Skip to main content

Capital Gains Tax

Volume 470: debated on Thursday 24 January 2008

With your permission, Mr. Speaker, I would like to make a short statement on capital gains tax reform.

Following discussion, I am today announcing the introduction of a new capital gains tax entrepreneurs relief. This will complement the new regime, which I set out in the pre-Budget report last year. The reformed regime and the new entrepreneurs relief will come into effect in April.

The relief will provide a special 10 per cent. tax rate for the first £1 million of qualifying gains. Gains made on different occasions will qualify for the 10 per cent. rate up to a cumulative lifetime total of £1 million. However, gains in excess of that will be taxed at 18 per cent. The special 10 per cent. rate will be available on the disposal of all or part of a trading business carried on by an individual either alone or in partnership. It will also be available to individuals disposing of shares in a trading company, provided that the individual is an officer or employee of the company and takes a minimum 5 per cent. stake in the business. The measure will benefit the owners of small businesses when they choose to sell their business, as well as business angels and other business investors who take a 5 per cent. or greater stake in the company concerned.

As a result of the reforms that I have announced, entrepreneurs and material business investors will keep 90 per cent. of the first £1 million of gains that they make. And they, and everyone else, remain entitled to make gains of up to £9,200 a year without paying any capital gains tax. That annual exemption will rise again in April.

We estimate that, next year, around 80,000 business owners and investors will make disposals eligible for the entrepreneurs relief. In approximately 90 per cent. of those cases, we expect the individual’s entire gain to be taxed at the special 10 per cent. rate.

In the other cases, people will pay 10 per cent. on the first £1 million of gains and the standard 18 per cent. rate on the excess. The proposal remains in line with the Government’s objective of keeping the tax system as simple as possible. It is very much in accordance with representations from small business.

I estimate that the proposal will cost around £200 million a year. Her Majesty’s Revenue and Customs is today issuing further information about the scope of the new relief, along with draft legislation and supporting materials related to the capital gains tax proposals announced in the pre-Budget report. Those documents have been deposited in the Libraries of both Houses and are available on the HMRC website.

As with all other aspects of the tax regime, I am determined that we do as much as possible to encourage entrepreneurship in this country and, in future Budgets, I will seek to do more. I will therefore keep the £1 million lifetime limit for the entrepreneurs’ relief under review.

I can confirm that we have retained the full range of reliefs for people investing in smaller, unquoted companies, including the enterprise investment scheme and venture capital trusts. Rollover relief also remains available to people wishing to reinvest in another business. Taken together, those measures include generous income tax reliefs, capital gains tax reliefs and exemptions, which have helped thousands of businesses. We have also retained several tax- advantaged share schemes, which include save-as-you-earn schemes, company share options plans and enterprise management incentives.

In December last year, the Treasury and HMRC issued a consultation document, which included legislation designed to prevent individuals from disguising income streams as a capital return to avoid tax. I will set out the Government’s next steps on measures to prevent abuse of the tax rules when the consultation process has concluded. I want to be satisfied that only genuine investors benefit from the reformed capital gains tax regime.

I have also received representations from the life insurance industry. That is a complex area and there are no clear answers, but we are ready to hear further representations.

The UK business environment remains one of the best in the world. I am determined to keep it that way. My announcement today, with measures to simplify the regime, will ensure that that continues to be the case. I commend the statement to the House.

In the short, inglorious time in which the Chancellor has been in office, he has had only one original idea on tax, which was a big increase in capital gains, thinly disguised as a simplification. It is now four months since he announced it—four months in which it has attracted the universal opposition of British business; four months in which his own Prime Minister has briefed against him; four months in which he has dithered and delayed on whether to ditch it; and four months in which thousands of businesses have faced uncertainty and instability, as we all waited for him to make his mind up finally.

And so we reach today’s humiliation, as the Chancellor of the Exchequer comes to Parliament, late in January, to announce a retreat on his one big idea. Does he remember saying in his very first interview in the job to the Financial Times, back in the dim and distant days when he still had a reputation as a safe pair of hands, that he thought that we needed to be very clear that

“When…we make…changes”

to tax

“they must be made at the proper time in the context of the Budget or the pre-Budget report”?

Now here we are, halfway between the pre-Budget report and the Budget, and he is announcing major changes to dismantle the single-rate CGT regime before it has even been put into place. What a textbook example of how not to write tax law.

May I ask the Chancellor about two features of his plan? First, will he confirm that it still represents a huge tax rise on businesses? He said that the move was a £200 million tax cut; in fact, if we take the whole package, it is a £700 million tax rise on enterprise, at the very moment we face the greatest economic difficulties. Can he name one other major western economy that is planning to raise taxes as its response to the global slowdown? Any claim that the Government are preparing Britain for the rainy days that may lie ahead now lies in tatters.

Secondly, will he confirm that any pretence to simplicity has also disappeared today? In October, he told us that he was abolishing the distinction between business and non-business assets. Will he confirm that that distinction re-emerges today? He said at the Dispatch Box that

“a single rate of capital gains tax is the right thing to do.”—[Official Report, 18 October 2007; Vol. 464, c. 957.]

Can he confirm that he is introducing another rate, so that there are now two rates of capital gains tax? He boasted of the simple administration of his new regime. Can he confirm that the lifetime limit will require an entirely new administration within HMRC?

Where does the Chancellor think the extra £700 million in tax will come from? Will it come from the people who start and build successful businesses or from the angel investors who help small companies get off the ground? What about the 4 million employees in the save-as-you-earn share schemes, who as far as I can tell will not benefit from the tax changes that he has announced today, or the entrepreneurs who add value to the British economy—in other words, all the very people whom we should be supporting in the face of global competition? No wonder the latest survey of business opinion, published today, shows that 59 per cent. of people think that he is out of his depth in his job.

In the two years I shadowed the Chancellor’s predecessor, with the exception of Budgets and pre-Budget reports, he never once came to make a statement to the House. But in the six months I have shadowed the right hon. Gentleman, he has been popping up every week, and sometimes twice a week, to explain the latest disaster to befall his Department—the mishandling of Northern Rock, the scandal of the missing discs and now this entirely self-inflicted wound on capital gains tax.

The Chancellor is a decent and pleasant man, and many of the problems that he is dealing with were inflicted upon him by the Prime Minister. However, I am afraid that he is the living proof of what is called the Peter principle, which states:

“in a hierarchy every employee tends to rise to the level of his incompetence”.

The misfortune for us all is that his incompetence means higher and more complex taxes on business at the very worst moment for the British economy.

I notice that at no time in the hon. Gentleman’s contribution did he say whether he was for or against the proposal. It is a bit like Northern Rock—we are not at all sure what his position is from one day to the next. Indeed, I am beginning to think that he does not know either.

The proposals that I announced last October were right then and I believe that they are right now. It is right to recognise, however, that we need to do more to help small businesses in particular, and the proposals that I have announced today will do that. As I have said, the vast majority of people who have put money into a company and built it up will benefit from the entrepreneurs relief. I believe that that will be welcomed by a large number of businesses.

The hon. Gentleman asked about employee share schemes. I remind him that everyone in this country is allowed an exemption of £9,200 before they pay any CGT, so someone would have to make a gain—that is not a total shareholder—of that amount in a year. Actually, the average gain under save-as-you-earn schemes is between £2,000 and £3,000, so most employees will be covered by that. One of the interesting things about capital gains tax is that most of it is paid by a comparatively small number of people.

The steps that I have announced today will provide a simpler scheme, with a rate of 18 per cent. We also recognise that we need to continue to encourage small businesses to expand, which is why I have introduced the entrepreneurial relief. That will benefit the vast majority of people who are likely to take advantage of it in the next year and in the years that follow. I will continue to keep these matters under review. It is far better to take the time to get these things right. That is what we have done, and that is what we will continue to do.

I welcome the statement from my right hon. Friend. I wonder whether he can answer this question. If someone had a 20 per cent. ownership of a private equity company that traded in other companies, and that private equity company owned a very small proportion—less than 5 per cent.—of a plc that made a lot of profit, could that individual claim the relief that my right hon. Friend has described, on the ground that their investment was in a trading company, namely, a private equity company, that traded in other companies, and their holding of 20 per cent. was more than 5 per cent.?

I am always wary of giving tax advice on the Floor of the House. I set out in my statement the condition that the arrangement would apply to unincorporated trading companies with a shareholding of more than 5 per cent. Certain other conditions would also be attached. If my hon. Friend wants further details, he will find them in the Library. We are aiming the measure at people who have set up a business and are either sole traders or in partnership, or people who own more than 5 per cent. of the shares in their unincorporated business and are an employee or an officer of their company. They are typically the sort of people who have been encouraged to set up a business and might at some stage want to sell up and then invest further. The measures will also help people who have reached retirement, because the first £1 million of gains will be taxed at the 10p rate. Those are people we are aiming at.

I said at the time of the pre-Budget report that, in relation to private equity, whenever there is a wide disparity between different rates—whether relating to income or capital—there is always a problem of people seeking to take advantage of capital gains tax. The 18 per cent. rate will help in that regard. In addition, as I said in my statement and as I have said before, we are seeking to close any loopholes in order to stop the kind of abuse that my hon. Friend might be concerned about.

May I take the Chancellor back to the beginning of his Odyssey through capital gains tax reform, and remind him of the moral outrage that was being expressed by, among others, his colleagues on the Treasury Select Committee at the fact that extremely rich people in the City were paying lower rates of tax than their cleaners? Will he confirm that, after all the twists and turns and comings and goings, those extremely rich people will now be paying 18 per cent.—or, in some cases, 10 per cent.—while their cleaners will now be paying 20 per cent. plus national insurance contributions? In what sense does that represent progress?

Will the Chancellor also explain the impact of all this on the second homes market? Has not he given a tax cut to second-home owners—


Has not the Chancellor given a tax cut to second-home owners of a minimum of 6 per cent. and, in certain circumstances, of 30 per cent.? Has he considered the impact of those measures on rural areas such as Cornwall, mid-Wales, the Lake district and large parts of rural England, where local people are being priced out of the housing market by second-home owners?

Is the implication of the Chancellor’s retreat today and his move away from taper relief that he accepts that the changes brought in at the outset of the Labour Government, when I believe he was Chief Secretary to the Treasury, were—as, indeed, some of us argued at the time—expensive, unnecessary and a diversion? Will he tell us what was wrong with the capital gains tax system under the previous Conservative Government, which was introduced by Lord Lawson? That system had at its heart a very simple central principle that income and capital should be taxed on the same basis. If, as the Chancellor is arguing and as the Conservatives now appear to want, income is taxed at a significantly higher rate than capital, there is a massive opportunity for tax avoidance as individuals and companies convert income into capital. What estimate has the Treasury made of the potential leakage into tax avoidance from that very familiar route?

Finally and on that basis, may I commend the idea of going back to the 1997 capital gains tax system, which was simple, made generous provision for small business, had indexation and would, on the Treasury’s own estimates, produce an additional tax revenue of about £2.7 billion? That could be used now for cutting the taxes of cleaners and other people on low pay.

I do not know of many people who would argue that capital gains tax should be put back up to the 40 per cent. rate. If that is the Liberal party policy, I was not aware of it—and I am sure that many of the hon. Gentleman’s colleagues are not aware of it either. I suspect that two parties in the House will make it their business to ensure that people around the country know that that has become the Liberal party’s policy. As the hon. Gentleman has set out, the Liberal policy has been to end taper relief.

I believe that our proposals of October and of today provide the right approach. Simplifying taxes must be a good thing if we can do it. What I sought to do in October was set out a much simpler capital gains tax system at a rate of 18 per cent., but I recognised that we needed to do more to help small businesses in particular. As I said earlier, there are 760,000 small businesses in this country. There is additional help—it is important to remember this—through venture capital trusts and enterprise investment schemes. The enterprise schemes have raised about £6 billion and have invested in 14,000 companies, while venture capital trusts have raised about £3 billion and helped about 1,400 companies. That shows that there are many other things we can do to help small businesses through the capital gains tax and income tax regimes. I believe that what I have announced today will be good for small businesses. I have listened to what people have had to say and I believe it important to get the issues right. Overall, simplifying the tax has to be the right way forward. I can see no justification for putting the rate of capital gains tax back up to 40 per cent., which is what I now understand the hon. Gentleman’s and the Liberal policy to be.

May I welcome the Chancellor’s statement? It is a huge step forward to have moved in 10 short years from a tax rate of 40 per cent. to 18 per cent. and with accompanying simplification. It is important for the Chancellor to continue to encourage entrepreneurship, which includes the private equity industry. However, may I say that there is a loophole in that management fees are not taxed? That information has come to me from the private equity industry, so I hope that the Chancellor will seek to close that loophole.

The insurance industry has also had discussions with me over the last couple of weeks and it is concerned that the new regime will disadvantage savers. I would ask the Chancellor to have further discussions with that industry to ensure that we do everything we can to encourage savings.

I am grateful to my right hon. Friend for his welcome. On his last point about the insurance industry, I did say that we have had discussions with that sector, but there are particular problems with one particular set of products. It is not immediately obvious that sorting out that problem will not create other problems. As I said, Treasury officials will remain in discussion with the industry. If we can resolve that problem, let us do so, but I believe that there may be considerable difficulties in doing so. As to the loopholes and various other points that my right hon. Friend raised, I keep them all under review. As a result of what I have announced today, I hope that small businesses, whose organisations have called for help of this nature, will recognise that we are determined to do all we can to help them. People who have made the effort and put all their skills and enterprise into setting up businesses should be helped to grow them and then hopefully to grow other businesses. We want to do everything we can to help them.

It is a bit rich for the Chancellor to come here and accuse my hon. Friends on the Front Bench of not saying whether they are in favour of or against the proposals, when he has been both against his own proposals and in favour of them at almost exactly the same time? Will he now accept that his Chief Secretary has let the cat out of the bag, as he has recently made it absolutely clear that under the new set of proposals people in Britain will be subject to a significant tax hike?

I do not think that that is right. I have just explained that the cost of the proposals announced today is about £200 million, which will go back into the small business sector. It is important, however, that we not only help small businesses but maintain stable finances in this country. I am not sure that the right hon. Gentleman was a supporter of the Conservative Government all the time in the 1990s, but he will certainly remember that they got into real difficulties because they could not manage their own finances.

Any tax system must have the confidence and consent of those involved in it, and today’s statement is a fair and sensible response to the consultation that has taken place. Will my right hon. Friend confirm that if the two owners of a hypothetical company of 40 or 50 employees, which has been established for about 30 years, for example selling management services to the not-for-profit sector, sold that company this year, the tax regime would be more generous now than it would have been under the taper system that preceded it?

As my hon. Friend describes, there are advantages for people who have set up and are perhaps considering selling small companies. If the other measures are taken into account, such as the small loans guarantee, the enterprise investment scheme, venture capital trusts and the regional help given, we are doing a lot to help small businesses, as well as helping the employees. It is also important to remember, as it is sometimes overlooked, that people have an individual annual tax allowance of £9,200 before they pay any capital gains tax. The proposals that I am announcing today represent significant help to a lot of small businesses, as we expect about 88,000 to be able to take advantage of them next year, most of them paying the 10p rate not the 18p rate; and the 18p rate is significantly less than the 40p rate that we had under the Tories and which the Liberals apparently want to reinstate.

What has puzzled me about the Chancellor’s announcement is that when he was first in the Treasury he espoused tapered tax as a key ingredient of long-term, stable capital formation and business investment. He has now abandoned that, so if he wanted to retain the advantages of his first premise, why has he not grandfathered the rights of the existing system to existing investments? If he wants his claimed benefits from the new scheme, why does he not move to that for new investments?

Quite simply because I think that that would make the system very complicated and difficult to administer.

I welcome the main thrust of the Chancellor’s announcement, but I would like to return to the item raised by the Chairman of the Treasury Committee, on life insurance. The Chancellor has indicated that he accepts that the issue is complex and he appears to accept that there are real difficulties for the life insurance industry. As we are nearing the end of January, and the new rules will operate from 1 April, can he give that industry, which is clearly worried about the proposals, any hope of some help before April?

As I said to our right hon. Friend the Member for West Dunbartonshire (John McFall) and others, and as I said in the statement, I am aware of the issue, which has been raised with me by the Association of British Insurers and individual insurers. If we can, we would like to try to help them. As I said to our right hon. Friend, however, it is not immediately obvious that the particular problem raised can be easily resolved. I have asked my officials, however, to speak to the industry’s representatives, and they will do so over the next few days and beyond. I hope that we can find a resolution, but I do not want to raise hopes because the issue is quite complex.

My hon. Friend the Member for Twickenham (Dr. Cable) raised the question earlier, but I am not sure that I caught the Chancellor’s response. Can he confirm that second-home owners will see a cut in their CGT bills? Was that an intended or unintended consequence of his proposals?

If there is a single rate, and we move away from the old system of a number of rates, does it not follow that some people will gain? Because we have a single rate of 18 per cent., that is less than some people might have paid on previous occasions.

I am sure that my right hon. Friend’s statement will be warmly welcomed by many small business owners in my constituency. He will be aware, however, that at the time of his initial proposal real concern was expressed that the simplification measures, although otherwise welcome, might disadvantage employee share ownership plans. Is he satisfied that the proposals that he has announced today will encourage companies to maintain, and indeed extend, their employee share ownership plans?

As I said earlier, the average gain under such employee schemes is between £2,000 and £3,000. Everybody in the country has an annual exemption for capital gains tax of £9,200—every year—so the vast majority of people would come nowhere near paying CGT. The number of people who benefit from capital gains tax exemption in such schemes is growing, because more people are in such schemes. I want to encourage that; I have always believed that employee share ownership schemes should be supported. My proposals will help small businesses, and the annual exemption, which will go up again in April, will ensure that many of the people about whom my right hon. Friend is concerned will be more than covered.

As today’s statement, far from complementing the previous proposals, is clearly a retreat, what lessons has the Chancellor learned from this sad affair? For instance, in future will he properly consult business before putting forward such tax proposals, which have caused such chaos and uncertainty?

Of course we will listen to what businesses—small and large alike—have to say. It is important that we introduce the right tax regime. What I propose today is right. We have introduced an overall simplification, but we recognise the particular circumstances of small businesses, which we want to encourage to grow. That is why I have introduced the measures.

Is the Chancellor convinced that people are being given adequate time to plan their affairs, particularly if we are dealing with the disposal of businesses as opposed to liquid assets such as quoted shares? Is there not a risk that forced disposals will take place, and that people will be disadvantaged because of the decisions taken at this time? Could taper relief not be extended, at least for a period? There is no requirement for it to end at midnight on 5 April, is there?

No, but the overall thrust of what people are saying is that they want certainty as to what the regime will be from April. To add a further uncertainty by putting it off for a year or so would not have been particularly helpful. What I propose now means that people know exactly the position and can plan accordingly. As my hon. Friend will know, it is not uncommon in Budgets for the tax changes to take place that evening. What is needed is some degree of certainty, and that is what I have provided today.

This statement is as inadequate as the Chancellor has proved himself to be incompetent on the issue. Many owners of small businesses have said to me that, after 15 weeks’ delay, as many right hon. and hon. Members have said, entrepreneurs will still lose £700 million. It will only be the smallest firms who will be spared, and then only if they remain the smallest. What kind of message does that send to the ambitious entrepreneur—the real wealth and job creators? What place do they now have in Labour’s Britain?

The tax regime in this country, whether it is the lowest corporation tax rates that we have ever had—due to come down again in April—the capital gains tax regime, or the incentives provided through enterprise investment schemes or venture capital trusts, has a whole range of measures that have helped businesses. On top of that, we have been able to maintain a strong and stable economy, with low levels of inflation, which has also encouraged long-term investment. That is very different from the situation 15 or 20 years ago.

Analysis of the economy in my constituency shows that it contains about a third of the number of businesses in the average constituency in the land. That is partly because of the devastation wreaked on the economy in south Wales by another political party, but will the Chancellor confirm that he will do more to encourage entrepreneurship in former coalfield areas, and that he will ensure that the enterprise investment scheme and venture capital trusts really do deliver more jobs and more small businesses in those peripheral economies?

My hon. Friend is right: the Tory party paid scant attention to communities like his that were devastated when the mines were shut in the 1980s. The situation in many parts of the country has changed almost unrecognisably since then.

We have introduced a range of measures, including regional venture capital funds and specific arrangements to assist people through reduced income tax, corporation tax and capital gains tax. That has helped businesses, which is why, as I said, there are more than 760,000 more small and medium-sized enterprises in the country than there were 10 years ago. But yes, we will continue to do all we can to encourage small businesses, because they are the engines of future growth. Ninety per cent. of businesses that are likely to take advantage of my announcement next year will pay the 10p rather than the 18p rate—which, of course, is infinitely better than the 40 per cent. rate with which they were confronted more than 10 years ago.

Does the Chancellor not understand that offering a tax break to second-home owners will make investment in second homes even more financially attractive and will put further pressure on house prices, especially in rural areas, making them even less affordable than they are now? Are the Government not making the same mistake that they made with self-invested personal pensions? Having originally proposed to include second homes as a qualifying asset, they then had to withdraw the proposal because of precisely the objections that are being made now.

I think the real answer to the problem that the hon. Gentleman has raised—and the shortage of housing is undoubtedly a problem in rural areas, as it is in urban areas—is for us to recognise the need to increase the supply of housing as a whole. I hope that Members in all parts of the House will support the Government’s measures both to encourage more housing and to reform the planning laws; otherwise we shall continue to experience the problem of far more people needing housing than there are houses, which will force prices up. It is important for us to recognise the fundamental problems that we face in this country.

I understand my right hon. Friend’s motives, but new reliefs will mean new opportunities. Tax changes behaviour. Can my right hon. Friend assure us that firm measures will be taken to prevent income being switched to capital and the real benefits going not to business angels but to money magicians?

I said in my statement that I would keep that under review. If there is any sign of abuse of this or, indeed, any other part of the tax system, the Government will be ready to take the appropriate action.

Will the right hon. Gentleman confirm my understanding that his October proposals, as modified today, involve the removal of the indexation of the acquisition costs in respect of a number of years from the early 1980s to the end of the 1990s? If so, is that not a form of retrospective taxation which should be deeply deplored, depriving people of a reasonable expectation in regard to acquisition costs? Perhaps I should add that I come into one of those categories.

It is good of the right hon. and learned Gentleman to say that.

One of the many changes that we have made in an attempt to simplify the system relates to indexation. I understand the right hon. and learned Gentleman’s point, but the tax system does change from time to time, especially in relation to capital gains. It is quite possible that something may be acquired long before a particular tax measure is introduced. Capital gains tax is a relatively new tax: it was only introduced in 1965.

I am trying to simplify the tax system, which is something that people in the House and outside have asked successive Chancellors to do. I readily accept that once we do start to simplify a tax, we soon hear from those who did not want that particular simplification.

Many Members have commented that the combination of the changes announced today and those announced in the pre-Budget report represents a tax increase of £700 million, and the Chancellor has not denied that. For the avoidance of doubt, will he confirm that it is indeed the case?

If the hon. Gentleman cared to look at the figures that we published in the pre-Budget report, he would see exactly what the changes meant. It is hardly a secret; it is in documents published at the time of the pre-Budget report.

Like many Members, in these sorry circumstances I support the proposal, although it flies in the face of the simplicity that was the whole idea of the original statement in October.

It is important to have a sense of perspective. I think that between 1945 and 2002 most business owners would have been delighted at the prospect of not having to pay tax on 82 per cent. of their earnings, but that is partly a function of being in a global economy. Does the Chancellor not recognise, and will he not confirm, that this climbdown will require yet more anti-avoidance measures?

I am grateful to the hon. Gentleman. He has endeavoured to give a fair assessment of what I am proposing, and he is the first Conservative Member to say that it might actually merit support. He is right: obviously the tax rates have changed over the years. I do not think many people apart from the hon. Member for Twickenham (Dr. Cable) believe that capital gains should be taxed at 40 per cent. I think that a lower rate is right, and our rate is comparable with international rates.

I believe that this measure will help small businesses. I believe that all Members believe that people who take the trouble, put in the effort and have the initiative to set up and develop such businesses ought to be supported, and that is what I am trying to do.