisfied.

It would be unfair to other taxpayers who hold shares that are non-business assets to give relief to ex-employees for periods when the relevant conditions of a business asset taper were not satisfied, simply because those people had satisfied them at some point. Employees who retire would benefit from business asset taper relief on any disposal within 10 years of retirement. It is right that a relief should dwindle the longer they hold the shares as non-employee investments.

The hon. Member for Epsom and Ewell asked whether residential property qualified as a business asset. As I understand it, residential property does not normally qualify and is defined as a non-business asset for taper relief. However, there are exceptions to that general rule. Property that is let to a qualifying company and used for trade can qualify as a business asset. I hope that we are interpreting the issue reasonably.

Mr. Burnett: Would furnished holiday lettings also qualify?

Ruth Kelly: I shall have to write to the hon. Gentleman on that issue to clear it up for him.

I think that I have clearly set out our rationale on the tax. We want to encourage appropriate and

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valuable economic activity. We do not want to distort the market for start-up finance. The regime is simple and appropriate, and will encourage investment in shares and productive activity.

Mr. Jack: I am grateful to the Economic Secretary for those words. I am delighted to hear that the Inland Revenue will produce some analysis to explain how tapered tax operates and, I hope, what its economic effect is. I eagerly anticipate that.

I also thank the Economic Secretary for agreeing that economic activity was turned off and start-ups were damaged as a result of the original proposals. She said that the purpose of the clause was to address a market failure. The failure would not have been there in the first place had the Government not introduced the original tapered tax regime. If they now say that there is time to change it and put forward an economic rationale, there must have been something wrong with the original proposals. I am grateful to her for confirming that on the record.

Question put and agreed to.

Clause 45 ordered to stand part of the Bill.

Clause 46 ordered to stand part of the Bill.

Schedule 10

Chargeable gains:

taper relief: minor amendments

Mr. Flight: I beg to move amendment No. 30, in page 179, line 30, at end insert—

'Conditions for shares to qualify as business assets

1A (1) Paragraph 4 (conditions for shares to qualify as business assets) is amended as follows.

(2) In sub-paragraph (2) for ''if at that time'' substitute ''if at the time it was acquired''.

(3) In sub-paragraph (3) for ''if at that time'' substitute ''if at the time it was acquired''.

(4) In sub-paragraph (4) for ''if at that time'' substitute ''if at the time it was acquired''.'.

This is the amendment to which I referred during the stand part debate on clause 45. It is designed to deal with what we still consider to be a potential unfairness in the treatment of people who work for a business, people who have been made redundant and people who have retired. As the Minister pointed out, if the holder of the shares leaves the qualifying appointment, the shares become non-business assets. On a later sale, the proceeds are divided into business and non-business gains and taxed at different rates. It is quite a complicated calculation. A person who sells while employed could easily pay a lower level of capital gains tax than a person who held the shares for a longer period and sold them in retirement.

The Economic Secretary's justification did not entirely stand up. I refer to an earlier debate, in which the Government seemed to have no qualms about imposing a tax rate that is now 52 per cent. on the main options, which are designed to encourage people to work hard and to make a success of business. The Government speak with a forked tongue about

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motivating employees in smaller and medium businesses.

The amendment seeks to clarify the position by freezing the status of the shares by reference to whether the person was an employee or a trustee acting on behalf of an employee at the time the shares were acquired. It would not apply to someone who had inherited the shares, who is clearly in a different position. Nor would it apply to non-share assets, because qualification relates to use in a business. The Chartered Institute of Taxation has suggested that paragraph 4 is deemed to have had effect from 6 April 1998, which would deal with the problems.

Mr. Hoban: May I add to my hon. Friend's comments? In many respects, there is a world of difference between the circumstances of someone who has shares as a consequence of his or her employment and retires, choosing not to sell the shares but to enjoy their income, and someone who is no longer an employee of the firm but is required to hold on to the shares, or is forced to make a sale as a consequence of their employment being terminated. In private companies, there may be agreement that an employee must sell their shares if they resign from the firm. Clearly, if they take a while to reach agreement with the employer, some part of the gain may be taxed on the basis that the shares are non-business assets. There is an issue if a sale is forced on an employee.

There are other situations, perhaps as a consequence of a flotation, in which certain shareholders are locked in for a period. For employees at the time of flotation, the lock-in agreement is not lifted on their departure from the company. They may be forced to hold on to the shares for one or two years after they cease to be an employee. On the basis of current legislation, the shares are treated as business assets for the period as an employee, but are treated as a non-business asset and, as a consequence, incur a high capital gains tax charge for the period after they left employment, even though they cannot realise the shares until the lock-in agreement has expired.

The amendment addresses a series of anomalies in which people must account for a non-business asset gain. It is important that the Government recognise cases in which employees, through no fault of their own, must pay a high capital gains tax charge as a consequence of the distinction between non-business and business assets.

 

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Prepared 21 May 2002