| Finance (No. 2) Bill
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Mr. Gibb: Does not the clause also contradict the Government's purported aim when they abolished repayment of dividend tax credits to pension funds? They said that the previous regime encouraged companies to pay dividends and, therefore, short-termism. Here, they are encouraging the opposite. Mr. Loughton: My hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) makes a pertinent point. The clauses covering capital gains tax are highly self-contradictory. The Government are saying one thing about long-term investment, but the practical implication of what they are doing will encourage short-termism. That point was well made by my hon. Friend. The clauses will seriously affect investor behaviour and distort investor decisions. If the Financial Secretary is correct, that will affect more than 100,000 people. Smaller savers especially use their annual allowance to mitigate the accruing of potential liability to tax, even if only by inflationary pressures. Now that the indexation facility has gone out of the window, inflationary pressures will be more considerable for investors. It is right that they should be able to use the relief, but they will no longer be able to do so if they cannot use the bed-and-breakfasting facility. There is a sneaking suspicion that the measure is a first step towards the eventual abolition of capital gains tax allowance. The second amendment seeks to allow rollover of unused capital gains tax allowances for a six-year period. Ideally, I would like the bed-and-breakfasting facility to be retained, but I am hopeful that, if I am charming enough, the Financial Secretary will accept the amendment covering that with due courtesy. However, as a fallback and if we do not get on to a sound footing today, amendment No. 242 would give investors the same facility that is already available through the carry over of losses, although that is available for an indefinite period. If investors are no longer to have the bed-and-breakfasting facility, rather than lose their £6,800 CGT allowance which, hopefully, will increase in future years they should be allowed to roll the allowance forward to future years, to a time when it is convenient and prudent from an investment point of view for them to sell. In that way, they could use not just that year's CGT allowance, but the previous several years' unused allowances, up to six years. That is only reasonable. That would be of great benefit to investment in property. At present, the CGT allowance is especially useful when dealing in equities and other pooled funds, where one can sell a clump of shares or units in a unit trust. It is not practicbl to sell off a wall of one's house or several bricks in a property. If investors were allowed to accumulate several years' unused CGT allowance, when they sold investment property they could set off several years' CGT allowances against the profit that they made. That would have especially healthy implications for the rented market and we have already discussed the shortage of rented property. It would help with schemes such as the previous Government's rent-a-room scheme, which encouraged home owners to use rooms in their houses for cheap lettings to people in need of rented accommodation. Therefore, the clause could have serious implications for the provision of much-needed housing space: we may have to concrete over our countryside in order to provide the 4.4 million new homes that the Secretary of State for the Environment, Transport and the Regions would have us believe we need. I seriously recommend both amendments, but certainly recommend the second as a fallback if the first is not accepted. I fear that the clause is badly thought out. The Government should have the courage of their convictions; if they think that using a £6,800 CGT allowance is an abuse, they should abolish it. I hope that they do not do that, but that is the implication of the clause. I am sure that it is not the Government's intention to discriminate against smaller investors, as these measures undoubtedly do, and I am sure that they will want to encourage the efficient use of capital. If the Government reject the amendments, I fear that to that long litany of fat-cat tax avoiders which has so far included aid workers, teachers working abroad, pensioners with small numbers of shares in their portfolios and disabled trust beneficiaries will be added small, prudent investors. Mr. Edward Davey (Kingston and Surbiton): While moving the amendment, the hon. Member for East Worthing and Shoreham (Mr. Loughton) touched on many arguments that I want briefly to skirt over because they are pertinent to amendment No. 242, which stands in my name and that of my hon. Friends. Bed-and-breakfasting is being portrayed by the Government as some sort of tax loophole. Perhaps its[Mr. Edward Davey] name is somewhat unfortunate; it sounds like some sort of dodgy exercise by someone trying to make a quick buck, but nothing could be further from the truth. It is a legitimate tax planning mechanism. I do not understand how a device whereby individuals can use their annual CGT allowance could be described as anything but legitimate. The device was originally introduced into the tax system to promote savings, to encourage share ownership and the growth of capital and to provide an incentive for savings and investment. As it was introduced deliberately, it would surely be sensible to encourage ways in which people can take most advantage of the allowance. It is a good feature of the tax system, not only because of the incentives that it provides, but because it promotes efficiency in tax planning. As we have heard many times, CGT is complex to administer and I fear that, as a result of the Bill, the complexities will increase exponentially. The CGT allowance and bed and breakfasting ensure that those complexities are reduced somewhat. I fear that the Bill will increase the costs of administering the CGT system for companies, individuals, tax practitioners and the Inland Revenue. To consider tax theory for a moment, the tax system should be moving in the general direction of equal treatment of capital and income. A former Chancellor, Nigel Lawson, made an important step in that direction by making the marginal rates of tax on income and capital the same. That was an important and welcome development. We should consider making the income tax allowance and the CGT allowance the same. If we consider the tax system in that light, we begin to see why getting rid of bed and breakfasting is inappropriate and illegitimate. We should think of the CGT allowance as an annual allowance similar to the personal income tax allowance. We should ensure that savers and those who earn an income can take full advantage of those allowances. Making the CGT allowance and the income tax allowance the same would have been much more consistent with the Government's approach to the development of the tax system. One approach could have been the reduction of the CGT allowance, but the best approach would have been to increase the income tax allowance. In the long term, that is the right method to take people further out of tax. It would produce a much more coherent tax system and would attempt to ensure that capital gains were taxed in the same way as income. Mr. Geraint Davies (Croydon, Central): May I ask the hon. Gentleman whether he has evaluated the cost of raising the income tax allowance to £6,800? Mr. Davey: I am more than happy to deal with that intervention as, in the next few weeks and months, my party will put on record the cost of our proposals for an increased income tax allowance. The increased income tax allowance is a fairer way of reducing the overall income tax burden for those on low pay than introducing an anomalous 10p or 20p tax rate. The CGT annual allowance is important in removing anomalies and unfairnesses in the current tax system. An individual who makes a £12,000 capital gain in one year is liable to tax for £5,200 of that amount. Another saver, who manages to spread that £12,000 gain over two years, has no tax liability. When such small amounts of capital gain are involved, the tax system should enable both individuals to have no CGT liability and to spread their tax liabilities. That would be a fair way of assisting ordinary individuals saving small amounts. Getting rid of bed and breakfasting would penalise those people. The abolition of bed and breakfasting is totally contrary to the Government's stated aim of promoting long-termism, as the hon. Member for East Worthing and Shoreham outlined. The Government seem not to understand the impact of the change. It will encourage savers to switch out of the equities that they hold and into other equities. They will do that rather than staying with shares to which they are attached and with which they want to stay, simply for tax purposes.
11 amWe could take the example of a Manchester United fan who wants to invest in his team and who has seen the shares rocket through the roof. He wants to ensure that his liability on those shares is kept to a minimum. If he is considering serious and sensible tax planning, he will, as a result of the proposed change, have to shift into shares in Tottenham Hotspur. That could be difficult for an individual and shows how ridiculous and short-termist the Government's approach is. Mr. Loughton: If the hon. Gentleman studied the stock market a little more closely, he would notice that Manchester United shares have more than halved in value. There would, therefore, be no gain to take, which slightly undermines his cause. Mr. Edward Davey: I am happy that the hon. Gentleman made that point. Obviously, he does not represent a constituency in Manchester. I am sure than hon. Members who do would want to ensure that people stuck with their shares because they would assume that they were a sensible investment over the long term. The bizarre point about the proposal is that it is fairly easy to circumvent the Government's aim of taking away bed and breakfasting. The pages of the serious financial journals are already awash with ways in which people can get round the Government's intentions. It is easy for married people to get round them. I suggest that the Minister has a word with the Minister without Portfolio, because he could put a spin on the issue. The proposals are an incentive to marriage because people can reduce their tax liability by getting married. They can exchange shares with their spouses to reduce their tax bill. That shows that anomalies that the Government are introducing by getting rid of bed and breakfasting. The financial press has made a series of other more complex proposals for circumventing the Government's intentions on, for example, future options on shares. An investor can buy back shares after the 30 days and ensure that his exposure is limited.
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| ©Parliamentary copyright 1998 | Prepared 16 June 1998 |
