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Clause 64

Volume 78: debated on Wednesday 8 May 1985

The text on this page has been created from Hansard archive content, it may contain typographical errors.

MODIFICATION OF INDEXATION ALLOWANCE

4.6 pm

I beg to move amendment No. 12, in page 59, line 26, leave out 'indexation allowance' and insert 'chargeable gain'.

My hon. Friend the Member for Croydon, South (Sir W. Clark) is unable to be here today, and in the absence of any more alluring invitations I have agreed to become his PPS for this debate. As we see eye to eye on these matters, I thought that I should say what he would have said had he been here.

Last year my right hon. Friend the Chancellor of the Exchequer promised to reform capital taxation, especially capital gains tax, in the 1985 Finance Bill. The indexation provisions that we are debating today appear to represent the full extent of that reform, and, of course, the reliefs given are most welcome.

One widely recognised anomaly—which I believe Treasury Ministers also recognise—is that the system of capital gains tax as it now applies has ceased to be a capital gains tax in the general sense and has become a 17-year inflation tax covering the years 1965 to 1982. That results from the indexation provision introduced by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) when he was Chancellor.

Confusion surrounds the tax, and that makes it an inefficient and ineffective tax. It is also an unjust tax, especially for the long-term investors who acquired their assets during the 17-year period or who held assets when the tax was introduced. It was introduced as a short-term tax, but, in effect, we have removed that element of the tax and made it bite hardest against those who have held assets for a significant period. That will become worse as the years go by and as the number of those investors diminishes.

There will also be considerable administrative difficulties. The new rules, especially those allowing indexation losses—which I welcome—are complex. Schedule 16 adds an additional eight pages to the statute book, which I regret because that means more work for accountants and lawyers. I do not complain so much about that as about the additional work for business men, especially those involved in small and family businesses.

Those who remember the administrative difficulties surrounding valuation when the tax was introduced in 1965, hardly relish the problems and the administrative and accountancy costs of now determining the March 1982 values, especially for land and unquoted family companies.

A simple solution to those difficulties is contained in the amendment. Far from seeking to extend the indexation provisions, which would be cumbersome and complex, the amendment seeks the simple solution of treating property as having been acquired in 1982.

This change would incur a cost, I do not deny, but in terms of its rationality, there is much to be said for it. For example, the complicated 1965 transitional provisions would cease to be important and it would no longer be necessary to delve into history to calculate, for example, allowable expenditure. Valuations, in particular, would relate to a period much more within the practical experience of practitioners and valuers.

Furthermore, fewer valuations would be required. At present, it is possible that before computing the chargeable gain, the land or other asset concerned must be valued both for a 1965 and a 1982 value. The amendment seeks a simplification in that the 1965 or other valuation would no longer have to take place.

The amendment would be particularly helpful to those family businesses that have been carried on through long-established companies where the double charge to capital gains tax on liquidation inhibits the sensible reorganisation of the business. Those are valuable reforms that we might make in this complicated tax as it now stands, a tax which will bring in a diminishing revenue year on year as real gains only are taxed and not the inflationary gains that we have had since the tax was introduced.

If my right hon. and learned Friend the Chief Secretary is not minded to accept the amendment, he might care to consider another way in which this part of the Bill could be simplified. It comes in the form of a simple suggestion that has been put forward by the Institute of Directors. The institute proposes that after an asset has been held for seven years, it should drop out of the charge to tax and should not be available for a loss to be acquired for the purposes of computing one's capital gains tax liability. That alternative also merits consideration.

Consider, for example, an asset which has maintained its real value throughut the period up to 1982. We find an extraordinary situation. By April 1982, the asset would have accumulated an inflationary taxable gain—which will still be taxable after the Bill has become an Act unless an amendment is accepted—of 85 per cent. of its real value if it were originally acquired in April 1965; of 75 per cent. if acquired in April 1975; and of 42 per cent. if acquired in April 1978. That is not acceptable.

Is the hon. Gentleman aware that at a time when Ministers repeatedly ask the British public to take in the waste and cut out excess, to accept cuts in social services and education spending and to accept increases in bus fares, it sticks in the throat to have him move an amendment which would effectively reduce the amount raised by way of capital gains tax, a tax that is paid by few people in society and invariably by those with great wealth? Is he aware that he is not serving the national interest by moving this amendment, particularly when in Manchester, which is close to his constituency, hundreds of thousands of people are living in poverty and deprived circumstances? Why does he favour the few at the cost of the many?

I do not accept the premise on which the hon. Gentleman makes that intervention. The simplification which this tax change would bring about would mean that many people who are now engaged in activities which can hardly be regarded as productive would turn their energies elsewhere, which in turn would produce more real jobs in the economy and thus contribute towards the creation of that enterprise culture which we have done so much to achieve in the past six years. Priorities in expenditure are, of course, for the Government to determine, and I have not denied that a cost would be incurred in making this change. I am pleading for a more rational tax system, which I hope Opposition Members will support.

4.15 pm

There is an injustice involved in this tax, which is a clog on free markets because there is—to the extent that it taxes inflationary and not real gains—a considerable disincentive to disposing of assets to reinvest the money, at least in certain types of company. To that extent it prevents individuals from making investments which are likely to be most productive.

There are many reasons to support the amendment and other forms of reform that are proposed in the area about which I am speaking. I will not go further into the detail of the argument. I seek only to invite the Government to take two steps. The first is to admit that there is no justification for not giving relief in some appropriate form, not necessarily by means of indexation, for pre-1982 inflation, except in terms of the cost to the Exchequer, which will diminish year by year. Secondly, I want my right hon. and learned Friend to promise action in future, so long as Exchequer costs can be justified, to remedy the injustice.

I support the amendment, which was tabled in the first instance by my hon. Friend the Member for Croydon, South (Sir W. Clark). I must at the outset declare a distinct personal interest, having just agreed to sell an asset in my ownership; and if the Committee agreed to the amendment, I should not be liable to a substantial payment by way of capital gains tax to which I shall otherwise be liable.

Having spoken for myself, I know that I am speaking for thousands of my constituents and hundreds of thousands of other citizens who are obliged to pay what I consider to be an unfair form of capital gains tax.

I do not disagree with the idea of a capital gains tax being levied in cases where people make a regular income—and I am not saying that it is wrong that they should do so—by achieving small capital gains in the course of their work, such as those who work in the commodity markets. It is right that where they are using capital gains as a form of income, something equivalent to income tax should be levied.

It seems absolutely wrong, however, for us to retain this survival from the great inflation of the 1970s. It is the wrong way to raise a capital gains tax. It is, in fact, a capital levy rather than a respectable tax and it should not be continued in the Bill.

The Government are obviously ashamed of this form of taxation because they have started nibbling away at it again. Their right course, however, would have been to have got rid of the tax altogether in so far as it refers simply to inflationary gains. There are many reasons for that. For example, it is a random levy. It is not raised on everyone who owns capital but on those who manage their assets competently and who decide to change their portfolios so as to invest in the future rather than to hold on to the investments of the past. It does not touch people who are content to hold on to yesterday's investments.

It is wrong also on the Treasury's part in that it is continuing to use this tax as something which, as the Minister said on Second Reading, is regarded as a source of revenue. If the Government were to use the proceeds from this capital levy as capital, that might be more respectable, although it would still be wrong. As he admitted, the Treasury simply raises this money as a capital levy and then applies it as revenue. This is yet another insight into the muddled thinking of the Treasury which does not distinguish properly between the capital account and the revenue account. This tax also distorts the capital market.

The hon. Gentleman has made a point about regarding a capital gain as revenue. How does the hon. Gentleman think the Treasury regards the sale of British Gas? Does it regard the sale as revenue or not?

The hon. Lady has put her finger on an extremely serious point. The Government need capital and revenue. They should differentiate between the sources of the money that they take from society, and have a properly stated capital account and revenue account. Until we have that, we shall never be able to penetrate into what the Government are doing with regard to the economy.

This tax distorts the capital market because it prevents the adjustment of share prices which would benefit rising companies seeking new funds. It helps to sustain the price of shares in companies which are suspected by investors but because of the tax they do not sell, because they are not prepared to suffer the loss involved in changing their holding. This is a drag on the stock market's efficiency.

The tax also has the effect of diminishing the private sector of the stock market. In past years it has been decided that unit and investment trusts and the like are not required to pay this tax when they change their portfolios, but private sector investors must continue to do so. The diminishing private sector faces a particular penalty because of the way in which the Government continue to raise this capital gains tax.

The stock market in London is being weakened because there is a diminishing number of people to make up their minds on a particular issue. The herd of institutional investors tend to move in the same way at the same time. The London market is becoming dangerously unstable. It is wrong that we should diminish the number of people who are willing from time to time, because of their personal knowledge, judgment and ability, to draw on other sources of advice, to take a contrary view to that of the market.

The Government are acting against their own best principles in continuing this tax. It is the opposite of the ideal of private thrift and self-provision. Lately we have heard my right hon. Friend the Prime Minister—I think that all Conservative Members agree—say that she wants to initiate an era in which everyone can be a capitalist. Yet the Treasury is continuing with this unfair form of capital gains tax. It is particularly inapposite at a time when we want to place more emphasis on the need for people to provide for their own retirement through personal pension schemes. People who obtain a pension through one of the established institutions will be able to rely on a body that is exempt from taxation, including capital gains tax. People who try to provide for their old age through their own earnings will remain in the category of those who are hit by this tax.

The Government have done a great deal with regard to indexation and have taken away much of the stigma of this tax for people making their first investment choices; but it is still wrong to impose a retrospective tax on inflation. If we want capitalism to succeed, we must take off the brakes. I understand the sincerity of the hon. Member for Workington (Mr. Campbell-Savours)—he is not in the Chamber now—who is concerned about the burden of taxation and the way in which the Government plan their expenditure within a limited budget; but it is wrong to raise money from the capital market by confiscation. If the Government want to raise money from the capital market, they should pay for it on market terms, and not by relying on obsolete legislation, which imposes a partial and unfair capital levy. It is the role of the House to watch what the Executive is doing when levying taxation on our people. Unfortunately, all too often, hon. Members fall down on that role because the major Opposition party regards itself as the party of high taxation and welcomes increases in taxes. It is not prepared to stand up for the people who are unfairly taxed.

I have heard hon. Members, from the same party as the hon. Gentleman, who revel in the idea of increasing taxation, making the rich squeak, and so on. I do not say that there should not be taxation, but it must be proved to be necessary and shown to be fair. This tax is neither, and that is why the Committee should accept the suggestion made by my hon. Friend the Member for Tatton (Mr. Hamilton).

Although we are sorry that my hon. Friend the Member for Croydon, South (Sir W. Clark) has not been here to move his interesting amendment, I am sure that we are all glad that my hon. Friend the Member for Tatton (Mr. Hamilton) resisted more alluring invitations. How could there be a more alluring invitation than one to participate in a debate in Standing Committee on capital taxation, especially in relation to the Finance Bill? I congratulate my hon. Friend the Member for Tatton on his discrimination and the sensitivity with which he moved the amendment. I am sure that hon. Members welcome also the contribution of my hon. Friend the Member for Kensington (Sir B. Rhys Williams) who has thought long and deeply about this and other matters relating to the operation of our capital markets.

The amendment is not restricted to the elimination of the inflationary element of gains accrued before 1982. In fact, it moves the whole base line forward, taking the matter a good deal further. There may be a case, although it was not developed in full, for moving the base line forward—my hon. Friends the Members for Tatton and for Kensington touched on the matter of simplicity—but that is a slightly broader case than that based on inflation between 1965 and 1982.

A short-term gains tax was introduced in case VII of schedule D which was set up in the Finance Act 1962. It was limited to the disposal of most assets within a year, but disposal of real property within three years. Such was the appetite of the Labour party, for a period from 1965 the short-term gains tax was run in double harness with the longer-term capital gains tax with which we are still saddled. We abolished that short-term gains tax. We are left purely with what might be called a long-term gains tax.

I take the point made by my hon. Friend the Member for Tatton about the ravages of inflation. No doubt we shall have a chance to consider the general principles underlying this aspect when we consider the motion that the clause stand part of the Bill. I have no doubt that that occasion will be admirably utilised by the hon. Member for Thurrock (Dr. McDonald).

We can consider how equitable it is to have something which is described as a capital gains tax but which, to a degree, impinges on inflationary and not real gains. I point out one practical reason for suggesting to the Committee that it should resist the blandishments of my hon. Friend the Member for Tatton. The cost will be £550 million. My hon. Friend would say that that demonstrates the extent of the damage. The amendment, however, goes wider than inflationary gains—it brings the base line forward. The cost would be considerable.

The amendment would be slightly capricious in its effects. For example, between 1965 and 1982 agricultural land increased in value, on average, by about 750 per cent. while voting shares increased by 250 per cent. In both cases, there were dramatic increases. Moving the base line forward for all assets, regardless of their quality, would have a capricious impact.

My hon. Friend the Member for Tatton rested his case on the ground of rationality, which I think, on closer investigation, meant simplification. I would be the first to commend any amendment that was designed to simplify this extraordinarily arcane and complex field of law. I suspect that many of the complex provisions with which capital gains tax is presently encrusted would survive. I doubt whether real simplification would be achieved. The logic of my hon. Friend's case is that the tax should be abolished. That raises an interesting area of debate, but it is not one that my hon. Friend has chosen to employ on this occasion.

When an original base line was introduced at the time the first capital gains tax was levied in 1965, the taxpayer was given the option of adopting a time apportionment method to arrive at his capital gain or of taking the 1965 base line. I notice that, perhaps in the interests of simplicity, my hon. Friend the Member for Croydon, South chose not to introduce that concept in the amendment. Not all taxpayers will feel that the suggested solution was as equitable as my hon. Friend the Member for Kensington has suggested. My hon. Friend widened the debate. He reflected on the impact of such capital taxation on the operation of capital markets. I take his point. May I be bold enough to advance the general proposition that few forms of direct taxation do not distort the operation of the markets to a degree? Regrettably, few civilised states have been able to dispense with direct taxation.

We could have an interesting debate on the relative merits of direct and indirect taxation and how they impinge upon the markets, but I suspect that I should be travelling a little wide and that even your indulgence, Sir Paul, might be strained to the limit. I merely leave my hon. Friend and the Committee with that thought.

4.30 pm

The hon. Member for Thurrock mentioned the composition of Government accounts and asked whether the yield of capital taxation should be allocated solely to capital expenditure. I should be the last to claim perfection for the public expenditure White Paper although, in a constitutional and perhaps in a personal sense, I have to accept responsibility for it. I was happy to do so in our debates before Easter.

The Committee will, however, recall that one of the innovations and improvements introduced was table 112 which sets out capital expenditure. If my hon. Friends study that table, they will see that the Government's capital expenditure is running at £22 billion per annum—considerably more than the yield of capital taxes and privatisation. I hope that the Government meet the point acceptably made by my hon. Friend the Member for Kensington. I am not claiming perfection for Government accounts and if we can set out that point with greater clarity, we shall endeavour to do so.

We have had an interesting debate. My hon. Friend the Member for Tatton has conceded that the amendment goes a little wider than he wished. The general principles have been well deployed. I hope that my hon. Friends will feel that they have had a sufficient airing. I hope that my hon. Friend the Member for Tatton will recognise that for many reasons, in particular the practical ground of cost, I cannot commend the amendment to the House. I hope that I shall not tax the patience of the House too much if I ask it to accept that capital gains tax is now on an acceptable and sustainable basis.

I accept what my right hon. and learned Friend says about the case made for the amendment. I said at the end of my remarks that I was looking for an indication from him that it was only cost that was preventing the Government from accepting a measure of indexation for the period 1965–82, that the Government would keep the matter under review and that when we could afford to introduce such a reform, the Government intended to do so.

I should like to be able to succumb to my hon. Friend's blandishments, which are so moderate and charming. It is natural that cost oppresses the Chief Secretary. One must be interested in the brutal facts of public finance. However, I ventured to deploy one or two other points which oppressed me. I should hate to say that my mind or those of my right hon. and hon. Friends were ever closed to the possibility of improving our tax system, for many parts of which I could not claim perfection.

The considerable reforms will be tested in the clause stand part debate. There may be criticisms from the Opposition. There may be unanimity on that aspect of our fiscal affairs, but somehow I doubt it.

I hope that my hon. Friends will support me in feeling that if clause 64 and the schedule attached to it commend themselves to the Committee, the tax will, at any rate for all present purposes, be regarded as acceptable and sustainable. I hope on that basis that my hon. Friend the Member for Tatton will not feel disposed to press the amendment to a Division.

I was going to say that my arguments had been overcome by the suavity, knowledge and skill of my right hon. and learned Friend which make him such an asset to the Treasury team; but I find it necessary to contradict one point—his suggestion that capital gains tax is now on an acceptable and sustainable basis. I cannot agree with that. I hope that this is a matter that the Treasury will bear in mind when planning the taxation changes to which we look forward during the Government's term of office, if not during the course of the Bill.

My right hon. and learned Friend said that the amendment goes wider than the inflationary issue. It therefore goes wider than the intention for which I was arguing, and I shall not seek to divide the Committee on the issue, although that had been my intention when I first rose.

I ask my right hon. and learned Friend to realise that many people in this country sincerely believe that this form of taxation is wrong. The Government should not indulge in practices which are unfair and damaging to the capital market and which are contrary to the Prime Minister's principles.

Amendment negatived.

Question proposed, That the clause stand part of the Bill.

The Opposition felt that the debate on amendment No. 12 was a matter for the Conservative Benches, but I must commend the hon. Member for Kensington (Sir B. Rhys Williams) for the refreshing honesty with which he put his arguments. He referred to the fact that he had a strong and immediate personal interest in the outcome of the matter. That is refreshing and, as we have heard this afternoon, it was a better performance than that of some other hon. Members.

The theme of the hon. Member's argument on the amendment is relevant to clause 64. Clause 64 and the amendment aim to inflation-proof capital gains. We should pause on that issue for a moment because the underlying principles will require justification by the Chief Secretary.

Clause 64 represents the Government's determination to protect a section of the community against the ravages of inflation. We can perhaps understand that, but we cannot understand the fact that the Government set a stony face against the request of others in the community—teachers, nurses, civil servants and others—to have their income inflation-proofed. Last night, the Chief Secretary was asked to justify the unequal treatment given to one section of the community compared with another, and he manifestly failed to do so. An important issue is at stake here which affects many poor people, and he should explain why the Government are prepared at some cost to inflation-proof the gains made by a tiny proportion of society and to do nothing for teachers, nurses, civil servants and many other public servants. Not only does the clause require a general justification of that kind, but it needs rather a special justification these days. After all, it could better be argued in the past that the main source of capital gains was inflation but now, and perhaps only recently, returns on investment might be regarded as real returns rather than inflationary gains. Therefore, one could say that the Government, in introducing a clause such as this which has as part of its purpose to protect capital against inflation, are doing it at just the wrong time. They are doing it when people are making real returns rather than merely inflationary gains.

The Government cannot have it both ways, of course. They cannot say on the one hand that they have conquered inflation and on the other that they need to protect capital gains from the ravages of inflation. They have to go for one line or the other. They cannot have both at the same time.

The Government might well argue that they are out to promote wider share ownership and therefore they must protect such shareholders from an overbearing tax burden. They want direct investment in equities by individual shareholders in their own right and as a substitute for investment through financial institutions. The Government might argue that reductions in capital gains would stimulate growth in the number of small shareholders which, of course, the Government have stated as their purpose. However, since no tax is payable on gains in any one year of up to £5,900 after the Budget, and exemptions are available for unit and investment trusts, the prospects of any small shareholder being liable for capital gains tax directly or indirectly are very remote. Therefore, small shareholders will not gain particularly from the clause because they are unlikely to be liable for capital gains tax anyway.

The hon. Member for Kensington, in an honest and open speech, made the important point that the Government are nibbling away at capital gains tax. I think that some members of the Government would very much like to abolish capital gains tax at one fell stroke, but instead the Government, perhaps because that would be too obviously a favour to the better off in society, have decided gradually to reduce the impact with the various changes that they have made, including clause 64. Indeed, there are—although the Chief Secretary, I am not surprised to notice, did not outline them—good arguments for having capital gains taxation, and it is worth while mentioning one or two of them. It is important to keep the general principles in mind before we get lost in the details of a complicated clause such as this.

Many would say that there is nothing wrong with stock market speculation and that it provides a valuable financial function in a free market. They might go on to say that, although it has that kind of function, there is no need to give speculators what amounts to a substantial tax incentive to play their chosen role. One might continue the argument by saying that if investors are allowed to make capital gains tax some kind of optional tax and to accumulate a tax credit by establishing short-term losses—which, indeed, is the sort of thing that can be done under the indexation rules in clause 64—then the whole of capital gains tax would become a farce, yielding no revenue. If that were the end product, it might be cheaper and more sensible to have no tax.

4.45 pm

A capital gains tax does not discourage investment. The right way to encourage investment is not to be soft on capital gains but instead to have a sensible and effective regime of capital gains tax. Such arguments will be put forward for having a capital gains tax. Indeed, they were put forward by the Chancellor in The Sunday Telegraph in 1962. I wish that he had stuck to the principles that he there set out clearly and rather well instead of abandoning them and taking up some of the options which he so clearly decried in that article, especially the one about establishing short-term losses, thus making the whole tax a farce. It is a pity that he did not stick to his earlier principles because then we would have a fairer tax regime than we shall have after the passage of the Bill.

The changes in capital gains tax are designed to benefit the better off. Some of them already find a capital gains tax useful—and I am aware, of course, that the Government have eliminated one of those with the bond-washing measures that have been introduced—because it is convenient to take returns in the form of capital gains taxed at 30 per cent. with a threshold of £5,900 a year and indexation rather than taking returns as income taxed in full at up to 60 per cent. Therefore, the structure of capital gains tax already gives a clear incentive to seek capital gain rather than income, and to choose equity investments rather than deposits or gilts. But incentive already existed before the changes in the Budget and, apart from the bond-washing proposals, the Budget has done little to alter that.

The kind of people who benefit from the changes proposed in the clause are not the small shareholders or the people on average or below average incomes; they are portfolio investors, wealthy individuals with a share portfolio. The changes will also benefit corporations with liquid resources which would themselves take out portfolios as investments. The indexation will reduce chargeable gains generally and will reduce the tax base for such companies. Those who will benefit from the changes in the clause are therefore a fairly small minority of the population and certainly to be numbered among the better off. To them the Government propose to give more money, and to do so at great expense.

Although I do not agree with the amendment, I think that the hon. Member for Kensington rightly made the point that the measures are complicated, and they will certainly be complicated to administer. Not only will they lead to a growth in the activities of accountants and others, but they will also increase the activities of the Inland Revenue staff. Extra staff will probably be required to be taken on by the Inland Revenue as a result of the clause. I suggest the following figures, and it will be interesting to know whether the Chief Secretary agrees with them. The increases in staff will probably begin not before April 1987. They will lead to an increase of 190 in that year, 360 in the following year and 455 in the year following that. Thereafter, the figures of extra staff required will probably begin to decline somewhat.

It is difficult to estimate the costs of the extra staff, but undoubtedly they would have to be staff at a fairly high level—tax officers or inspectors. It would not be cheap. At the current salaries, they would probably cost the Revenue about £10,000 in salary plus the additional expenses of employment. The tax change is expensive to administer. The Opposition would not necessarily object to the employment of more staff, and we would certainly not object to the employment of higher grade staff, but we object to the fact that the Government are introducing a measure which will cause more staff to be employed by the Inland Revenue to give money to those who do not need it—the better off.

The changes follow the watering down of capital gains tax, which took place under the previous Chancellor of the Exchequer. In 1980, there was a big increase in the gains exemption, from £1,000 to £3,000. The benefit was extended by no longer withdrawing the exemption from those whose gains were obtained at above that level. The allowance was bumped up again in 1982 to £5,000, and increased each year thereafter in line with the retail price index. In 1982, the previous Chancellor began indexing the CGT base, but the changes that he proposed and that were passed pleased nobody. They were complicated and difficult to administer. All the changes have, at least in the long term, reduced the amount of revenue which can be expected from CGT to a quarter or less of what it would otherwise have been. Therefore, this nibbling away at CGT has reduced the amount of revenue that the Government can expect from it.

The Chancellor in his 1985 Budget continued that process with the indexation provision and with the introduction of the pooling of assets provisions. There is no need for me to go into detail because those provisions are spelt out in the clause and schedule.

The Chief Secretary said that the Chancellor had now reached an acceptable form of CGT, and that it would be unlikely that any further changes in the form of capital gains tax would take place. He may be right. Few further changes are needed if the Financial Times was correct in saying:
"Very few private investors will ever again have to pay capital gains tax, as a result of the changes announced on Tuesday."
The Investors Chronicle, which was more anxious in welcoming the changes, said of them:
"Most significantly they mean that CGT for all investments made after March 1982 is now a tax on real net gains, an important step forward."
I can understand the qualified welcome that the Investors Chronicle gave to the changes. Its comments show the extent of the Government's changes.

The pooling provisions mean that, as more shares are bought, the latest pool increases in size and value, and eventually investors will have only one pool—the post-1982 pool. Given that the overall upward trend in share prices—that has been true for the past two years—is averaged out, the CGT payable on the disposal of shares is less than it would have been if the pooling arrangements had not been introduced. In other words, both the indexation of changes and the reintroduction of pooling contained in clause 64 mean that the amount of revenue that the Government can obtain in future from CGT will be far less than it might otherwise have been. For that reason, it is easy to see why the Chancellor says that the tax is now on a broadly acceptable and sustainable basis, and why the Government have delighted all but their greediest critics.

Amendment No. 12 was designed not to iron out anomalies, as its proponents said, but to allow the March 1982 costs to be used in place of the historical cost so that the entire gain accruing before March 1982 would become tax free. It is easy to see the benefits that would follow from such a change, and why the Chief Secretary suggested that the cost of that would be immense. Obviously, the benefits from such a change would have particularly favoured property companies, for example. The Government have certainly pleased many of the better off, but it is plain that they can never give enough to keep some of them happy.

One or two features of the changes that the Government have made in clause 64 may mean that they will be more generous than they had intended. Perhaps the Chief Secretary would comment on that. Compound indexation is now possible under the rules.

Let us suppose that one has a holding in securities in a company called Blacks, and one bed and breakfasts one's shares each year. Every time one sells, one receives the benefit of that year's indexation because one buys back at a higher price—inflation plus any growth in the value of Blacks' shares. The following year's indexation allowance is based on a percentage of the new acquisition costs, not the real costs to the owner of the shares. No real extra costs are incurred in the buying and selling that takes place. At present, nothing in the clause or schedule prevents a benefit from compound indexation of that type.

I ask the Chief Secretary to consider a further case. Let us suppose that a portfolio now worth £50,000 was bought in 1984 when the Financial Times all-share index, which I am using, was 102 points below its present level. The indexation allowance based on the March retail price index figures gives a real gain in one year of 70 points. The portfolio is now worth £50,000 and was valued in May 1984 at £41,892. That is a difference of just over £8,000. The indexation allowance amounts to £2,549 and the exemption level is £5,559. The capital gains tax indexation allowance in clause 64 and the annual allowance will allow a £50,000 portfolio to be bed and breakfasted every year without CGT liability.

5 pm

I am not sure whether the Government intended the changes to produce such an effect. If they did, the changes will benefit the better off alone in the community. Not many of my constituents have portfolios of £50,000 that could be treated in such a way. If they intend the change to have that effect, they are being wrongly over-generous in these apparently straitened times by allowing the better off to pay no tax. If they did not intend such generosity, they should introduce amendments to tidy up the provisions of clause 64 and schedule 16, because at present they contain nothing to prevent that from happening.

The Chief Secretary will be aware that as soon as the Government introduce such a measure, and the other anti-tax avoidance measures contained in the schedule, the tax-planning industry goes to work to find other loopholes. I draw his attention to "Gremlin Corner"—it is aptly named—in the 4 May 1985 edition of Taxation, which states on page 87:
"Another tax planning point is that it will be possible to create … an artificial allowable loss by purchasing a high-coupon gilt and selling it within the year (but after 27 February 1986). Even if the purchase and sale prices are the same, indexation allowance will create a capital gains tax loss. This stratagem is likely to appeal to institutional investors and individuals paying income tax at 40 per cent. or less."
They are not the most well off in society, but they are among the better off. What action will the Government take to prevent that tax avoidance? We wish to hear the Chief Secretary's views on that point.

By introducing the changes in capital gains tax, the Government are helping exactly the same people as they helped last year when they abolished investment income surcharge. That benefited people with investments of £75,000 or more—again, not many of my constituents have £70,000 tucked away in investments. We were told that the full-year cost of that would be £360 million. Immediately after that Budget, The Times described the abolition of investment incomes surcharge as
"A tremendous bonus for the rich, and especially the idle rich."
The cost of that change, together with the £155 million that it will cost to introduce the changes in clause 64, would be just enough to cover the payment of long-term supplementary benefit this year to those who have been unemployed for more than a year. That would cost the Government £500 million, but I bet that if we asked the Chief Secretary now whether the Government would be willing to benefit the long-term unemployed in that way, he would say, "We do not have the money to do that. We cannot possibly make such a change, because we do not have £500 million in the kitty." Yet the abolition of the investment income surcharge and the changes in capital gains tax could easily cover the payment of much-needed benefits to people who are not among the idle rich, but who have been forced by the Government to be idle. For that reason, we oppose the presence of the clause in the Bill.

Unlike the hon. Member for Thurrock (Dr. McDonald), I welcome the presence of clause 64 as a necessary relieving provision. I shall address my remarks to subsection (5).

I especially welcome subsection (5) because, without it, the clause would have provided for the creation of a new Doomsday Book at March 1982. It would have been necessary, on any future capital gain, to agree with the Inland Revenue a value at March 1982. I welcome the inclusion of the provision that the taxpayer must make a claim before the new provisions can operate. Such a provision will ensure that many taxpayers will not have to bear the expense of establishing a value at 1982 to claim what may, especially as a result of the Government's partial success in reducing inflation, be fairly limited relief.

The fact that the new provisions will operate only following a claim by a taxpayer will ensure that the compliance costs inherent in the clause will be limited. At the same time, the benefit of the relieving provision will go where it is most needed.

May I ask my right hon. and learned Friend to clarify the status of a claim under subsection (5)? Is it irrevocable, or can it he withdrawn at any time? I have a special reason for asking that question, because I must contrast the relieving provision in clause 64 with what was admitted to be a relieving provision in the 1965 legislation that introduced capital gains tax. The then Labour Government saw clearly that the operation of capital gains tax would be grossly unfair—it was grossly unfair anyway, given the inflation that they later created—to those who had old assets that fluctuated markedly in value. Therefore, they introduced a provision for valuation at April 1965, but it was introduced only on the basis of an irrevocable election by the taxpayer.

The result was that a taxpayer who owned an asset such as jewellery, a painting or land, which was a chargeable asset that he had sold and which fluctuated in value over the years, was given, not a relieving provision but a ticket in a lottery. The result of the lottery was that he entered, and could end up paying substantially more tax as a result of entry, or he did not enter and wondered what would have happened had he entered.

If the claim under subsection (5) is irrevocable, in some circumstances exactly the same effect could occur. The taxpayer could elect for the indexation provisions to apply and could then discover that, as a result of the opinion of the district valuer, which could be upheld by the courts, the value of his asset at March 1982 was considerably lower than it originally cost.

I take it that the intention of clause 64 is not to penalise the taxpayer, but to compensate him for inflation. Therefore, it would seem rather unfair if, as a result of the provision, the taxpayer ended up paying more tax, particularly when such additional tax liability would be based solely on the opinion of one or more valuers.

The evil that I have outlined could have been dealt with already in the clause. If my right hon. and learned Friend the Chief Secretary can assure me that a claim made under subsection (5) can be withdrawn at any time prior to determination of the capital gains tax assessment for the year, even my slightest doubts about the clause will be immediately withdrawn. If, on the other hand, it is intended that a claim under the clause should be irrevocable, I should like to draw my right hon. and learned Friend's attention to the possibility of bolstering the relieving provision by introducing what is known in the Department of the Environment as a cost floor. As a result, the valuation arrived at after a claim under subsection (5) could be no less than the actual cost of the asset. In that way, my right hon. and learned Friend would ensure that the clause achieved what I understood it originally set out to do, which was to provide a measure of tax relief where it was needed rather than an arbitrary tax charge in certain cases.

I am not quite following the point made by the hon. Member for Bristol, North-West (Mr. Stern). It seemed like a piece of special pleading. I smelt a Rees about half way through his speech.

If the hon. Gentleman was saying that the backdating to March 1982 does not apply unless there is a claim so capital gains is charged on the whole increase in value since the date that the asset was purchased after 1965—in other words, the consequences of the two great inflations, that of Labour and that of the Conservatives—it seems a little mysterious. Perhaps the Chief Secretary will explain when he winds up. Does it mean that the taxpayer has to claim that the gain measured is only since March 1982 for it to be the operative gain? if not, is he then assessed on the whole gain accruing since the date of purchase?

If the hon. Gentleman reads the clause, particularly subsection (4), he will find that the indexation allowance dealt with under the clause is indexation of a valuation at March 1982. Subsection (5) brings in valuation at March 1982 whereas the existing law provides for indexation on original cost.

Surely that means a Domesday assessment of what valuations were at 1982. I was making the point simply to show the difficulties under which some of us in the Opposition, particularly myself, labour when dealing with such a measure. For me, it is extremely complex and difficult to follow. That is why the Government have been able to get away with so much. Such a change in the legislation brings about quiet, back-pocket giveaways. It is difficult for the non-accountant and non-specialist tax person to understand it. Conservative Members are away making the money while the Government slip money into people's back pocket, with the capital gains that will be sanctioned under the measure. Mum's the word. I suppose that the message is, "Mother sent the money." In the meantime the rest of the country is not clear about what is going on. It is another of those back-door giveaways carried through under the guise of complex legislation, with no warning to the country as to exactly what is going on. That is why I have worn trousers of this bright colour today, to express my opinion of the legislation and the basic principle behind it—it stinks.

5.15 pm

Clause 64 takes more of the teeth out of capital gains tax. In a sense, it might be a measure of the Government's political menopause, a confession that the fight against inflation is not over, but certainly lost. If the Government are to index gains, they are admitting that inflation is about to accelerate, as most of the figures seem to show. No more can they give us the stern imperative, "Don't worry about the taxation of inflationary gains because we are bringing down inflation, thanks to the brilliant success that we have had." It has been a success in ruining the economy. That struggle has now failed. Our inflation rate is still higher than that of our industrial competitors, certainly higher than the rate in countries with which we are competing most directly. Our unit costs are going up more rapidly, and the Government are seeking to cushion the effects of that failure for their supporters by the change in capital gains tax. The Prime Minister is obsessed with fighting inflation and with the value of sound money. She wants it sound because she has more of it than most other people.

The indexation provisions cost about £10 million and the giveaway costs £155 million. Those are substantial sums, given to a section of the population that has no claim to that money and does not deserve it. It could be used for other more important and, from the point of view of economic development, more useful purposes.

On whose behalf is the measure being carried through? An interesting example is given by The Economist on 23 March 1985. Joe Bloggs bought a second home in 1975—presumably in Wales, so that he could keep warm in the winter. It cost £30,000. He sold the house in 1985 for £100,000, realising a gain of £70,000. Supposing that retail prices have trebled since 1975, and have risen by 15 per cent. from March 1982 alone, before the Budget the man would have subtracted for inflation only £4,500, which is 15 per cent. of £30,000, bringing his taxable gain to £65,500. Supposing his house was worth £80,000 in 1982, he would subtract £12,000, reducing his taxable gain to £58,000. If he had no other capital gains to eat up his allowance, now increased to £5,900, he would pay £15,630 in capital gains tax, which is £2,250 less than under the old system, and substantially less than it would have been under our system. Inflationary gains should be taxed.

That is an example of a person with a substantial profit on the sale of his second home. One might also make a substantial profit on the sale of shares. Such people benefit by the measure. It is an interesting reflection of the attitudes and perceptions of the Government. They are deaf to the pleas of the sections of society who have been hardest hit by the unemployment and depression that the Government have generated. They are deaf to the pleas of the disabled and the charities. They are deaf to the pleas of the unemployed and the pensioners. However, they are ever alive and alert to the pleas of the small section of people who benefit massively from such measures.

The Chancellor talks about capital gains tax now being "on a sustainable basis". He means "on a declining basis". A chart in the capital gains tax revenue forecast by the Institute of Fiscal Studies shows, on the basis of the measure, even more than on the basis of the 1982 measure, a substantial and steady falling away in the revenue from capital gains tax. Even on 1984–85 prices, there will be a substantial and steady falling away in capital gains tax revenue after this year. By the 1990s, it will be down from the present levels to about £600 million. By the turn of the century it will be down to £400 million at 1985 prices.

The Government are literally taking the teeth out of the capital gains tax by this clause, which is why we should oppose it. It is a particularly tawdry part of a tawdry Budget. Perhaps the Chief Secretary can tell us the scale of wealth of those who will benefit from this measure, and what effect it will have on incentives. The Government are constantly telling us about incentives, but this is a gift to those who have, and has nothing to do with incentives for business or for those who put money at risk for the growth of the economy. It is a giveaway to people with substantial sums of money, second homes and shareholdings. Will the Chief Secretary give us examples of the people who will benefit from this measure and explain what benefit that will bring to the economy and to incentives generally?

This Budget is only a pathetic half-measure, but the fact that it is cautious and restrained does not mean to say that the giving has stopped. It goes on, but at a lower level and to a narrower class and a narrower section of society—the giving slows down. What does it have to do with improving the real wealth and the dynamic strength of the British economy and bringing jobs to our people? It is shovelling money into the pockets of the well-off.

I understand the wish of the hon. Member for Thurrock (Dr. McDonald) to introduce teachers' and nurses' pay into the debate on capital gains tax, but the relevance and the logic, if there were any, of the argument were lost. It is a misconception that pay increases at or above the level of inflation provide any long-term protection against the effects of inflation. Experience suggests that such a process has the effect of stoking up inflation to the detriment of all, but particularly to the detriment of those on fixed incomes.

Seeking to ensure that capital gains tax is levied only on real gains and not on inflationary gains, which erode the underlying value of chargeable assets, has no such inflationary effect. Therefore, I welcome the measures in clause 64 to extend relief against taxation on inflationary gains. The Labour party would like to see a tax that should be described not as capital gains tax but rather as inflationary gains tax. With its appalling record in government of high inflation and its desire to impose ever higher capital taxation, one can see the attractions of the two. If a Labour Government could stoke up inflation and then heavily tax capital on those inflationary gains, they would have a strong source of revenue but not a moral one.

Like my hon. Friends the Members for Tatton (Mr. Hamilton) and for Kensington (Sir B. Rhys Williams) I am sorry that it was not possible this year to go further in providing fuller indexation relief against inflationary gains for capital gains tax purposes. However, I recognise the need to make choices in the Budget judgment about how the limited resources available for tax relief should be deployed. I have made it clear on previous occasions that I believe that the choice of concentration on national insurance contributions and over-indexation of income tax thresholds were the right priorities this year.

However, I hope that my right hon. and learned Friend the Chief Secretary will not close his mind to the possibility of extending the indexation allowance in later years. It could be done on a creeping basis by moving back to 1981 then 1980 and so on. If he cannot be persuaded on that, it could be done on a time exemption from capital gains tax, which would provide a more simple basis for the tax, and one that would not be too inequitable.

The title of this clause sounds modest—"modification of indexation allowances". That sounds an innocent proposal, but having listened carefully to the admirable and lucid exposition of what it implies from my hon. Friend the Member for Thurrock (Dr. McDonald), I begin to understand that this is not the simple measure implied by its title.

The principle of inflation-proofing or indexation is not anathema to Labour Members. We are in favour of it when there is obvious cause and justification, for instance in indexation of benefits. There is not a philosophical divide but a pragmatic divide, which is on whether this form of indexation will be either effective or desirable, and whom it will affect and profit. This is not similar to the indexation of benefits.

There is a good case for indexing at times of high inflation, but we are constantly being told by the Government that this is not a time of high inflation and that they have cured inflation, and it seems a strange moment for the Chief Secretary and the Chancellor to introduce such a proposal. There have been higher stages of inflation under the Government, but they choose now to introduce something that would protect investors, perhaps with some justification, from the ravages of high inflation. However, this is being done at a time when, although inflation is rising again, it is rising from a fairly modest base at a fairly slow rate. It remains to be seen whether that will continue.

I am glad that the hon. Gentleman has conceded in principle the idea of indexation. He has said that now inflation is low, the proposals are not necessary, and somebody who had bought an asset after inflation fell will benefit little from the indexation proposal. However, a good many people purchased their assets in the 1970s and have had a considerable amount of inflationary gain that would be taxed as a capital gain. Protection is still needed for them.

It is strange to do this now, when the Government could have made a more effective and urgent case for it at other times. I take the point that we are including in this measure assets that reflect back to a period of a lower base.

The Committee should be concerned with the financial effect of clause 64. My hon. Friend the Member for Thurrock quoted from the Investors Chronicle, and made it clear that some individuals—we should remember that these are well-off individuals, whose gains will be well over £5,000 in any year—may be paying less tax. Will the Chief Secretary confirm that this is the case? Is it true that the typical investor who makes gains of £6,000 a year on his investment income will be paying less tax? The Committee would benefit from clarification of those points, or confirmation.

Will the Chief Secretary confirm that the yield for the Treasury will fall, and will he specify what the fall in revenue yield resulting from this provision will be? Will it be more or less expensive to administer this? Hon. Members on both sides of the House recognise that capital gains tax is an expensive tax to collect. I suspect that the fairly long and technical provisions of the Bill will make it a great deal more expensive. Will the Chief Secretary include in the net gain, to the Revenue—or loss as I fear it will be—the figures for increased administration costs, if there are going to be some?

The hon. Member for Tatton (Mr. Hamilton) and others have said that this measure could have some effect on the incentive to invest and to take risks on the stock market. We have constantly urged the Government to take more steps to encourage greater investment in the future of this country in both tangible and intangible forms, so the desire for greater investment is common to both sides. What we want, however, is more investment in good projects. We want good and intelligent investment. By indexing losses and allowing marginal gains to be turned into losses, this measure will effectively reward unfortunate and ill-judged investment. Is that really the intention? Will the Chief Secretary explain why those provisions are included in the clause? Both sides wish to encourage good investment, but we do not wish to encourage poor or faulty investment.

5.30 pm

I hope that the Chief Secretary will also address himself to the fact that only very wealthy, large-scale investors will benefit from the measure. The Government are always telling us how much they wish to encourage small investors through the sale of British Telecom and the proposed sale of British Gas. If the Chief Secretary is honest, however, he will confirm that this clause is utterly irrelevant to any widening of the base of individual investment in companies in this country and will benefit only the well off who already invest in shares. I hope, therefore, that the right hon. and learned Gentleman will not try to argue that this is an incentive for new investors. Anyone in a position to benefit from it—that is, anyone making more than £5,000 per year in capital gains—is almost bound to be investing in the equity market already, so I hope that the Government will not try to imply that this is all part of their move to widen individual share portfolios.

The question is whether the provision will be effective even as an encouragement to those who are extremely well off and already invest. Recent history shows that in the past 10 years private investors have to a large extent failed the country in terms of investment in United Kingdom shares. In replying to the first amendment, the Chief Secretary referred to the substantial investment in United Kingdom land in the early 1970s, which drove up land values for both agricultural and building land. I suspect, however, although I do not have figures to prove it, that the individual investor has not done well by this country in terms of investment in manufacturing industry and the Financial Times index generally. Indeed, I suspect that a considerable proportion of the £40 billion capital outflow from this country has been the result of investments by very wealthy individuals.

I hope that the Chief Secretary will give figures to show the significance of individual investors in our equity market, as I suspect that the percentage of the equity market taken up by individual shareholders is very low indeed. Perhaps the right hon. and learned Gentleman will also tell us how many individual investors will benefit from the clause.

The hon. Member for Tatton referred to the encouragement that the clause would give to greater mobility of investment. I hope that the Chief Secretary will comment on that. I do not know a great deal about the stock market, but I should have thought that, above all, companies seek stability of investment. Those which have performed very well in the past 10 to 15 years seem at a cursory glance to be those with a stable, steady investment base—Marks and Spencer, for example—because they know what their level of investment and security has been, rather than those which have been the subject of wild speculation and have gone up and down. Perhaps hon. Members who are more expert in these matters will confirm that mobility of investment and frequent switching of investment does not benefit British industry. If the clause is designed to encourage that, as the hon. Member for Tatton suggested, is it really a good thing?

I am very confused about why the Government want this change at all. Will the Chief Secretary tell the Committee how effective the present tax situation is? Does he have figures showing capital gains tax as a percentage of all capital gains made in any one financial year? I suspect that the effective rate of tax as a proportion of capital gains is very low. I believe, as I am sure do Conservative Members and tax lawyers throughout the country who are experts on these matters, that the complexities of the tax make it relatively simple to avoid even without these indexation provisions. If the Chief Secretary has figures for the effective rate of capital gains tax, the Committee would be very interested to know them.

If capital gains tax is effective—I fear that it is not—why should the Government seek to change it? If it is ineffective but the Chief Secretary believes that there is validity in it, surely he should tighten and not loosen the tax. The Government are moving in entirely the wrong direction. The clause is not the moderately worded measure that it appears to be from the title in the margin of the Bill. As my hon. Friend the Member for Great Grimsby (Mr. Mitchell) has said, it is an example of the Government being extremely sensitive to the supplications and vested interests of those who are already very well off. Although we all want to improve performance and investment in manufacturing industry, I doubt whether the Chief Secretary can prove that these changes will benefit manufacturing industry in this country. These changes will merely benefit those investors who are very wealthy already. For those reasons, I am confident that Opposition Members will vote against the proposal.

The hon. Member for Stoke-on-Trent, Central (Mr. Fisher) made a characteristically speculative intervention. He queried whether this was a modest clause. The most powerful evidence of the modesty of the clause came in the powerful speeches of my hon. Friends the Members for Kensington (Sir B. Rhys Williams) and for Tatton (Mr. Hamilton) and in the amendment in the name of my hon. Friend the Member for Croydon, South (Sir W. Clark) which they supported. My hon. Friend the Member for Slough (Mr. Watts) also pressed us to go further.

There is clearly a divide between Members on the scope and importance of the clause and it is perhaps a deep philosophic divide. That was the tenor of many speeches from Opposition Members. They may not attach so much importance to private property or to the operation of the capital market and private investment in the British economy as we do.

The hon. Member for Stoke-on-Trent, Central asked how many people would be affected and what would be the width of these changes. The best I can say is that the changes will affect about 120,000 people and institutions within the area of capital gains tax, corporation tax and chargeable gains.

I was asked about the current yield. If one takes capital gains tax, which is the tax on individuals, and corporation tax on chargeable gains, it is just about the £1 billion mark. The tax likely to be forgone is of the order of £155 million. That, I would have thought, amply demonstrates the modesty of the clause.

The hon. Member for Thurrock (Dr. McDonald) advanced a theme which seemed to find favour with several of her hon. Friends. They said that this would benefit a very small, privileged section of our community. That was the thrust of the case made against the clause and the schedule. That is an extraordinary proposition—that equity is to be denied to those who have a certain amount of capital assets and is to be reserved only for those who are not likely to be within the charge to capital gains tax. If there is a case for equity—and I shall demonstrate that there is—it applies just as surely to those who have capital assets as to those who do not. We can debate whether there should be a tax on capital gains, but I hope that there will be unanimity in the Committee that where the tax goes a little further, and because of the ravages of inflation, particularly in the 1970s, it bites deeply into gains which are largely inflationary—I take account of the point made by my hon. Friend the Member for Kensington—we should, so far as possible, try to eliminate those inflationary gains.

I have searched the powerful debates in 1965, when long-term capital gains tax was first introduced. I cannot attribute to the Labour members of the then Treasury Bench the intention that it should bite on inflationary gains. I should like to think that what we did in 1982, and what I am commending today, is in harmony with the underlying concept of the tax as it was introduced in 1965.

From the Opposition's contributions to this debate I am led to suppose that the Labour party has perhaps changed its philosophic approach. We have not heard a great deal about the Opposition's plans for capital taxation, and it would have been helpful had the hon. Member for Thurrock—speaking with all the authority of the Opposition Front Bench—told us what kind of capital taxation system they would have devised had they been in power.

It is a rather one-sided debate if we are purely defending the ameliorative measures that we are introducing without knowing what is in the Opposition's mind. They have been very frank on the basic philosophy and are saying that equity should be reserved for those who are not likely to be within the charge of capital gains tax. They seem to be suggesting that, in relation to capital taxation in the fiscal sector, equity is as dust in the balance.

Let me give some of the underlying figures to explain why we believe that this modest clause—over-modest to some of my hon. Friends—is long overdue. In the 20 years between 1965, when capital gains tax was first introduced, and 1985, the retail price index has risen by 535 per cent. It is worth pondering that sombre figure because it indicates the extent to which so-called chargeable gains subject to capital gains tax contain a very large inflationary element. In a philosophic or economic sense they do not represent true gains—they are inflationary gains. If one believes in a properly operated capital market and that people should be encouraged to save and invest in this country, this is a problem to which any Government are bound to address themselves.

5.45 pm

The hon. Member for Thurrock made a powerful speech and asked many questions with which I shall attempt to deal, but she and her hon. Friends have not faced this essential question. The hon. Member for Stoke-on-Trent, Central should have done so, because he said that the private investor had failed this country. He also made the extraordinary proposition that we should encourage good investments and discourage bad ones. So say all of us, whether we speak from the Treasury Front Bench or as private investors! We all want good investments.

Does the hon. Gentleman take this a stage further and argue that we should deny loss relief to those who have made unfortunate investments? Of course we all want good investments in both a private and public capacity, but the hon. Gentleman must recognise—I am sure that he has devoted his keen intellect to this problem—that there is a risk dimension to investment.

After all, our great economic institutions often started as small risky enterprises. Had the Opposition's philosophy prevailed—thank heaven it did not—there would not have been very much investment to nourish those great institutions. There may be an opportunity in the Committee to hear from the Opposition how we should encourage good investment and identify it. When the hon. Member for Stoke-on-Trent, Central has told me, I shall no doubt profit from his advice and will be able to see how I can translate his views into practical legislative form.

While recognising the imperfections and weaknesses of our judgment in this area, we think it is fair to cream off a modest amount of real gains for the state and to afford relief for real losses. That is the underlying philosophy behind the clause. I have given the expense, but that is a fair price to pay to try to reduce the charge to what I believe was the Labour party's real intention when it introduced capital gains tax in 1965. It could, dare I say it, have thought a little bit more about the detail. On some other occasion we shall no doubt be privileged to hear what the Opposition's long-term plans are for the future. We want to know how far they have advanced beyond 1965.

The hon. Member for Thurrock and the hon. Member for Stoke-on-Trent, Central asked about administrative costs. That is a pertinent question. The hon. Lady gave a figure of 460 by 1989, whereas I would suggest 455—but what is five between both sides of the Committee? This may seem an increase in the administrative burden to Somerset house. The Economic Secretary will shortly commend the abolition of development land tax, and there is a point which may just change the hon. Lady's mind on whether to press abolition of DLT to a Division. That will release about 250 people expert in the valuation of land and buildings who will be available to take on that role in relation to capital gains tax.

Will the Chief Secretary confirm that this is already a very expensive tax to collect and administer? Is it really wise to introduce changes to that tax which make it still more expensive to administer? Notwithstanding the fact that savings will be made elsewhere in the Finance Bill and that 200 staff will be released to deal with this, the Minister seems to be putting additional expense on a tax which I am sure he will concede is one of the most expensive that the Treasury collects.

Perhaps the most expensive is development land tax, but the Economic Secretary will give the full figures in a moment. The hon. Gentleman is absolutely right. This is not a very cost-effective tax, particularly when one takes into account the compliance cost of the individual taxpayer. The Committee should always bear that dimension of our fiscal system in mind, and should ask whether we are placing an unfair burden on individual taxpayers. As the hon. Member for Stoke-on-Trent, Central will know, we do not allow tax relief for professional advice. The Government must always reflect whether this is over-complex and upon the administrative burdens that we are placing on the Inland Revenue. As Chief Secretary, I am deeply conscious of that point. I am charged with overseeing the costs of running the Government, if I may put it that way. The hon. Member for Stoke-on-Trent, Central is absolutely right. We have to be sensitive about compliance costs as they affect the individual taxpayer.

I should like to pretend that this will result in massive simplification. However, when I contemplate schedule 16 I do not put that forward as the paramount reason. The real conclusion to which the hon. Gentleman's shrewd questions drive me is that possibly capital gains tax ought to be abolished altogether. I do not know whether he wishes to impel me in that direction if he is serious about simplification, the reduction of the administrative burden and compliance costs. I have probably taken the hon. Gentleman's arguments a little further than he intended. Nevertheless, he may care to ponder that point.

The hon. Members for Stoke-on-Trent, Central, for Thurrock and perhaps for Great Grimsby (Mr. Mitchell) asked about the small taxpayer. The Committee recognises that the Government have increased the threshold to £5,900, which will take the small investor out of capital gains tax liability. If a beneficent Conservative Government continue to preside for some time over the economy it is possible that the small taxpayer will not be brought back within liability to capital gains tax. To return, however, to the philosophical point, I hope I carry my right hon. and hon. Friends with me when I say that I believe that the large investor is just as entitled to equity as is the small investor.

This is a play on words. I appreciate the hon. Gentleman's wit. He knows that he is dragging a rather malodorous red herring across my track. The hon. Member for Thurrock asked me a shrewd and complicated question about an investment in Black and company. It is not for me to advise the hon. Lady on her investments. Professional advisers formerly went away and reflected upon Finance Bills after they had become law in order to advise their clients. Now, it seems, they are to obtain free advice from the Opposition Front Bench. We live in stirring times. This will enliven our debates in Committee. If I understood the full complexity of the hon. Lady's bed-and-breakfasting scheme, which would continue for a period of five years, the tax result would be the same. However, if the hon. Lady chooses to bed and breakfast year after year she will get her relief or pay her charge a little earlier. When I have read the full report of this debate in Hansard I may find that I have not fully appreciated the subtlety of her scheme, in which case I shall write to her and make my reply public. I should not wish the outside world to be misled either by my advice or by hers.

Since we are dealing with technical points, may I say that my hon. Friend the Member for Bristol, North-West (Mr. Stern) put forward a very important point about a claim for relief. He was absolutely right to fasten upon this point. We do not wish to saddle the taxpayer with a burden which he may be unable to foresee due to valuation eccentricities. Provided that the assessment has not been finally determined and that revocation does not take place within the period of two years during which a claim can be made, it can be withdrawn.

As for the hon. Lady's interesting technical points, she raised matters which have been canvassed in both the Financial Times and the Investors Chronicle. The tax is broadly in a sustainable and acceptable form. If, however, imperfections are revealed we shall be ready to look at them if they disadvantage either the taxpayer or Somerset house.

Is it recognised by the Treasury that there is an imperfection in the tax, in that it still remains a levy purely on an inflationary gain?

As my hon. Friend will recognise, it will not be a levy on future inflationary gains. However, total relief will not be offered for pre-1982 inflationary gains, and that is a matter of profound regret. The full cost of the amendment supported by my hon. Friend would be £550 million. Although the whole of that figure does not represent inflationary gains, a large proportion of it—about three fifths—is represented by such gains. I take my hon. Friend's point, and as I say it is a matter of profound regret.

To return to the point made by the hon. Lady, the suggestion has been made that the indexation provisions could be used by those seeking to establish a short-term capital gains tax loss on gilts and other debt instruments where counterbalancing gains do not normally arise. If the Government were to conclude that countervailing action was necessary, we should be prepared to introduce amendments at a later stage. I hope I have reassured the hon. Lady that it is no part of our philosophy that anything the Government do should contain imperfections of that kind.

This has been an interesting debate. It has ranged from points of fine detail to points of high philosophy. I hope that at the end of the day the Committee will be persuaded by the equity argument: that this tax should bite on real, not inflationary, gains. Whether a person has £70,000 worth of investments, or more, or less—I pick on that figure only because the hon. Lady chose that figure and I know exactly why she did so—he is entitled to a broad measure of equity from the tax system of this country. The measure will also encourage further savings and investments and a freer working of the capital markets. This must lead to an even greater and better flow of investment into the manufacturing and service industries. On both counts I hope that the Committee will accept the clause and agree that it does justice to a very important case.

May I deal first with two points of detail before I comment upon the general principle? First, on Black and company, the Chief Secretary has dodged the point and he ought to look at it again. One receives the compound allowance and a greater indexation allowance if one bed and breakfasts every year rather than if one holds for five years without bed and breakfasting. The Chief Secretary ought to examine that example again and introduce amendments to avoid a gain of that kind. As for extra staff and simplification, the class IV contributions would have been reduced from 6·3 per cent. to 5·3 per cent. if the Government were serious about simplification, yet that has not been done. It was made clear by the Financial Secretary in last night's debate on the class IV contributions that 60 extra staff would be required. A figure of over 400 extra staff was given for the administration of capital gains tax.

The Financial Secretary suggested that this increase would be offset by the transfer of about 250 staff because of the abolition of development land tax. We do not support abolition, but because of the Government's majority presumably this measure will be passed. The result is that the Government will still have extra staff, extra expense and more complicated taxes to administer. Those points have not been fully answered by the Chief Secretary.

The Chief Secretary accused us of holding the view that equity should be reserved for those who are not likely to face the possibility of paying capital gains tax. That is not our view. We are committed to a fair tax regime for capital and income. The point is that the treatment should be fair between one group and another. We must face the fact that only those who will make a gain of at least £5,900 in any one year are likely to pay capital gains tax. Moreover, additional allowances are available as a result of those measures. That is far more, just like the exemption limit, than many people in Britain receive as their total gross income in any one year. That is why we want equal and fair treatment for all taxpayers, not just that group with whom the Chief Secretary is so much concerned. We are most concerned that those who have suffered most at the hands of the Government—those on average and below average earnings—should be taxed fairly.

6 pm

As the Chief Secretary well knows, because he has considered these matters for a number of Budgets now, any Budget that is put before the country and Parliament has a number of priorities. Certain inequities might need to be ironed out in some sections of the tax system. The removal of each of those inequities will have a cost. It is a matter of the Government's priorities. The Opposition's quarrel with the Government's priorities is that they constantly choose to redress what they see to be inequities and injustices in the tax system for the better off. That is why we object to clause 64. The Government continually fail to give priority to those on average and below average earnings, who have suffered at the Government's hands.

At the end of my previous speech I referred to those who benefited last year from the abolition of the investment income surcharge and who will benefit this year from the changes in capital gains tax to the tune of about £500 million. I also referred to the payment of long-term supplementary benefit to the long-term unemployed. In the use of that £500 million, the Government have shown where their priorities lie. It has gone to 120,000 taxpayers who are liable to capital gains tax instead of to the 1·2 million long-term unemployed who are idle through no fault of their own.

It is not that we think that people who pay capital gains tax should not receive fair treatment. Of course they should. We quarrel with the Government's priorities. They will not treat the poor with fairness, justice, consideration and sympathy. That is why we oppose the clause.

I rise to intervene only briefly because a part of my annual ritual activities in the House is to speak on this matter. We have never in any way managed to influence the Government by any amendment to capital gains tax or capital transfer tax legislation since 1979, when I was elected to the House. The reason is simple: the Government do not want to know. All they want to do is press on with the substantial tax reductions for the better off in society. Once again, the Minister sits in his seat, as he has done for the past three years, and laughs because he finds these matters most amusing. The Government simply intend to press on making these reductions which everyone knows to be quite immoral.

Last week, during the county council election campaign I took a chair and put it on the pavement outside a chemist's shop in Maryport in my constituency. I stood on the chair and set out to explain to my electorate exactly what had happened in the Budget. I went through each of the measures and when I got to taxation I spent a few moments commenting on the reduction in capital gains tax. As I began to explain what had happened, I saw increasing expressions of anger on the faces of the people who were standing across the road listening to my speech.

Suddenly, a motor car came round the corner covered in Tory streamers and a man opened the window, leaned out and told me that I was talking rubbish in addressing my comments to the £150 million allocation to the small group of people in society to whom we have referred today. Suddenly, from the back of the crowd that had gathered around where I was speaking, two eggs appeared. Both of them shot across in front of me and landed on the bonnet and windscreen of the car. The Conservatives protested and drove off.

The point that I am trying to make is simple. When the public learn from Budget debates such as this where the money is being spent, in so far as it is being spent on subsidising the better off in society, they become increasingly angry. The problem that Labour Members have had over the past six years in trying to get that message out of the House.

Last year, during my contribution to a debate on the Budget, I addressed myself to the press lobby. I told them not to refer to me because I was irrelevant, but just to the issue when they reported what happened in Parliament that day. I told them to refer to the fact that in that Budget statement the Government were handing back £280 million in the form of free tax concessions. As usual, none of that reached people outside the House and nobody knew.

This year, in the allocation of time for debates in the Chamber on this year's Budget, we have tried, through the normal channels, to ensure that this debate took place during prime time in the House of Commons so as to ensure that people outside learned what was happening. Once again, we must tell them that on this occasion the Government are now spending a further £150 million—money which is being raised on the back of the deprivation of the great majority of people in British society.

The Minister does not give a damn. He is not interested. He believes that as part of this incentive society, which he is always telling us is at the heart of conservative philosophy, there is a need to interfere with capital taxes in this way. That is a load of tripe. It is a load of old rubbish. We all know that the only thing which motivates business men in this society is the demand for their products. First, the product must be right, and, secondly, a market must exist with a means of distribution into that market. That is the only incentive that a business man needs. He does not need interference in the capital gains tax and capital transfer tax mechanisms to ensure that he has the incentive to go out and start a business. In representing that position to the House once again this year, the Minister completely misunderstands the very people he represents. The right hon. and learned Gentleman might say that I was not here to hear his reply, but I was upstairs in the Public Accounts Committee where we were dealing with another equally absurd area of Government policy—the rate support grant and its allocation to local authorities.

In every area of financial management, the Government are wrong. They will continue to be wrong because they start from the wrong base. Next year the Government will introduce yet again an indexation measure. "Indexation of losses" is an absurd term. It is another little mechanism introduced by the Government to ensure that those who make are able to cover themselves when they lose. It is a grubby little measure, typical of this Government's Finance Bills.

I only wish that the public could hear the Chief Secretary. I do not support the televising of Parliament, but I wish that they could see and hear the right hon. and learned Gentleman. I should like the public to be able to respond to the insensitivity which the Minister has repeatedly demonstrated over the years. If the public were able to hear one of our debates on capital gains tax and capital transfer tax, they would understand the Government's real priorities and the Conservatives would never survive another general election.

Question put:

The Committee divided: Ayes 225, Noes 154.

Division No. 201]

[6.11pm

AYES

Adley, RobertAtkinson, David (B'm'th E)
Alexander, RichardBaker, Nicholas (N Dorset)
Alison, Rt Hon MichaelBaldry, Tony
Arnold, TomBatiste, Spencer
Ashby, DavidBeaumont-Dark, Anthony
Aspinwall, JackBellingham, Henry
Atkins, Rt Hon Sir H.Bendall, Vivian

Best, KeithHawkins, Sir Paul (SW N'folk)
Biffen, Rt Hon JohnHawksley, Warren
Blackburn, JohnHayes, J.
Blaker, Rt Hon Sir PeterHayhoe, Barney
Boscawen, Hon RobertHayward, Robert
Bottomley, PeterHeathcoat-Amory, David
Bottomley, Mrs VirginiaHickmet, Richard
Bowden, A. (Brighton K'to'n)Hicks, Robert
Bowden, Gerald (Dulwich)Hill, James
Braine, Rt Hon Sir BernardHolt, Richard
Brandon-Bravo, MartinHowarth, Alan (Stratf'd-on-A)
Brinton, TimHowarth, Gerald (Cannock)
Brown, M. (Brigg & Cl'thpes)Howell, Rt Hon D. (G'ldford)
Browne, JohnHowell, Ralph (N Norfolk)
Bruinvels, PeterHunt, John (Ravensbourne)
Buck, Sir AntonyJackson, Robert
Budgen, NickJessel, Toby
Bulmer, EsmondJohnson Smith, Sir Geoffrey
Burt, AlistairJones, Gwilym (Cardiff N)
Butcher, JohnJones, Robert (W Herts)
Butterfill, JohnKellett-Bowman, Mrs Elaine
Carlisle, John (N Luton)Kershaw, Sir Anthony
Carlisle, Kenneth (Lincoln)Key, Robert
Carlisle, Rt Hon M. (W'ton S)King, Roger (B'ham N'field)
Cash, WilliamKnight, Gregory (Derby N)
Channon, Rt Hon PaulKnight, Mrs Jill (Edgbaston)
Chope, ChristopherKnowles, Michael
Churchill, W. S.Knox, David
Clark, Dr Michael (Rochford)Latham, Michael
Clarke, Rt Hon K. (Rushcliffe)Lawrence, Ivan
Clegg, Sir WalterLeigh, Edward (Gainsbor'gh)
Cockeram, EricLennox-Boyd, Hon Mark
Colvin, MichaelLester, Jim
Conway, DerekLewis, Sir Kenneth (Stamf'd)
Coombs, SimonLilley, Peter
Cope, JohnLloyd, Ian (Havant)
Cormack, PatrickLloyd, Peter, (Fareham)
Couchman, JamesLord, Michael
Cranborne, ViscountLyell, Nicholas
Critchley, JulianMacfarlane, Neil
Currie, Mrs EdwinaMacKay, Andrew (Berkshire)
Dorrell, StephenMaclean, David John
Dunn, RobertMaples, John
Durant, TonyMather, Carol
Dykes, HughMaude, Hon Francis
Eggar, TimMellor, David
Evennett, DavidMerchant, Piers
Eyre, Sir ReginaldMeyer, Sir Anthony
Fallon, MichaelMiller, Hal (B'grove)
Farr, Sir JohnMills, lain (Meriden)
Favell, AnthonyMitchell, David (NW Hants)
Fenner, Mrs PeggyMoore, John
Fletcher, AlexanderNeale, Gerrard
Forman, NigelNeubert, Michael
Forth, EricNicholls, Patrick
Franks, CecilOppenheim, Phillip
Fry, PeterOsborn, Sir John
Gale, RogerPage, Richard (Herts SW)
Galley, RoyParris, Matthew
Gardiner, George (Reigate)Pawsey, James
Gardner, Sir Edward (Fylde)Peacock, Mrs Elizabeth
Garel-Jones, TristanPortillo, Michael
Goodhart, Sir PhilipPowell, William (Corby)
Goodlad, AlastairPowley, John
Gow, IanPrice, Sir David
Gower, Sir RaymondProctor, K. Harvey
Greenway, HarryRaffan, Keith
Gregory, ConalRees, Rt Hon Peter (Dover)
Griffiths, Peter (Portsm'th N)Rhodes James, Robert
Ground, PatrickRhys Williams, Sir Brandon
Grylls, MichaelRidsdale, Sir Julian
Hamilton, Hon A. (Epsom)Roberts, Wyn (Conwy)
Hamilton, Neil (Tatton)Rossi, Sir Hugh
Hampson, Dr KeithRost, Peter
Hanley, JeremyRowe, Andrew
Hannam, JohnRyder, Richard
Hargreaves, KennethSackville, Hon Thomas
Harris, DavidSayeed, Jonathan
Harvey, RobertShaw, Sir Michael (Scarb')
Haselhurst, AlanShelton, William (Streatham)

Shepherd, Richard (Aldridge)Twinn, Dr Ian
Silvester, Fredvan Straubenzee, Sir W.
Sims, RogerViggers, Peter
Smith, Tim (Beaconsfield)Waddington, David
Soames, Hon NicholasWakeham, Rt Hon John
Speller, TonyWalden, George
Spence, JohnWaller, Gary
Spencer, DerekWalters, Dennis
Spicer, Jim (W Dorset)Ward, John
Stanbrook, IvorWardle, C (Bexhill)
Steen, AnthonyWatson, John
Stern, MichaelWatts, John
Stevens, Lewis (Nuneaton)Wells, Bowen (Hertford)
Stewart, Andrew (Sherwood)Wheeler, John
Stewart, Ian (N Hertf'dshire)Whitfield, John
Sumberg, DavidWhitney, Raymond
Taylor, John (Solihull)Wiggin, Jerry
Taylor, Teddy (S'end E)Winterton, Mrs Ann
Temple-Morris, PeterWinterton, Nicholas
Terlezki, StefanWolfson, Mark
Thompson, Donald (Calder V)Wood, Timothy
Thompson, Patrick (N'ich N)Yeo, Tim
Thorne, Neil (llford S)Young, Sir George (Acton)
Thornton, Malcolm
Thurnham, PeterTellers for the Ayes:
Townend, John (Bridlington)Mr. John Major and
Trotter, NevilleMr. Tim Sainsbury.

NOES

Adams, Allen (Paisley N)Eastham, Ken
Alton, DavidEdwards, Bob (W'h'mpt'n SE)
Archer, Rt Hon PeterEwing, Harry
Ashdown, PaddyFatchett, Derek
Ashton, JoeField, Frank (Birkenhead)
Atkinson, N. (Tottenham)Fields, T. (L'pool Broad Gn)
Bagier, Gordon A. T.Fisher, Mark
Barnett, GuyFoot, Rt Hon Michael
Barron, KevinForrester, John
Beckett, Mrs MargaretFoster, Derek
Beith, A. J.Freud, Clement
Bennett, A. (Dent'n & Red'sh)Garrett, W. E.
Bermingham, GeraldGeorge, Bruce
Bidwell, SydneyGilbert, Rt Hon Dr John
Blair, AnthonyGould, Bryan
Boothroyd, Miss BettyGourlay, Harry
Boyes, RolandHamilton, James (M'well N)
Bray, Dr JeremyHamilton, W. W. (Central Fife)
Brown, R. (N'c'tle-u-Tyne N)Harrison, Rt Hon Walter
Bruce, MalcolmHart, Rt Hon Dame Judith
Buchan, NormanHeffer, Eric S.
Caborn, RichardHogg, N. (C'nauld & Kilsyth)
Callaghan, Jim (Heyw'd & M)Holland, Stuart (Vauxhall)
Campbell-Savours, DaleHowell, Rt Hon D. (S'heath)
Canavan, DennisHowells, Geraint
Carlile, Alexander (Montg'y)Hoyle, Douglas
Carter-Jones, LewisHughes, Robert (Aberdeen N)
Clarke, ThomasHughes, Roy (Newport East)
Clay, RobertHughes, Simon (Southwark)
Clwyd, Mrs AnnJanner, Hon Greville
Cocks, Rt Hon M. (Bristol S.)John, Brynmor
Cohen, HarryJohnston, Russell
Concannon, Rt Hon J. D.Jones, Barry (Alyn & Deeside)
Cook, Frank (Stockton North)Kaufman, Rt Hon Gerald
Cook, Robin F. (Livingston)Kennedy, Charles
Corbett, RobinKinnock, Rt Hon Neil
Corbyn, JeremyKirkwood, Archy
Cowans, HarryLamond, James
Craigen, J. M.Lewis, Ron (Carlisle)
Cunliffe, LawrenceLewis, Terence (Worsley)
Dalyell, TanLitherland, Robert
Davies, Rt Hon Denzil (L'lli)Loyden, Edward
Davis, Terry (B'ham, H'ge H'l)McDonald, Dr Oonagh
Deakins, EricMcKay, Allen (Penistone)
Dewar, DonaldMcKelvey, William
Dixon, DonaldMcNamara, Kevin
Dormand, JackMcTaggart, Robert
Douglas, DickMcWilliam, John
Dubs, AlfredMadden, Max
Duffy, A. E. P.Marek, Dr John
Dunwoody, Hon Mrs G.Maxton, John

Maynard, Miss JoanSheldon, Rt Hon R.
Meadowcroft, MichaelShore, Rt Hon Peter
Michie, WilliamSkinner, Dennis
Mikardo, IanSmith, C.(lsl' ton S & F'bury)
Millan, Rt Hon BruceSnape, Peter
Miller, Dr M. S. (E Kilbride)Spearing, Nigel
Morris, Rt Hon A. (W'shawe)Steel, Rt Hon David
Nellist, DavidStewart, Rt Hon D. (W Isles)
O'Brien, WilliamStott, Roger
O'Neill, MartinStrang, Gavin
Orme, Rt Hon StanleyThomas, Dafydd (Merioneth)
Owen, Rt Hon Dr DavidThomas, Dr R. (Carmarthen)
Park, GeorgeThompson, J. (Wansbeck)
Parry, RobertTinn, James
Patchett, TerryTorney, Tom
Pavitt, LaurieWainwright, R.
Pendry, TomWallace, James
Penhaligon, DavidWareing, Robert
Pike, PeterWigley, Dafydd
Powell, Raymond (Ogmore)Wilson, Gordon
Prescott, JohnWinnick, David
Radice, GilesWoodall, Alec
Randall, StuartWrigglesworth, Ian
Redmond, M.
Richardson, Ms JoTellers for the Noes:
Roberts, Allan (Bootle)Mr. Sean Hughes and
Roberts, Ernest (Hackney N)Mr. Frank Haynes.
Sheerman, Barry

Question accordingly agreed to.

Clause 64 ordered to stand part of the Bill.