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Modification Of Indexation Allowance

Volume 82: debated on Wednesday 10 July 1985

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Amendment made: No. 43, in page 62, line 10, leave out from 'Act' to 'on' and insert—

  • (a) shall not have effect with respect to disposals of gilt-edged securities as defined in Schedule 2 to the Capital Gains Tax Act 1979 or qualifying corporate bonds as defined in section 64 of the Finance Act 1984; and
  • (b) shall have effect with respect to disposals of other securities.'.—[Mr. Ian Stewart.]
  • I beg to move amendment No. 131, in page 62, line 19, leave out 'and'.

    With this it will be convenient also to take Government amendments Nos. 132 and 133.

    I intend to speak mainly to the amendments which have been grouped with amendment No. 131. The amendments were tabled on 4 July—only last Thursday — and that in itself is extremely interesting.

    The Minister has chosen a rather sly way of getting out of defending his amendments. Amendment No. 131 is rather trivial, but No. 133 is a substantive amendment. I had expected the hon. Gentleman to tell us about its effect before we discussed it.

    I am grateful to my hon. Friend. That is why I wanted to make it clear that I intended to discuss the whole of the Chairman's selection. The amendments were tabled quite recently, and that is interesting, because they make significant changes in the capital gains tax regime.

    Companies were able to pool their shares — indeed, they still are — and under the pooling arrangements all purchases of shares in other companies were pooled to produce an average acquisition cost. If, for example, we talk about Fred Bloggs Investments Ltd. and assume that 1,000 ICI shares were bought at £1 each in 1967 and another 1,000 at £10 each in 1984, the acquisition cost under the pooling arrangements could be averaged out at £5·50.

    This group of amendments allows companies to have a choice. Companies will be able to revoke the pooling election — formerly, companies preferred that, even though it might have meant that they paid more tax, because it simplified book keeping arrangements. The reason why they might want to revoke the pooling election, despite the administrative convenience and so on, is that they can go for a last in, first out arrangement under later amendments, in which case they will be able to sell off the most expensive shares first.

    This group of amendments seems enormously to advantage companies in terms of capital gains tax, and they have been tabled rather late in the day. We know from the Red Book that the Government expected to get £720 million from capital gains tax this year. If these changes are advantageous to companies in the way in which I have described, that amount could well be reduced, and we want to know how much these changes will cost and why the Government have introduced them at this late stage.

    I repeat that the amendments were tabled on 4 July. Why were we not given an opportunity to discuss them in Committee, when we would have had tine to consider them in great detail, instead of having to discuss what seem to be quite significant changes at half-past 11 at night? It will be interesting to hear the Minister's answers to all these questions.

    I am happy to respond to the hon. Lady. The only reason why I did not deal with the amendments at greater length was that she had told me beforehand that she wanted to raise a number of questions and it seemed more sensible to explain the amendments in more detail after she had spoken.

    The substance of the changes recently announced come in a later group of amendments, Government amendments 165 to 168, which I am not dealing with now but which my right hon. and learned Friend the Chief Secretary will deal with in a moment.

    Government amendments Nos. 131 to 135 deal with the technical side of the implementation. They involve additional parts of the schedule, which deal with two aspects of the reforms, and they were not included in the Bill so that discussions could take place with the representative bodies of those concerned. The first part of the two provisions relates to the rule for parallel pooling, which was introduced for companies in 1983 to facilitate the application of computer programmes to large portfolios. The way in which the companies now hold their portfolios under those arrangements are not in a form to which the new arrangements could be applied.

    11.30 pm

    As the hon. Lady knows, the system of parallel pooling involves two pools — one with the actual cost, and the other with the index cost. The comparison between the two will enable the indexed gain to be calculated. The new system, which could be called consecutive pooling, will have a pool of pre-1982 holdings and one of post-1982 holdings. They will be updated for each transaction. Two provisions are being introduced to meet that.

    The first provision will allow those who have elected for parallel pooling to revoke that election, and we understand that most companies would wish to do that. For those who do not, a statutory instrument will be issued detailing how the parallel pools can be converted into the correct form. We shall have further discussions of the details with those concerned.

    The second provision relates to the application of the new indexation provisions to underwriters' premiums trust funds. Hitherto, because indexation has not applied to the first 12 months of any asset holding, indexation relief has not been due on the premiums trust fund. Under the special statutory provisions the securities in those trust funds are treated as disposed of and reacquired at the end of each calendar year accounting period. Now that the indexation provisions apply to the first year of ownership, the amendment secures that with the necessary modifications, indexation relief could be given in calculating the gains arising on the assets in those trust funds.

    The provisions are purely technical, and I commend them to the House.

    The Economic Secretary referred to discussions with the representative bodies of those concerned. He should tell the House exactly who he means by that. I notice that he has still not answered the question about costs.

    There is no cost involved in the implementation of the arrangements. Those concerned are mostly insurance companies and large companies which hold pools of investment shares. Further discussion is needed because the arrangements for the new consecutive pooling involve changes in computer arrangements. As soon as that has been sorted out with the companies, the provisions can be published in a statutory instrument.

    The Economic Secretary has still not named the bodies with whom discussions took place, and we want those names. Secondly, is he saying that the changes have no revenue impact? I remind the House that the amendments must ultimately be linked with amendments Nos. 165 to 168. Therefore, what is the revenue impact of the changes together with the later amendments?

    I have already explained that discussions took place with insurance companies and most of the life offices associations. The cost of the changes does not arise on these technical arrangements. My right hon. and learned Friend the Chief Secretary, who will deal with Government amendments Nos. 165 to 168, which are the substantive ones, will answer questions about the substantive changes. These are technical, not substantive provisions.

    Amendment agreed to.

    Amendment made: No. 132, in page 62, line 22, at end insert—

  • `(d) Part V has effect with respect to securities in respect of which elections have been or could be made under Schedule 6 to the Finance Act 1983; and
  • (e) Part VI contains consequential provisions relating to assets forming part of a premiums trust fund'.— [Mr. Ian Stewart.]
  • I beg to move amendment No. 156, in page 62, line 31, at end insert—

    '(4A) In applying subsection (4) above if the asset is disposed of by a company B to whom it was transferred directly or indirectly by another company A, within section 273 Taxes Act 1970, then if A held the asset at 31st March 1982 B shall be entitled to be treated as if it B had held the asset at 31st March 1982.'.

    With this it well be convenient to discuss Government amendment No. 130.

    The House will recollect that where a person disposes of shares after April 1985, indexation will start from April 1982 under the new indexation rules. The amendment relates to indexation only and has nothing to do with the eventual capital gain on the share or asset.

    Sometimes assets are transferred within a group of companies and the purpose of the amendment is to allow the asset, wherever it is in the group, to enjoy indexation. The amendment is simpler than Government amendment No. 130 and it is unusual for a Back Bench Member to move an amendment and to have the Government tagging on behind. However, I am grateful to my right hon. and learned Friend the Chief Secretary to the Treasury for taking the point. The Government's amendment is more complicated but it deals with the problem more comprehensively, which I welcome.

    My hon. Friend the Member for Croydon, South (Sir W. Clark) has identified a problem and he and my hon. Friend the Member for Tatton (Mr. Hamilton) have sought to meet it by means of the amendment. Government amendment No. 130 identifies the problem and goes slightly wider in tackling it.

    My hon. Friend the Member for Croydon, South has referred to transfers within a group of companies, but there are other no-gain, no-loss transfers where the same problems arise. These include company reconstructions or amalgamations and transfers between husband and wife. There are such arcane matters as transfers by the marketing board that deals with hops. The House will be moved when it hears that the problem can arise for a local constituency association after a redrawing of boundaries.

    I pay tribute to my hon Friends the Members for Croydon, South and for Tatton for having identified the problem in their amendment but I hope that they and the House will feel, on reflection, that it is better that it should be dealt with comprehensively, which is the purpose and intention of the Government amendment.

    The Chief Secretary has rightly said that Government amendment No. 130 goes wider than amendment No. 156. The hon. Member for Croydon, South (Sir W. Clark) has suggested that the amendment has nothing to do with indexation but I shall describe the effect of the amendment as I understand it. If a group of companies can switch assets around within the group it will not pay capital gains lax. However, when the last company in the group sells the asset outside the group, the acquisition cost will be the cost to the first company in the group. If the amendment were accepted, the last company in the group would be able to claim the indexation allowance against the cost to the first company which bought the shares or asset. We see no reason for agreeing to such an amendment.

    The Chief Secretary will remember that when we discussed the abolition of stamp duty on voluntary dispositions in Committee we emphasised how the Government have been busily dismantling capital transfer tax. Indeed, that had been done to such an extent that the Institute of Fiscal Studies — which, as hon. Members know, is an independent research group — produced an article in August last year entitled "CTT Adieu", and that would be even more true of this year's Finance Bill. When we were discussing that, my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis) pointed out that one way of avoiding what remains of the CTT charge is to make lifetime gifts, and that the Government have made this easier by the introduction of the CGT holdover relief.

    If a rich man gives some shares to his son in 1985, the object being to reduce his eventual CTT liability, and they make a CGT holdover election, no charge to CGT will arise, but the son will be deemed to have acquired the shares at the price originally paid by the father. The effect of amendment No. 130, in terms of that example, is to allow the son, when he sells the shares, to claim indexation allowances calculated from the time when the father paid the shares, or from 1982, if that was later.

    Given that example, which seems to follow from the Government tabling amendment No. 130, how much will it cost and how many people will benefit from that kind of change? We have figures of the number of capital gains tax payers with whom the Inland Revenue deals. I am here referring to individuals and not, of course, to companies. How many rich individuals are likely to benefit from that kind of change, and how much will it cost? What possible justification have the Government for introducing such an amendment? Why is it that at this stage in the Finance Bill the Government appear to be introducing a series of amendments to capital gains tax which, if taken together—we cannot, of course, discus them in total—seem to lighten the burden of capital gains tax still further?

    The Chief Secretary is right in saying that the Government's amendment is far wider and far more equitable than the one tabled by my hon. Friend the Member for Tatton (Mr. Hamilton) and myself. In view of that, I beg to ask leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    Amendments made: No. 130, in page 63, line 4, at end insert—

    `(6A) Subsection (6B) below applies to a disposal of an asset which is not a no gain/no loss disposal, if—
  • (a) the person making the disposal acquired the asset after 31st March 1982; and
  • (b) the disposal by which he acquired the asset and any previous disposal of the asset after 31st March 1982 was a no gain/no loss disposal;
  • and for the purposes of this subsection a no gain/no loss disposal is one on which, by virtue of section 267 or section 273 of the Taxes Act, section 44 of the Capital Gains Tax Act 1979, section 148 of the Finance Act 1982 or section 7(4) of the Finance (No. 2) Act 1983, neither a gain nor a loss accrues to the person making the disposal.
    (6B) Where this subsection applies to a disposal—
  • (a) the person making the disposal shall be treated for the purpose referred to in subsection (4) above as having held the asset on 31st March 1982; and
  • (b) for the purpose of determining any gain or loss on the disposal, the consideration which, apart from this subsection, that person would be treated as having given for the asset shall be taken to be reduced by deducting therefrom any indexation allowance brought into account by virtue of Part I of Schedule 13 to the Finance Act 1982 on any disposal falling within subsection (6A)(b) above.'.
  • No. 44, in page 63, line 7, leave out from 'include' to 'relevant' in line 8.— Mr. Peter Rees.]