 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, James Davies, Committee
Clerks
† attended the
Committee
Public Bill CommitteeThursday 8 May 2008(Morning)[Sir Nicholas Winterton in the Chair]Finance Bill(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)9
am
The
Chairman:
May I welcome hon. Members to the third sitting
of the Finance Bill Committee. It may still be a slightly early hour
for some, but summer has finally arrived, and I welcome the sun and the
blue sky. The Opposition may welcome the arrival of summer in many
different ways, but I am sure that that will not affect the way in
which the Committee conducts its business
today.
Stephen
Pound (Ealing, North) (Lab): On a point of order, Sir
Nicholas. Will it be permissible for Members to remove their
jackets?
The
Chairman:
I can tell the honourable and
distinguished Member that I indicated at our first sitting that if
members of the Committee wished to derobe I would be quite happy for
them to do
so.
The funeral
of our late colleague, Mrs. Gwyneth Dunwoody, is being held
a little later today. My fellow Chairman, Mr. Frank Cook,
therefore intends to take the Chair not as would be normal at 1
pm but at 1.30 pm. I understand that at the end of its second sitting
the Committee clearly expressed the wish and will to meet at that
time.
We now move to
our real business. I call the Minister, who has a smile on her face, to
move Government amendment No. 53.
<++++>
Schedule 2Capital
gains tax
reform
The
Financial Secretary to the Treasury (Jane Kennedy):
I beg
to move amendment No. 53, in schedule 2, page 109, line 3, at end
insert—
‘(6A) For the
purpose of determining whether a company which has a qualifying
shareholding in a joint venture company is a trading
company—
(a) any holding
by it of shares in the joint venture company is to be disregarded,
and
(b) it is to be treated as
carrying on an appropriate proportion of the activities of the joint
venture
company or, where the joint venture company is the holding company of a
trading group, of the activities of that
group;
and in paragraph (b)
above “appropriate proportion” means a proportion
corresponding to the percentage of the ordinary share capital of the
joint venture company held by the
company.’.
Jane
Kennedy:
Thank you, Sir Nicholas, for your introduction. I
am grateful to you and your colleagues for being flexible on our
starting time this afternoon. It will give us the opportunity to pay
our respects to our very good friend.
Schedule 2
delivers the central elements of the capital gains tax reform programme
announced in the 2007 pre-Budget report, with the changes taking effect
from 6 April 2008. They are complemented by the new entrepreneurs
relief, which is delivered by schedule 3, and which we will discuss in
detail later. Taken together, this major reform of the capital gains
tax regime will deliver a system that is more sustainable and
straightforward for taxpayers, while remaining internationally
competitive.
The
schedule makes changes consequential to the new 18
per cent. capital gains tax rate introduced by clause 6; it abolishes
taper relief and indexation allowance; it simplifies the rules for
rebasing of costs to 31 March 1982 by requiring rebasing for all assets
held on that date and by abolishing the associated halving relief; and
it simplifies the rules for matching the acquisition and disposal of
certain assets. Those changes replace layers of complex rules built up
over many decades with a substantially simpler capital gains tax
framework. For completeness, I remind the Committee that the tax-free
annual exempt amount for 2008-09 is set at £9,600 per person and
is not altered by the provisions in this schedule.
The amendments make a
straightforward correction to the part of the
schedule that deals with the definitions of a “trading
company” and a “trading group”. Those definitions
are relevant for a number of capital gains tax purposes, including the
relief for gifts of business assets and the new entrepreneurs relief.
Until now, the definitions were embedded in the legislation governing
taper relief, which is being repealed. Schedule 2 therefore contains
provisions intended to preserve the relevant definitions without
altering their wording or
effect.
Following
publication of the Bill, it came to our attention that the provisions
were incomplete in respect of companies with holdings in joint venture
companies. The amendments in this group complete the provisions
so that they fully reproduce the relevant trading
company and trading group definitions. Making this change will ensure
that the policy operates as it was always intended to. I therefore
commend the amendments to the Committee.
Amendment agreed
to.
Amendments made: No. 54,
in schedule 2, page 109, line 37, at end
insert—
‘(10A) For the
purpose of determining whether a group of companies is a trading group
in a case where any one or more members of the group has a qualifying
shareholding in a joint venture company which is not a member of the
group—
(a) every holding
of shares in the joint venture company by a member of the group having
a qualifying shareholding in it is to be disregarded,
and
(b) each member of the group having such a
qualifying shareholding is to be treated as carrying on an appropriate
proportion of the activities of the joint venture company or, where the
joint venture company is a holding company of a trading group, of the
activities of that group;
and
in paragraph (b) above “appropriate proportion” means a
proportion corresponding to the percentage of the ordinary share
capital of the joint venture company held by the member of the
group.’.
No.
55, in
schedule 2, page 109, line 38, leave
out from first ‘of’ to ‘are’ in line 39 and
insert
‘this section the
activities of the members of a group of
companies’.—[Jane
Kennedy.]
Mr.
Mark Hoban (Fareham) (Con): I beg to move amendment No. 3,
in schedule 2, page 116, leave out lines 11
to 29.
I welcome you
to the Chair, Sir Nicholas. I am not sure that I enjoy scrutinising the
Finance Bill when the sun is shining as brightly it is today; indeed, I
would much rather that it was wet, miserable and grey outside so that I
did not think that I was missing out on very much by being
here.
This is a
straightforward amendment, which I hope will be accepted with the same
ease as the Government amendments that we have just accepted. It would
reinstate the indexation relief that the Chancellor abolished when he
introduced his capital gains tax regime changes last year. Indexation
relief was introduced at a time of inflation, when the uplift in the
value of assets was partly due to increases in prices rather than in
the intrinsic value of the assets. The proceeds from the sale of such
assets were reduced not just by the cost of those assets, but by the
indexation allowance.
The rules have been modified
over time. Until this year’s Finance
Bill—assuming that the schedule is passed unamended—the
rules calculated the indexation allowance on the basis of the increase
in the retail prices index between the date of acquisition and April
1998 or of the market value in April 1982, depending on which was the
later. The indexation allowance was frozen in 1998, when reforms led to
the creation of taper relief, which in some way reflects the
inflationary gains that may have taken place since that date. The
schedule now scraps the indexation allowance completely.
As a consequence, people who
are disposing of assets acquired before 1998 will be taxed on the gains
attributable to inflation. The Government could argue that the level of
uplift in the value of assets acquired recently is relatively slight
given existing inflation rates, but that does not apply to
assets held over a long period. It is worth bearing it in mind
that the compulsory rebasing of assets at March 1982 values captures
inflationary gains up to that point, but that gains accrued due to
inflation between 1982 and 1998 will be taxed.
A number of groups that have
sought to hold assets for the long term will be affected by the
proposed change. One group that will be particularly affected is
farmers. Following the pre-Budget report, concern has been expressed in
the farming industry about the impact of the changes. An article in
Farmers Weekly immediately after the PBR hit the nail on the
head when it said that the Chancellor’s
“decision to scrap indexation
allowance means inflationary rises in the value of
farmland—which have been protected from taxation—will now
be liable for a hefty tax
bill.”
Jeremy Moody,
secretary of the Central Association of Agricultural Valuers,
said:
“There’s
a lot more in it than first appeared. The public’s eye was
caught by Mr Darling’s announcements on inheritance tax. But the
changes to the capital gains tax system are quite a serious exercise in
raising money from
business.”
For
farmers, the abolition of indexation allowance was seen as a more
serious hit than the increase in the effective rate of CGT for business
assets from 10 to 18 per cent. Farmers Weekly was not
the only publication to identify that issue. By considering land
prices, Farmers Guardian gave an example of how the abolition of
indexation allowance would affect farmers. In 1982, an acre of farmland
would have cost £1,500 and could now be sold for
£4,000—I suspect that the price is going up all the time
due to some of the problems with food supply. The indexation allowance
would have increased the base cost of an acre of land bought for
£1,500 in 1982 to £3,070, roughly doubling the cost of
the land. In that case, the gain per acre was £930 and, with tax
at 10 per cent., the tax paid would be
£93.
Under the
new rules, the gain would be calculated on the cost of the land
in 1982—£1,500. The gain, therefore, would be
£2,500 and, with tax at 18 per cent., we are talking about a
figure of £450, so there is quite a significant increase in the
tax to be paid by farmers due to the abolition of the indexation
allowance.
The longer
an asset has been held, the greater the loss from indexation relief.
Let me give an example. An asset acquired for 100 in April 1982 would
attract an indexation allowance of 100.7. If the sale value of that
asset increased in line with the retail prices index from the date of
acquisition to the date of disposal, it would be worth on disposal now
about 260. Based on last year’s rules, the gain on disposal
would be 59.7 and the tax would be 14.3 per cent., assuming maximum
taper relief on a non-business asset. Under the rules set out in the
Bill, the gain would be 60.4, as there was no taper relief and, with
CGT of 18 per cent., the tax charge would be 28.9—double the
charge under the old
rules.
If an asset was
acquired more recently, say in 1996, the indexation allowance would be
only 6.55. Assuming that the value of the asset grew in line with RPI
over its life, the proceeds would be 138.2, giving a gain of 31.65
based on a CGT rate of 24 per cent. The tax paid would be 7.6 per cent.
However, under the new rules, without indexation and at 18 per cent.,
the tax paid would be 7.2, so there would be a small gain in those
circumstances, but that would be for an asset that was acquired
relatively close to the freezing of indexation relief. Depending on how
long the asset is held before 1998, the lower rate, which was announced
in October in the pre-Budget report, does not automatically compensate
for the scrapping of the indexation allowance, so there will be a
significant impact on assets held for a long
period.
It would be
easy to suggest that the problem will diminish over time, and indeed it
will diminish over time, but it is worth bearing it in mind that the
most recent figures for CGT on the HMRC website, which relate to the
2004-05 financial year, suggest that more than half of all assets sold
in that tax year were held
before 1998 and therefore would have been subject to some form of
indexation allowance. So the change will affect a not inconsiderable
pool of assets. The people holding those assets will have to pay
increased tax as a consequence of the decision to scrap the indexation
allowance.
What
is the cost of that relief? Looking at the 2007 Red Book, the
cost of indexation allowance is estimated to be £300 million in
2005-06, and £280 million in 2006-07. Therefore, the
abolition of indexation allowance will yield for the Treasury quite a
significant part of the tax to be raised from the package of CGT
reforms. However, that will come at a cost to people who have held
shares for a long time. Although I have talked about farmers at some
length, it is not just farmers who are affected. I have seen
correspondence from constituents who have held shares for a
considerable period of time who will lose out as a consequence. People
who have held other types of assets over a long period of time will be
similarly affected.
9.15
am
So, the
question that we need to ask the Government is why they decided to
proceed with the scrapping of the indexation allowance given that it is
going to decline over time. Why did they think it appropriate to tax
people on inflationary gains rather than on the real increase in the
value of their assets? When the package of reforms was introduced in
October and when the further changes were announced at the start of
this year to reflect the widespread anger about the
scrapping of various aspects of the CGT reform, did the Treasury
consider providing some form of transitional relief to help people who
had held their assets for a long time? Did the Treasury do any work at
all to determine whether any particular sectors would be affected by
the scrapping of the indexation allowance? It is not clear whether that
work was done. I shall be grateful if the Financial Secretary will
elaborate on that.
In
conclusion, there are a number of issues around the indexation
allowance. It is a valuable relief for people who have held assets for
a long time, which is something that I thought the Government were
trying to encourage. The move, however, penalises people who have done
so, as it will raise significant tax revenue from them. I think that we
deserve an explanation from the Treasury as to why the Government took
this step when they announced the CGT reforms in October last
year.
Mr.
Colin Breed (South-East Cornwall) (LD): The hon. Member
for Fareham has set out the position very fairly. I agree with his
analysis and interpretation. Many people are concerned that huge
changes have been made without any opportunity for transitional
procedures to be put in place, and without any consultation. Many
people have suddenly been placed in a difficult situation with little
time to take the proper advice and get their affairs in order. The
change that we are talking about is very large indeed. Most of the tax
practitioners who have written on this have expressed concerns. They
feel that there needs to be some respect for taxpayers’
legitimate expectations so that they can
quite properly and fairly pay the tax that is due, but also to arrange
their affairs in order to do
so.
The indexation has
surprised many people. Its omission in the Budget was a surprise. I
remember that at a Treasury Committee meeting a year or so ago, we had
to interrogate some of the private equity bosses about the way in which
the taxation system was enabling them to have their income taxed as
capital. Addressing that situation was a big issue. We have ended up
with very little assistance in that respect. Many people still have the
ability to have their income taxed as capital so that they do not pay
what might be considered to be the appropriate amount. The
indexation provides the Government with a significant amount of
additional revenue, but does not attack those particular people in any
way at all.
The hon.
Member for Fareham rightly pointed to the effect on agriculture. I can
tell him that land prices in the far south-west sometimes reach
£6,000 an acre, and they are rising. Some considerable tax bills
will be paid in future. More important for many people is the effect of
the measure on second homes. Under the measure, there will be less tax
on them. We envisage that second home ownership, which has already
created affordable housing problems, will
rise.
Hopefully, in
some respects, simplification is fairer. However, it can be unfair on
some people. Capital gains tax rules will not be fair until they are
properly indexed. I find it difficult to accept that indexation has
been abolished. It was rightly introduced when we had much higher
inflation; that has come down but, nevertheless, those who have held
assets for a long period and who have probably arranged their affairs
in such a way as to accept that they would pay some tax, will look at
the new rules and find that they go back a long way and that they will
result in their paying significantly more, which they will deem
unfair.
As the hon.
Member for Fareham pointed out, there has been no attempt to introduce
a transitional period, or to give people time to adjust. For those
reasons, we support the amendment. The Government ought to think again
on the measure, which will have an impact on
significant matters, including employee shareholders— we
have not discussed that. We wanted to encourage employees to own
shares, but now they might find themselves paying a lot more additional
tax. I hope that the Government will reflect on the measure and that
they will have the opportunity to reconsider. The amendment, which
would remove the indexation measure, is appropriate, and we support
it.
Emily
Thornberry (Islington, South and Finsbury)
(Lab): I find myself somewhat confused by
the Opposition position. I have read some of what the Opposition say in
public and through the media. The Conservative party website states
that
“simpler business
taxes and lower rates are the right responses to demands of the modern
world for a more efficient tax system...and would satisfy Adam
Smith’s first principle”.
In public, the Conservatives have
repeatedly stated that they want a simpler, easier tax system that
everyone can understand. The difficulty with that always is that some
people will lose out. We have a choice: we have either an immensely
complicated tax system or a simpler one. I therefore do not understand
why the Opposition do not support the changes to CGT. Previously, it
was
immensely complicated, with rates between 10 and 40 per
cent., all sorts of exclusions, tapers, indexation and so on. As I
understand it, CGT has been made simpler, so that the rate overall is
18 per cent. and there is now additional relief available for small
businesses.
Mr.
Hoban:
The hon. Lady has pointed out an obvious issue, but
she will recognise that simplification brings its own costs. The move
from three rates of income tax to two is a simplification measure that
has cost 5.3 million households. She must consider whether the cost of
transition is worth the benefit that accrues from
simplicity.
Emily
Thornberry:
It is probably important, to get away from
entirely foggy thinking, to focus on the topic that we are on. As I
understand it—I stand to be corrected if I am wrong—we
are talking about CGT and its simplification. The hon. Gentleman wanted
to talk about the simplification of CGT—the
Conservatives wanted it and have been banging on about it for
years—and now he is complaining. One of the reasons why
indexation was introduced was that inflation was in double figures. He
will of course know that, since the Labour Government have been in
charge of the country, inflation has not been in double figures, so the
need for indexation is entirely reduced.
Mr.
Mark Field (Cities of London and Westminster) (Con): It is
a pleasure to be here, as ever. I can understand the idea behind the
Government’s desire to simplify capital gains tax and I have
some sympathy—albeit limited sympathy—with the view that
was just expressed by the hon. Member for Islington, South and
Finsbury. There has been relatively low inflation, although one also
should remember that, within a 15-year period, the compound impact of
even 2 per cent. or 3 per cent. inflation is still pretty considerable
and leads to distortions in the rates that apply for
valuation.
The
contributions made by my hon. Friend the Member for Fareham and by the
hon. Member for South-East Cornwall rather hit the nail on the head.
One of the biggest concerns was the lack of any consultation and indeed
the lack of any sensible transitional arrangements to allow those
people who have been long-standing owners of land or other assets to be
able to make other arrangements accordingly.
One of the difficulties is that
I suspect that the effect of this measure goes well beyond the
agricultural sector. My hon. Friend the Member for Fareham rightly
pointed out that he had had representations from Farmers Weekly
and from Farmers Guardian; I assume that the latter publication
is the preferred publication for left-wing farmers, but I stand to be
corrected on that matter. I suspect that it probably has a very small
circulation.
On a
more serious level, I suspect that it is not just the agricultural
sector that will be affected. There may well be a considerable number
of other sectors that, unknowingly, will be affected by this change
because there has not been a proper consultation process and there has
not been the opportunity of having a transitional arrangement, so those
sectors will also lose out as a result.
I am very
much in favour of simplification; it is the right thing for the tax
system. Ideally, it is the right thing in the longer term, indeed even
in the medium term, to try to phase out the taper relief, indexing and
the like. However, without repeating arguments that we had in our
previous sitting, the Government need to remember that one of the great
strengths of the British financial system over many decades has been
that sense of certainty—that economic decisions can be made by
investors, both investors on these shores and from abroad, on the basis
of certainty.
What
the Government are proposing is a retrograde step and I hope that they
will pay due attention to the amendment and at least give an
opportunity for a proper consultation process and indeed a transitional
arrangement, to allow for those long-term investors who have
understandably made decisions on the basis of a stable CGT regime to
make their arrangements in whatever way they need to, in order to
ensure that the tax burden does not become
unbearable.
Jane
Kennedy:
The CGT regime that we are
removing charged CGT at headline marginal rates of 10 per cent., 20 per
cent. and 40 per cent, with a tax-free annual exempt amount of
£9,200, as I said earlier. It had taper relief, which
distinguished business assets from non-business assets. It also meant
that, for those paying the highest rate of income tax, the effective
rate on business assets came down from 40 per cent. to 10 per cent.
after two years, the effective top rate on non-business assets for CGT.
For those people in that highest-income bracket and paying the highest
rate of income tax, the effective top rate after 10 years on
non-business assets reduced from 40 per cent. to 24 per cent.
I will return to this point in
a few moments, but we believe that it is reasonable to ask those people
who are benefiting from capital gains of this sort, particularly where
the gain is not being reinvested in the way that was intended by the
taper relief, to contribute more in taxes. The new regime will charge
CGT at a new rate of 18 per cent. The tax-free annual exempt amount
remains at £9,600. We are withdrawing the taper relief and
indexation allowance because, as I have explained, it was effectively
benefiting everybody irrespective of whether it was
reinvested.
There are
other technical changes to simplify the rules. The entrepreneurs
relief, which applies from 6 April onwards, targets business
owners and material investors—in practice, anyone who has a 5
per cent. or greater shareholding—and will deliver a 10 per
cent. tax rate for the first £1 million of lifetime capital
gains. I believe that it remains a relatively generous regime, and
bears comparison
internationally.
9.30
am
Mr.
Peter Bone (Wellingborough) (Con): Is there not a
principle here? The purpose of the indexation was to try to remove the
inflationary element, so the gain was taxed—that is what capital
gains tax is about. The gain that should be taxed is not the
inflationary gain, but the actual gain. That is why it applied to
everyone, and why it was
fair.
It has been suggested that
people who have built up a business over a long time will not be able
to fund their retirement—that is one concern that I have
heard—but people who sell their business will benefit from an
effective 10 per cent. rate on the first £1 million. Farmers are
treated in the same way as everyone else for capital gains tax
purposes. Capital gains tax is paid only if a farmer leaves farming. If
they sell and reinvest, the gain can be rolled over and there is no
immediate tax to pay. Farmers are treated in exactly the same way as
anyone else disposing of an asset. Removal of indexation stands
alongside a number of other
changes.
I turn to the
point raised by the hon. Member for Wellingborough. When indexation was
introduced, capital gains tax was 40 per cent. It is now 18 per cent.,
or just 10 per cent. with the new entrepreneurs relief. We are not
sacrificing fairness for supposed simplicity, as the hon. Member for
Fareham suggested. We are committed to simplifying
the tax system, and the changes to capital gains tax are a massive
simplification.
We
pre-announced the capital gains tax reform in the pre-Budget report so
that people could rearrange their affairs if they wanted to. Whether
someone pays more or less tax depends on their circumstances. The
Government believe that it is right for people with capital gains above
the tax-free annual exempt amount to make a contribution to public
finances via capital gains tax.
The hon.
Member for South-East Cornwall suggested that we did not consult
sufficiently, but we have engaged with a wide range of individuals and
groups to listen to views on capital gains tax reform, and it is widely
known that that included the Confederation of British Industry, the
British Chambers of Commerce, the Institute of Directors, the
Federation of Small Businesses and the Engineering Employers
Federation.
Mr.
Breed:
I am sure that the Minister consulted, and I am
sure that there was broad consensus for simplification and some
changes, and that the principle of capital gains tax should be
considered, but I am also sure that the consultees pointed out that
some groups will be harder hit, that there should be transitional
arrangements, and that people should be given time.
There may have been broad agreement for simplification, but I am
certain that the consultees suggested that time should be provided for
people to adjust their affairs and that specific groups should have
been
considered.
Jane
Kennedy:
I hear what the hon. Gentleman says, but the
announcement in the pre-Budget report, with implementation in April
this year, was intended to allow people time. It could be argued that
that is not much time, particularly as we then introduced further
changes, and the entrepreneurs relief in
January.
Mr.
Hoban:
The Minister says that people were given adequate
notice to reorder their affairs, but part of the problem was that there
was so much uncertainty about what the reforms would be, because the
Chancellor dithered for months about whether there would be any
backtracking on the reforms. People had only a short window in which to
plan and reorder their tax affairs.
Jane
Kennedy:
If the primary purpose of a reform is
simplification, introducing a transitional period
reintroduces complexity to the process. We also took account of
feedback from HMRC’s consultation with tax experts and others
following the announcement in the pre-Budget report. The Treasury does
not generally consult on tax rates, but once the change was announced,
the Government engaged with a wide range of groups, as I
said.
The hon.
Member for Fareham asked whether we considered transitional relief. As
I said, to have introduced a transitional process would have
reintroduced complexity. Disposal before April 2008 attracted
indexation allowance where it was relevant. We considered that it was
right to remove indexation as an integral part of the simplification of
capital gains tax. He also asked what work had been done on different
sectors affected by the scrapping of indexation allowance—the
hon. Gentleman speaking for the Liberal Democrats made the same point.
The Government consider all relevant aspects of such changes when we
work on policy changes. Removing indexation is just one element of the
capital gains tax reform, but we did consider the impact on different
sectors.
Mr.
Hoban:
Can the Minister identify which sector she believes
will be most affected by the abolition of indexation allowance, other
than the farming
sector?
Jane
Kennedy:
As the Exchequer Secretary to the Treasury, my
hon. Friend the Member for Wallasey says, because this is a tax on an
individual’s disposals, it will depend on that
individual’s circumstances. But when we are considering reforms
of this nature, we examine all relevant aspects. Individual tax bills
will depend on individual circumstances. It is worth noting that some
people with second homes will no longer benefit from indexation
allowance. Amendment No. 3 seeks to preserve indexation allowance for
periods of ownership prior to April 1998. When we
introduced these reforms, we recognised that it would be inappropriate
to remove indexation allowance without warning. Consequently, disposals
made before April 2008 continue to attract indexation allowance where
that was applicable. Following that brief period of transition, we
believe it is now right to remove the allowance as part of the broader
reform and simplification of the capital gains tax regime. In
particular, the removal of indexation allowance streamlines the capital
gains tax calculation and facilitates the major simplification of the
share identification rules also delivered by schedule 2. If indexation
allowance were retained, these welcome simplifications would be
lost.
I note that the
amendment makes no provision for the necessary consequential
changes to the share identification rules in that
respect. It makes no provision for recouping the revenue that would be
lost if indexation were retained. Because indexation allowance was
frozen in 1998, only a minority of disposals now qualify. In addition
to maintaining complexity, the amendment would benefit only the
relatively small group of individuals who acquired assets before 1998.
Indexation allowance works by reference to the acquisition cost of the
asset in question, so it is of no benefit where the acquisition cost is
low or zero, for example, for someone who has built up a business from
scratch.
Having heard
my remarks, I hope that the hon. Member for Fareham will withdraw his
amendment. I
suspect that it is likely that he will, but if he
does press it to a vote, I will encourage my colleagues to resist the
amendment.
Mr.
Hoban:
I am grateful to the Minister for her explanation.
It goes half way towards addressing my concerns, but not the full way.
She referred to a process of simplification—a point that the
hon. Member for Islington, South and Finsbury made in her brief
contribution. Part of the challenge of simplifying the complex system
of taxation is to do it in a way that is planned, well thought
through and achieves a particular end. I am afraid that the reforms
that the Chancellor introduced in October were the tax equivalent of a
handbrake turn. There was no sense that they had been the
Government’s direction of travel. I shall return to that point
on stand part. There was a sudden change in direction; there was no
sense that the Government were heading towards the abolition of either
indexation allowance or taper relief. That sudden change has angered
people.
The Minister
says that the Government do not normally consult on tax rates, but this
is a significant restructuring of the taxation of individuals. It is
not just about tax rates, but about changing a whole range of rules.
She referred to taper relief, but the changes also affect pooling
arrangements for shares, the kink test and the halving allowance. There
are to be quite significant changes to the structure, not just the
rate, of taxation.
The way in which the decision
was taken unsettled people. It was unpredictable and created
uncertainty, and it was difficult for people to know where the
Government were going to end up. There seemed to be a slow and steady
march back from the reforms that the Chancellor announced in the
pre-Budget report, and there was great uncertainty
until his announcement in
January.
Mr.
Jeremy Browne (Taunton) (LD): Does the hon.
Gentleman share my view that although the Government might not consult
on rates, it is perfectly proper for them to consult on timing? The
effect of the truncated time scale was that some people who,
perfectly reasonably, were not able to make reasonable and necessary
adjustments to their affairs were hit by a tax that had the
characteristics of a retrospective
tax.
Mr.
Hoban:
I understand the hon.
Gentleman’s point. A number of people were able to make changes
to their arrangements and reorder them, and I am sure that many lawyers
and accountants were grateful for that work in the run-up to 6 April.
There have been many stories in the paper about it. Lord Sainsbury, who
I think was the largest personal donor to the Labour party, reordered
his tax affairs prior to 6 April to take into account the capital gains
tax changes, and he was not alone in doing so. People had to cobble
their responses together, which relied on their having access to proper
advice and sometimes to funds to help them to restructure their
arrangements. It was not a very good way of dealing with tax
policy.
Emily
Thornberry:
When considering the levels of income and
assets of people who will be paying CGT, one ought to keep one’s
feet on the ground. It does not apply to homes, pensions, anything over
£5,000 a year,
individual savings accounts, personal equity plans or tax-exempt special
savings accounts. One feels that the complaint from the Opposition is
that it is not fair that the rich have to pay
taxes.
Mr.
Hoban:
The hon. Lady rattles the sword of class warfare.
She should think about the 250,000 people who are in employee share
schemes. It is estimated that they will lose out as a consequence of
the reforms. The changes will affect not just people on high incomes or
owning the quantity of shares that Lord Sainsbury holds, but people
with modest holdings in the business in which they work. They will find
themselves paying higher tax as a consequence of the reforms. She talks
about keeping our feet on the ground, but she should listen more to
people on the ground who will have to pay higher taxes—not just
the rich but people across the whole income strata. The sword of class
warfare should be put in its scabbard for the time being and she should
move
on.
9.45
am
John
Penrose (Weston-super-Mare) (Con): Does my hon. Friend
agree that the people who are more likely to suffer are not the rich,
who can afford to pay the high short-notice lawyers’ fees
necessary to adjust their affairs, as Lord Sainsbury did? The people
who will be hardest hit are those who are not up on that sort of thing
and who do not employ high-class tax lawyers. They are more likely to
be the hard-working middle-class families that the Labour party always
says it is trying to
help.
Mr.
Hoban:
This could turn into a battle for middle England,
with people fighting on both sides. My hon. Friend makes an important
point.
Mr.
Hoban:
I will give way to the Minister, as she has been
gracious in giving way during this debate, but first I will finish
responding to my hon. Friend’s point. He is right. Some people
will be able to afford the fancy legal advice and the structures that
accountants are good at putting together in order to respond to such
changes. I spoke to one accountant after the pre-Budget report who
planned to dust off some of the schemes that they had used before to
convert income into capital, because a differential has opened up in
tax rates, as the Liberal Democrats have been keen to point out in
previous debates. Some people sitting on relatively modest portfolios
of shares, which they may have inherited or built up over time, will
miss out in consequence. One example that I saw was somebody in their
80s who had shares that they had held for 20 or 30 years. They will
miss out as a consequence. As ever, people with access to good advice
will be able to reorder their affairs, but that is not always available
to
everyone.
Jane
Kennedy:
I think that the hon. Gentleman is wrong about
employee shareholding schemes. I understand that employees making
disposals of their shares will not pay capital gains tax if the gain
that they make when they sell the shares, when combined with any other
gains, is less than the threshold, which is
generous. Equally, if someone holds shares from their employer under an
approved share incentive plan, the cost of the shares that they can
deduct in working out the gain on the sale is the value of the shares
when they were taken out of the SIP. That will not be affected by the
capital gains tax rules. I do not want the hon. Gentleman to suggest
that such schemes will be
disadvantaged.
Mr.
Hoban:
The Minister should be aware that the organisation
ifs ProShare wrote to the Treasury about the issue towards the end of
last year, pointing out that, in the schemes that it examined in
conjunction with some of its members, there were situations where
employees’ gains exceeded the annual exemption of £9,200,
and would therefore be subject to CGT—I will touch on this point
in the stand part debate, so I do not want to spend too much time on
the matter—because they are affected by the abolition of taper
relief. When the Chancellor was asked by the Select Committee on the
Treasury about the impact on employee share schemes, he had no idea
what the impact would be. Ifs ProShare did some work on the matter. I
shall touch on that
later.
I am concerned
about indexation allowance. It was introduced for good reasons. Yes,
inflation is lower now than it has been, but as my hon. Friend the
Member for Cities of London and Westminster pointed out, even at
relatively low inflation rates, the base cost of an asset can increase
significantly on a compound basis, and there can be a significant
element of inflationary gains. Such inflationary gains may have been
made when inflation was a little higher, but they will be taxed through
the abolition of the indexation allowance. The impact of the abolition
will depend on when those assets were bought: the longer assets have
been held, the greater the impact will be.
Will the Minister comment on
that, if she has the information to hand? The issue will decline over
time. As I mentioned in my opening remarks, the last set of statistics
from Her Majesty’s Revenue and Customs website indicated that
about half the value of assets sold would have qualified for some form
of indexation relief. Can she give an estimate of how, if indexation
relief remained in place, it might decline over
time?
Stephen
Hesford (Wirral, West) (Lab): Unless we are in a state of
rampant inflation—it has been mentioned before in relation to
why indexation came in—what is the difference between asset
appreciation and inflation in the normal sense? Is it not double
counting? Is not an inflationary rise in an asset the same thing as an
increase in an asset’s
value?
Mr.
Hoban:
I am not sure that the hon. Gentleman is
right. He needs to distinguish between nominal and real growth in the
value of an asset, in the same way that, in dealing with GDP, we would
strip out nominal growth in GDP when looking at the figures overall. It
is possible to distinguish between the two, and clearly it was a matter
of sufficient concern to lead to the introduction of the indexation
allowance.
There is a
real issue, and the Minister said that now, with the rate lower, we
could scrap indexation relief.
However, of course, the effect of introducing a taper relief in 1998 was
to reduce the effective rate of capital gains tax. A
change in the approach to indexation allowance might have been
appropriate then. Obviously, it was frozen at that point, but on that
logic the Government could have swept it away completely,
rather than freezing it.
I can see
where the Minister is going with simplification, and we agree that
simplification is the right approach to tax reform. The Opposition have
advocated it for some time. However, it needs to be done in a measured
and thoughtful way, with mindfulness as to the consequences and the
losers. Thought should be given to the consequences of what is done and
whether it would be appropriate to mitigate losses. I do not think that
the Government have demonstrated that they have thought through the
process particularly well in the run-up to the reforms. I do not know
whether the Minister wants to make any further comments about
how she approached the
matter.
Mr.
Hoban:
The Minister does. I shall perhaps return to the
subject at a later point. The debate has been fruitful and perhaps hon.
Members on both sides of the House should have an opportunity to
discuss the issues on Report, so I beg to ask leave to withdraw the
amendment.
Amendment, by leave,
withdrawn.
Question
proposed, That this schedule, as amended, be the Second schedule to
the
Bill.
The
Chairman:
I suspect that the hon. Member for Fareham
wishes to speak. If he rises, he will catch my
eye.
Mr.
Hoban:
I was not entirely sure, Sir Nicholas, whether the
Minister would choose to open the debate on the schedule. I was being
polite, as my mother taught me, and allowing a lady to go
first.
I suppose I
start, in discussing the schedule, almost where I left off. If
simplification is to be successful the Treasury needs a clear
understanding of its impact. It must understand who the winners and
losers will be, and the impact of the reforms, and must work that
through. On Tuesday the Minister and I agreed on the importance of
consultation on change, and on how important it is to engage tax
advisers and the business community in consultation. The schedule
provides a very good example of how consultation could have saved the
Government’s
blushes.
Mr.
Browne:
Does the hon. Gentleman share my concern that some
Labour members of the Committee seem somewhat complacent about future
prospects for inflation? I readily acknowledge that inflation has been
consistently low in Britain in the past 10 years, and that is a record
of genuine achievement by the Government, but there are many
inflationary pressures now, including those on food prices and energy
bills. Many of our constituents do not recognise the official
inflation rate as representative of their day-to-day experiences at the
moment. Would many people not regard it as a strange time to be taking
away indexation when all of the pressures on inflation seem to be
upwards?
Mr.
Hoban:
The hon. Gentleman makes a valid
point. I think that people are concerned about inflationary pressures.
I do not think that anyone can afford to be complacent about inflation,
and anyone who talks about its death is being premature. We benefited
hugely from the falling value of imports from places such as China and
we have benefited historically from low food prices. Inflationary
pressures there demonstrate that inflation is not dead. We should be
mindful of that and not be
complacent.
Mr.
Field:
Have not Opposition Members repeatedly
expressed concern about the reliability of public
statistics? Over recent months, given the price of petrol and food in
particular, there have been big concerns among politicians about the
official statistics and inflation figures, in particular, which seem so
out of kilter with what the public at large regard as inflationary. If
we do not at least begin to empathise with public feeling and their
everyday experiences, we will run the real danger of creating even more
cynicism not just about statistics, but about the political process as
a
whole.
Mr.
Hoban:
My hon. Friend makes an important
point that all politicians need to be mindful of. Whether buying petrol
by the litre or barrel, it is important to understand the costs. I find
it difficult sometimes to rationalise the gap between how I see food
and fuel prices rising and inflation rates. It is all very well to say,
“Official inflation rates include a basket of goods, and some
things will be falling in price, such as white goods, DVD players or
televisions”, but of course people do not buy a television every
day, so they will not experience that fall in price. It is right,
therefore, to empathise and understand the plight that families face
when confronted with rising food costs—although I fear that none
of that is related to capital gains
tax.
Dr.
Nick Palmer (Broxtowe) (Lab): Given that we have ventured
down this avenue, is the hon. Gentleman saying that the Conservatives
would introduce a new measure of inflation other than the consumer
price
index?
Mr.
Hoban:
We have said that we believe that
independent statistics are an important part of the triple lock on
stability. However, I also think that part of the challenge that we
face as politicians is to empathise with people as well as rely on the
statistics and facts. For many people, perception is reality. I am very
careful about what I say about statistics, because the Titchfield
office of the Office for National Statistics is in my constituency, and
I know that it does all that it can to ensure the reliability, accuracy
and integrity of its
statistics.
Mr.
Siôn Simon (Birmingham, Erdington) (Lab): May I
invite the hon. Gentleman, on behalf of the official Opposition, to
think again about the Liberal Democrat notion that we must all be shy
of indexation
in case it causes inflation? That is essentially what he
said. That is not a very grown-up or intelligent
economic point, which he knows perfectly well. Surely, we do not have
to go down this silly Liberal
road.
Mr.
Hoban:
I shall spring to the defence of the hon. Member
for Taunton—for a change. I am going to disappoint the hon.
Member for Islington, South and Finsbury, but she and I have discussed
this before. He said that we should never be complacent about
inflation, that it might return and that we should think, therefore,
about an indexation allowance. I do not think that he was saying that
inflation would rise as a result of indexation allowance. I do not
think that he was trying to draw that causal
link—
Mr.
Hoban:
The point is that, historically, during times of
inflation, people were taxed on inflationary gains. Gains that were not
accruing because of an increase in the real value of the asset were
simply increasing because prices were going up. That was the point of
indexation—to compensate for and reflect that some gains were
not due to the real increase in the value of an asset. That is why the
indexation allowance was
introduced.
10
am
That
was why people were keen to ensure that inflation was reflected in the
calculation of gains. We are in danger of going back to the debate on
amendment No. 3, which reflected that, as a consequence of the
tax reforms introduced by the Chancellor, historical inflationary gains
would be taxed, whereas previously they would have been
untaxed.
Mr.
Hoban:
I will, but I am keen to move forward as I am
mindful that we are losing half an hour in the next
sitting.
Dr.
Palmer:
I was trying to find a full stop at the end
of the hon. Gentleman’s sentence. I would like
to clarify the Conservative party’s position. Is it to continue
with current inflation measurement, but with added
empathy?
Mr.
Hoban:
I think that it is to reflect the fact that there
are two measures of inflation. Many people become alienated from
politicians who say, “Ah, but RPI is only X,” when their
daily experience is that it is higher. Not everyone feels that the rate
of inflation measures their personal experience. One reason why the ONS
enables people to produce their own inflation rate on its website is so
that they can see how prices change for the basket of goods that they
buy.
The
Chairman:
Order. The hon. Lady is very
articulate, but if she wishes to speak, I trust that she will be on her
feet, not in a sedentary
position.
Mr.
Hoban:
If I had thought that inflation would be a suitable
topic for debate during the Finance Bill, I would have tabled a probing
amendment on it, but on a wider basis than simply the indexation
allowance.
Let me
return to the stand part debate on schedule 2. I do not believe that
the Government fully thought through the impact of the simplification.
They wanted to capture the political agenda with a bold measure in the
aftermath of the speech made by my hon. Friend the Member for Tatton
(Mr. Osborne) at the Conservative party conference in
Blackpool. They thought that simplifying capital gains tax would be the
answer and that they would get widespread support for that.
Interestingly, they managed to pull together all four leading business
organisations in opposition to their reform—an achievement in
itself. In going for that bold headline, they missed the point that
this is a complex tax and that they should proceed carefully with any
simplification of it.
John
Penrose:
I promise not to ask about inflation. I should
like to illustrate my hon. Friend’s point. Does he agree that if
the Government’s agenda was purely to simplify capital gains tax
by reducing indexation relief, and if they had thought through all the
implications, the logical way to do it would be to reduce the headline
of the CGT, because, if we are to get rid of indexation relief, the two
would equal each other out? They did not do that, which means that
their motivation was not purely
simplification.
Mr.
Hoban:
My hon. Friend raises an important point. Even
after the Chancellor’s climbdown on the entrepreneur’s
fee, the CGT reforms are still going to raise an extra £700
million for the Exchequer. My hon. Friend makes an important point
about how people perceive simplification
packages.
Mr.
Hoban:
I am sorry, Sir Nicholas. I was trying to avoid
seeing the rest of the Committee so that I could make some progress
without having to respond to more
interventions.
If
people see a simplification package simply as a tax-raising measure,
they doubt the motive behind it, even if that doubt is
unfair.
I want to deal
with three issues in this debate: the abolition of taper relief, the
impact of the repeal of sections 77 to 79 of the Taxation of Chargeable
Gains Act 1992, and the abolition of halving relief.
Taper relief was introduced to
encourage assets to be held for the long term. By providing an enhanced
rate for business assets, it also provided a further incentive
for entrepreneurs to invest in start-ups and for people to hold AIM
shares; indeed, it perhaps also encouraged employee share
ownership.
Last week,
in the stand part debate on clause 6 in the Committee of the whole
House, my hon. Friend the Member for Braintree
referred to the former Chancellor’s remarks about the
introduction of taper relief. Interestingly, the 1998 Red Book
says:
“The
Government believes the capital taxation system should better reward
long term investment particularly in economically productive business
assets. The Government also wants capital taxation to be simpler and
fairer to
understand.”
Given
the thought that would have gone into introducing the system in 1998,
it was presumably simple, but the Government should clearly make it
even simpler. Here we are, however, 10 years later, scrapping the
incentive for long-term investment in economically productive business
assets.
It is
difficult to fathom quite why the Chancellor decided to abolish taper
relief, which is one of the elements of his reforms that has come in
for the most criticism. In the early part of last year, there was
considerable debate about the taxation of gains and the speed at which
the lowest rate could be obtained. The focus of that debate happened to
be the private equity industry, and there was concern that, in two
years, private equity bosses could pay taxation at as little as 10 per
cent. on gains on their carried interest. There was great debate about
that, and there was some suggestion that a special deal had been made
for private equity, but taper relief was available for a wide range of
individuals and business assets. Indeed, I think that the boss of Gala
Bingo who pointed out that every employee of the firm was able to claim
taper relief on the shares that they held.
If that debate about private
equity and the speed at which the 10 per cent. rate
was achieved were the trigger for the present reforms, why did the
Treasury not look at extending the period of the taper and taking it
back to the level that it was at in 1998? That would have achieved the
goal of restoring the emphasis on holding assets for the longer term
and of retaining the framework that people understood. The 1998 reforms
also incentivised people to invest in economically productive assets
and to hold them for longer. There was a tax incentive for people to
invest in high-risk assets, such as shares on AIM or new start-ups,
rather than to invest in listed companies or second homes.
By abolishing the
differentiation between business and non-business assets, the
Chancellor’s reforms will send a signal
through the tax system that the Government are neutral about whether
people invest in high or low-risk assets. That has led to a position
where a second home is taxed at the same rate as the profits on the
sale of a successful business, if the person concerned has exhausted
the entrepreneur’s relief.
Mr.
Field:
My hon. Friend is making a good and thoughtful
point. Perhaps the raw politics was that the Government had a somewhat
long-term agenda in 1998, but that that had become much more short term
by last autumn. Does my hon. Friend agree, however, that one of the
biggest problems with the taper is that it has not applied for long
enough periods? Decreasing those periods, as happened in the early part
of this decade, to just two years for the 10 per cent.
relief—not
only in private equity, but beyond—goes against the admirable
goal of encouraging long-term share investment. I fear that it is a
reflection of the economy in which we live that even shareholdings held
for four years are regarded as long term, when shareholdings held for
far longer periods should have been rewarded. Is that not very much
what my hon. Friend has in mind for the sort of
longer term reforms that we in Conservative party would like to
introduce to encourage long-term and stable
investment?
Mr.
Hoban:
My hon. Friend makes an important point. I do not
consider two years as being long term. It does not give people an
incentive to hold on, perhaps for the growth of a business. It simply
says that after two years people will get the lowest rate of tax. In
retrospect, the Government might think that
shortening the taper to two years was a mistake. However, rather than
stick with the present structure of capital gains tax, which people
understand, they decided to go for a much more radical simplification,
and there will be a degree of pain to bear as a
consequence.
Stephen
Hesford:
Is the hon. Gentleman making a
spending commitment? He suggests not only
reintroducing the taper, but lengthening it so that there will be a
loss of revenue to HMRC. Is this a Tory spending
commitment?
Mr.
Hoban:
I have not yet spotted a spending
commitment. I am trying to tease out from the Government their
rationale for abandoning a feature of tax policy within months of the
new Chancellor taking office. Why did he throw out reforms that were a
centrepiece of his predecessor’s agenda to encourage investment
and stimulate entrepreneurialism? I am trying to expose their thinking
and bring it into the open, rather than saying how we would do this
ourselves. I am not writing our 2010 Budget
today.
Mr.
Hoban:
No. If I were to follow the hon.
Gentleman’s advice, I would have to sit like a Trappist monk
throughout our proceedings and say nothing. That is not the purpose of
the Opposition, although Labour Members could say nothing and let
business progress—something that they have failed to do this
morning.
I wish to
expose the Government’s thought processes to a wider audience.
We are undertaking a valuable service. It would help if the Minister
were to explain why the Government sought to move away from the central
plank of the previous Chancellor’s approach to stimulating
investment and chose instead to abandon the distinction between
business and non-business assets. That abandonment sends a particular
signal to people.
I turn to
employee share schemes, which are important, although we skated over
them in a previous debate. They allow an opportunity for the interests
of employees to be aligned with the company and other shareholders.
They give people a much more long-term interest in the success of their
employers. Those schemes in place enable people who hold shares to
qualify for the business asset taper. Even if they invest in listed
companies, they
have access to taper relief in a way that others do not. Under the
scheme, the basic rate taxpayer who held shares for more than two years
would have paid tax at 5 per cent. on the gains. They will
now be landed with a bill of more than three times that amount, with
the tax now at 18 per cent.
The estimate of ifs ProShare,
which was shared with the Treasury, was that about 250,000 people would
lose as a consequence of the reforms. Those are people whose gains
exceed the £9,200 annual exemption. Those investors are
employees of firms with household names who have built up their
shareholdings in a series of save-as-your-earn schemes and
savings for retirement. A large number of people will lose, and not
only the rich. People on modest incomes who were putting money aside
from their salary every month to buy shares in their employer, which I
think is a good thing, will also lost
out.
10.15
am
As I said, ifs
ProShare looked at the issue. I am concerned about how well thought
through the reforms were and whether the Government thought about those
groups affected. In Treasury Committee evidence, the Chancellor
said:
“I am not
sure how many employees who have shares will be in the happy position
of having an annual gain of
£9,200”.
That is
another example of the way in which the reforms have been done on the
hoof.
Another example
that I forgot to mention earlier relates to the
sectoral impact of the reforms. The Minister and her colleague the
Economic Secretary would have received representations from the
insurance sector about the impact of the reforms on the comparable tax
treatment of mutual funds and insurance bonds. The sense that I got
from talking to some people in the insurance sector was that the
Government had not really thought the impact through before they
introduced the reforms of the CGT in October last year.
I know that the Government have
kept CGT under review. They consulted in 2001 on reforms to capital
gains tax. They also consulted on simplification. It is interesting
that in the response to the consultation, people put forward such
outlandish notions as the abolition of taper relief and indexation
allowance. The Treasury dismissed those suggestions in 2001
because it was happy with the existing structure. Suddenly,
between 2001 and 2007, without anyone knowing about it, the Treasury
decided that those outlandish reforms were quite good ideas really. The
Treasury’s process of thinking was not shared with the industry;
hence the reason why I used the expression “handbrake
turn” in relation to the proposal. People knew the direction in
which the car was travelling until the driver slammed on the handbrake
and did a complete U-turn, and when people do handbrake turns, the
passengers become rather unsettled and critical of the driver.
Therefore, it is not surprising that the Government took a hit over the
issue. It is also not surprising that people think that the UK tax
environment has a poor reputation for certainty and predictability. It
would be helpful if the Minister explained a bit more about why the
Government suddenly decided to throw over taper relief, which was seen
as such a structural part of the way in which the
Government encouraged entrepreneur activity in the UK.
I shall move on to two slightly
technical issues. The first is the repeal of sections 77 to 79 of the
Taxation of Chargeable Gains Tax 1992. The explanatory note to the
repeal is very rocky. It states that the reforms mean that there is no
need for those sections to remain on the statute book because the rate
of capital gains tax is the same for the settlor and trustees of a
trust in which the settlor is deemed to have an interest. We have
received representations on that issue in relation to two sets of
circumstances. The first is where the settlor has an interest in the
trust and the second is where the trust has been created for a
vulnerable person—a term defined in
law.
Sections 77 to 79
mean that where a settlor has an interest in a trust, if there are
chargeable gains, they accrue to the settler. Under section 78, the
settlor is entitled to recover the amount of the tax from the trustees.
The existing rules also enable the personal losses of either the
settlor or the vulnerable person to be used to reduce the chargeable
gains on the trust. The concern expressed by the Law Society and others
is that the repeal of sections 77, 78 and 79 precludes the losses of
either the settlor or the vulnerable person to be used to reduce the
chargeable gains. I understand that that emerges as a consequence of
the cross-reference in section 77 to section 2(2) of the same Act,
which enables allowable losses to be offset against chargeable
gains.
It appears
that repealing sections 77 to 79 will mean the loss of the ability of
the settlor or vulnerable person to use their personal losses to reduce
the tax liability that arises on the trust. I do not think that that
the Government intended to make that change. Will the Minister clarify
whether that is the case and whether, as in the case of Government
amendments Nos. 53, 54 and 55, it is an omission that ought to be
rectified?
My
second technical point is on the abolition of halving relief. It harks
back to the discussion that we had about indexation allowance, which I
shall not reprise. The relief was introduced to relieve accrued
pre-1982 inflationary gains that were trapped in assets as a result of
the application of a deferral relief, by which the gain was held over
or rolled over to a later period. In cases in which part of the gain
accrued before the introduction of the indexation allowance, but the
taxation of that gain was held over, the notional gain triggered at the
date of transfer was halved when the tax was paid. That was a way of
giving relief on pre-1982 inflationary
gains.
The abolition
of halving relief will mean a tax increase, as all the heldover gain
will be subject to tax. Presumably the Government thought through the
implication of the abolition of the halving relief, and it is certainly
consistent with how they dealt with the indexation allowance, but it
will have an effect on people who had rolled over their gains and
expected a lower tax
bill.
The schedule is
intended to abolish the old capital gains tax regime, and it includes a
combination of
technical and political matters, but one problem of the simplification
is that it will lead to winners and losers. Some people will lose
significantly as a consequence. It demonstrates that
simplification is not a straightforward exercise, as I think Members in
all parts of the Committee would agree. It is slightly curious that,
although the Government talk about simplification, this is a
simplification for individuals and trusts, but many of the rules remain
in place for business. I am not advocating the idea that the Government
should go down the same route for business, but it is curious that
simplification is being applied to one group, and will raise
£700 million, but not to
another.
The
Chairman:
Before I call the next
speaker, I remind the Committee that I shall be obliged to adjourn
until 1.30 pm in about two minutes’ time. I call Colin
Breed.
I think that
there is a measure of agreement across the House about the need for
simplification and the fact that it is appropriate to tax capital
gains. However, we also accept that fairness plays an essential part in
taxation in general and in the proposals. That fairness should be
ensured by recognising that certain groups and technicalities, which
have just been pointed out, need to be considered—for instance,
employee share schemes, longer-held assets and, in many parts of the
country, second
homes.
Those matters
could and should have been addressed in a much fuller consultation, and
some groups could have been treated more fairly. Some things perhaps
even ought to have been exempted, such as employee
share schemes, and transitional arrangements for
others could have been implemented without any great increase in
complication. For those reasons, the Government should be given the
opportunity to reconsider the whole issue of indexation in the
capital gains tax regime. On that basis, the schedule should not stand
part.
The hon. Member
for Fareham spoke about winners and losers, and there
has been a great deal of discussion about employee share schemes and
save-as-you-earn schemes. The Minister has given some explanation of
how they will be treated, but I hope that she will address the issue of
share options, which has not been addressed so far. Like actual shares,
they are given as a reward for loyalty or as a bonus, for example. In
the case of a plc takeover, those share options crystallise into real
shares to allow
the—
It
being twenty-five minutes past Ten o’clock,
The
Chairman
adjourned the Committee without Question put,
pursuant to the Standing
Order.
Adjourned
till this day at One
o’clock.
|
| |
| ©Parliamentary copyright 2008 | Prepared 9 May 2008 |
