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Session 2007 - 08
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Finance

Finance Bill



The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, † Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 8 May 2008

(Morning)

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

9 am
The Chairman: May I welcome hon. Members to the third sitting of the Finance Bill Committee. It may still be a slightly early hour for some, but summer has finally arrived, and I welcome the sun and the blue sky. The Opposition may welcome the arrival of summer in many different ways, but I am sure that that will not affect the way in which the Committee conducts its business today.
Stephen Pound (Ealing, North) (Lab): On a point of order, Sir Nicholas. Will it be permissible for Members to remove their jackets?
The Chairman: I can tell the honourable and distinguished Member that I indicated at our first sitting that if members of the Committee wished to derobe I would be quite happy for them to do so.
Stephen Pound: Within reason.
The Chairman: Indeed.
The funeral of our late colleague, Mrs. Gwyneth Dunwoody, is being held a little later today. My fellow Chairman, Mr. Frank Cook, therefore intends to take the Chair not as would be normal at 1 pm but at 1.30 pm. I understand that at the end of its second sitting the Committee clearly expressed the wish and will to meet at that time.
We now move to our real business. I call the Minister, who has a smile on her face, to move Government amendment No. 53.
<++++>

Schedule 2

Capital gains tax reform
The Financial Secretary to the Treasury (Jane Kennedy): I beg to move amendment No. 53, in schedule 2, page 109, line 3, at end insert—
‘(6A) For the purpose of determining whether a company which has a qualifying shareholding in a joint venture company is a trading company—
(a) any holding by it of shares in the joint venture company is to be disregarded, and
(b) it is to be treated as carrying on an appropriate proportion of the activities of the joint venture company or, where the joint venture company is the holding company of a trading group, of the activities of that group;
and in paragraph (b) above “appropriate proportion” means a proportion corresponding to the percentage of the ordinary share capital of the joint venture company held by the company.’.
The Chairman: With this it will be convenient to discuss Government amendments Nos. 54 and 55.
Jane Kennedy: Thank you, Sir Nicholas, for your introduction. I am grateful to you and your colleagues for being flexible on our starting time this afternoon. It will give us the opportunity to pay our respects to our very good friend.
Schedule 2 delivers the central elements of the capital gains tax reform programme announced in the 2007 pre-Budget report, with the changes taking effect from 6 April 2008. They are complemented by the new entrepreneurs relief, which is delivered by schedule 3, and which we will discuss in detail later. Taken together, this major reform of the capital gains tax regime will deliver a system that is more sustainable and straightforward for taxpayers, while remaining internationally competitive.
The schedule makes changes consequential to the new 18 per cent. capital gains tax rate introduced by clause 6; it abolishes taper relief and indexation allowance; it simplifies the rules for rebasing of costs to 31 March 1982 by requiring rebasing for all assets held on that date and by abolishing the associated halving relief; and it simplifies the rules for matching the acquisition and disposal of certain assets. Those changes replace layers of complex rules built up over many decades with a substantially simpler capital gains tax framework. For completeness, I remind the Committee that the tax-free annual exempt amount for 2008-09 is set at £9,600 per person and is not altered by the provisions in this schedule.
The amendments make a straightforward correction to the part of the schedule that deals with the definitions of a “trading company” and a “trading group”. Those definitions are relevant for a number of capital gains tax purposes, including the relief for gifts of business assets and the new entrepreneurs relief. Until now, the definitions were embedded in the legislation governing taper relief, which is being repealed. Schedule 2 therefore contains provisions intended to preserve the relevant definitions without altering their wording or effect.
Following publication of the Bill, it came to our attention that the provisions were incomplete in respect of companies with holdings in joint venture companies. The amendments in this group complete the provisions so that they fully reproduce the relevant trading company and trading group definitions. Making this change will ensure that the policy operates as it was always intended to. I therefore commend the amendments to the Committee.
Amendment agreed to.
The Chairman: It is a very good start.
Amendments made: No. 54, in schedule 2, page 109, line 37, at end insert—
‘(10A) For the purpose of determining whether a group of companies is a trading group in a case where any one or more members of the group has a qualifying shareholding in a joint venture company which is not a member of the group—
(a) every holding of shares in the joint venture company by a member of the group having a qualifying shareholding in it is to be disregarded, and
(b) each member of the group having such a qualifying shareholding is to be treated as carrying on an appropriate proportion of the activities of the joint venture company or, where the joint venture company is a holding company of a trading group, of the activities of that group;
and in paragraph (b) above “appropriate proportion” means a proportion corresponding to the percentage of the ordinary share capital of the joint venture company held by the member of the group.’.
No. 55, in schedule 2, page 109, line 38, leave out from first ‘of’ to ‘are’ in line 39 and insert
‘this section the activities of the members of a group of companies’.—[Jane Kennedy.]
Mr. Mark Hoban (Fareham) (Con): I beg to move amendment No. 3, in schedule 2, page 116, leave out lines 11 to 29.
I welcome you to the Chair, Sir Nicholas. I am not sure that I enjoy scrutinising the Finance Bill when the sun is shining as brightly it is today; indeed, I would much rather that it was wet, miserable and grey outside so that I did not think that I was missing out on very much by being here.
This is a straightforward amendment, which I hope will be accepted with the same ease as the Government amendments that we have just accepted. It would reinstate the indexation relief that the Chancellor abolished when he introduced his capital gains tax regime changes last year. Indexation relief was introduced at a time of inflation, when the uplift in the value of assets was partly due to increases in prices rather than in the intrinsic value of the assets. The proceeds from the sale of such assets were reduced not just by the cost of those assets, but by the indexation allowance.
The rules have been modified over time. Until this year’s Finance Bill—assuming that the schedule is passed unamended—the rules calculated the indexation allowance on the basis of the increase in the retail prices index between the date of acquisition and April 1998 or of the market value in April 1982, depending on which was the later. The indexation allowance was frozen in 1998, when reforms led to the creation of taper relief, which in some way reflects the inflationary gains that may have taken place since that date. The schedule now scraps the indexation allowance completely.
As a consequence, people who are disposing of assets acquired before 1998 will be taxed on the gains attributable to inflation. The Government could argue that the level of uplift in the value of assets acquired recently is relatively slight given existing inflation rates, but that does not apply to assets held over a long period. It is worth bearing it in mind that the compulsory rebasing of assets at March 1982 values captures inflationary gains up to that point, but that gains accrued due to inflation between 1982 and 1998 will be taxed.
A number of groups that have sought to hold assets for the long term will be affected by the proposed change. One group that will be particularly affected is farmers. Following the pre-Budget report, concern has been expressed in the farming industry about the impact of the changes. An article in Farmers Weekly immediately after the PBR hit the nail on the head when it said that the Chancellor’s
“decision to scrap indexation allowance means inflationary rises in the value of farmland—which have been protected from taxation—will now be liable for a hefty tax bill.”
Jeremy Moody, secretary of the Central Association of Agricultural Valuers, said:
“There’s a lot more in it than first appeared. The public’s eye was caught by Mr Darling’s announcements on inheritance tax. But the changes to the capital gains tax system are quite a serious exercise in raising money from business.”
For farmers, the abolition of indexation allowance was seen as a more serious hit than the increase in the effective rate of CGT for business assets from 10 to 18 per cent. Farmers Weekly was not the only publication to identify that issue. By considering land prices, Farmers Guardian gave an example of how the abolition of indexation allowance would affect farmers. In 1982, an acre of farmland would have cost £1,500 and could now be sold for £4,000—I suspect that the price is going up all the time due to some of the problems with food supply. The indexation allowance would have increased the base cost of an acre of land bought for £1,500 in 1982 to £3,070, roughly doubling the cost of the land. In that case, the gain per acre was £930 and, with tax at 10 per cent., the tax paid would be £93.
Under the new rules, the gain would be calculated on the cost of the land in 1982—£1,500. The gain, therefore, would be £2,500 and, with tax at 18 per cent., we are talking about a figure of £450, so there is quite a significant increase in the tax to be paid by farmers due to the abolition of the indexation allowance.
The longer an asset has been held, the greater the loss from indexation relief. Let me give an example. An asset acquired for 100 in April 1982 would attract an indexation allowance of 100.7. If the sale value of that asset increased in line with the retail prices index from the date of acquisition to the date of disposal, it would be worth on disposal now about 260. Based on last year’s rules, the gain on disposal would be 59.7 and the tax would be 14.3 per cent., assuming maximum taper relief on a non-business asset. Under the rules set out in the Bill, the gain would be 60.4, as there was no taper relief and, with CGT of 18 per cent., the tax charge would be 28.9—double the charge under the old rules.
If an asset was acquired more recently, say in 1996, the indexation allowance would be only 6.55. Assuming that the value of the asset grew in line with RPI over its life, the proceeds would be 138.2, giving a gain of 31.65 based on a CGT rate of 24 per cent. The tax paid would be 7.6 per cent. However, under the new rules, without indexation and at 18 per cent., the tax paid would be 7.2, so there would be a small gain in those circumstances, but that would be for an asset that was acquired relatively close to the freezing of indexation relief. Depending on how long the asset is held before 1998, the lower rate, which was announced in October in the pre-Budget report, does not automatically compensate for the scrapping of the indexation allowance, so there will be a significant impact on assets held for a long period.
It would be easy to suggest that the problem will diminish over time, and indeed it will diminish over time, but it is worth bearing it in mind that the most recent figures for CGT on the HMRC website, which relate to the 2004-05 financial year, suggest that more than half of all assets sold in that tax year were held before 1998 and therefore would have been subject to some form of indexation allowance. So the change will affect a not inconsiderable pool of assets. The people holding those assets will have to pay increased tax as a consequence of the decision to scrap the indexation allowance.
What is the cost of that relief? Looking at the 2007 Red Book, the cost of indexation allowance is estimated to be £300 million in 2005-06, and £280 million in 2006-07. Therefore, the abolition of indexation allowance will yield for the Treasury quite a significant part of the tax to be raised from the package of CGT reforms. However, that will come at a cost to people who have held shares for a long time. Although I have talked about farmers at some length, it is not just farmers who are affected. I have seen correspondence from constituents who have held shares for a considerable period of time who will lose out as a consequence. People who have held other types of assets over a long period of time will be similarly affected.
9.15 am
So, the question that we need to ask the Government is why they decided to proceed with the scrapping of the indexation allowance given that it is going to decline over time. Why did they think it appropriate to tax people on inflationary gains rather than on the real increase in the value of their assets? When the package of reforms was introduced in October and when the further changes were announced at the start of this year to reflect the widespread anger about the scrapping of various aspects of the CGT reform, did the Treasury consider providing some form of transitional relief to help people who had held their assets for a long time? Did the Treasury do any work at all to determine whether any particular sectors would be affected by the scrapping of the indexation allowance? It is not clear whether that work was done. I shall be grateful if the Financial Secretary will elaborate on that.
In conclusion, there are a number of issues around the indexation allowance. It is a valuable relief for people who have held assets for a long time, which is something that I thought the Government were trying to encourage. The move, however, penalises people who have done so, as it will raise significant tax revenue from them. I think that we deserve an explanation from the Treasury as to why the Government took this step when they announced the CGT reforms in October last year.
Mr. Colin Breed (South-East Cornwall) (LD): The hon. Member for Fareham has set out the position very fairly. I agree with his analysis and interpretation. Many people are concerned that huge changes have been made without any opportunity for transitional procedures to be put in place, and without any consultation. Many people have suddenly been placed in a difficult situation with little time to take the proper advice and get their affairs in order. The change that we are talking about is very large indeed. Most of the tax practitioners who have written on this have expressed concerns. They feel that there needs to be some respect for taxpayers’ legitimate expectations so that they can quite properly and fairly pay the tax that is due, but also to arrange their affairs in order to do so.
The indexation has surprised many people. Its omission in the Budget was a surprise. I remember that at a Treasury Committee meeting a year or so ago, we had to interrogate some of the private equity bosses about the way in which the taxation system was enabling them to have their income taxed as capital. Addressing that situation was a big issue. We have ended up with very little assistance in that respect. Many people still have the ability to have their income taxed as capital so that they do not pay what might be considered to be the appropriate amount. The indexation provides the Government with a significant amount of additional revenue, but does not attack those particular people in any way at all.
The hon. Member for Fareham rightly pointed to the effect on agriculture. I can tell him that land prices in the far south-west sometimes reach £6,000 an acre, and they are rising. Some considerable tax bills will be paid in future. More important for many people is the effect of the measure on second homes. Under the measure, there will be less tax on them. We envisage that second home ownership, which has already created affordable housing problems, will rise.
Hopefully, in some respects, simplification is fairer. However, it can be unfair on some people. Capital gains tax rules will not be fair until they are properly indexed. I find it difficult to accept that indexation has been abolished. It was rightly introduced when we had much higher inflation; that has come down but, nevertheless, those who have held assets for a long period and who have probably arranged their affairs in such a way as to accept that they would pay some tax, will look at the new rules and find that they go back a long way and that they will result in their paying significantly more, which they will deem unfair.
As the hon. Member for Fareham pointed out, there has been no attempt to introduce a transitional period, or to give people time to adjust. For those reasons, we support the amendment. The Government ought to think again on the measure, which will have an impact on significant matters, including employee shareholders— we have not discussed that. We wanted to encourage employees to own shares, but now they might find themselves paying a lot more additional tax. I hope that the Government will reflect on the measure and that they will have the opportunity to reconsider. The amendment, which would remove the indexation measure, is appropriate, and we support it.
Emily Thornberry (Islington, South and Finsbury) (Lab): I find myself somewhat confused by the Opposition position. I have read some of what the Opposition say in public and through the media. The Conservative party website states that
“simpler business taxes and lower rates are the right responses to demands of the modern world for a more efficient tax system...and would satisfy Adam Smith’s first principle”.
In public, the Conservatives have repeatedly stated that they want a simpler, easier tax system that everyone can understand. The difficulty with that always is that some people will lose out. We have a choice: we have either an immensely complicated tax system or a simpler one. I therefore do not understand why the Opposition do not support the changes to CGT. Previously, it was immensely complicated, with rates between 10 and 40 per cent., all sorts of exclusions, tapers, indexation and so on. As I understand it, CGT has been made simpler, so that the rate overall is 18 per cent. and there is now additional relief available for small businesses.
Mr. Hoban: The hon. Lady has pointed out an obvious issue, but she will recognise that simplification brings its own costs. The move from three rates of income tax to two is a simplification measure that has cost 5.3 million households. She must consider whether the cost of transition is worth the benefit that accrues from simplicity.
Emily Thornberry: It is probably important, to get away from entirely foggy thinking, to focus on the topic that we are on. As I understand it—I stand to be corrected if I am wrong—we are talking about CGT and its simplification. The hon. Gentleman wanted to talk about the simplification of CGT—the Conservatives wanted it and have been banging on about it for years—and now he is complaining. One of the reasons why indexation was introduced was that inflation was in double figures. He will of course know that, since the Labour Government have been in charge of the country, inflation has not been in double figures, so the need for indexation is entirely reduced.
Mr. Mark Field (Cities of London and Westminster) (Con): It is a pleasure to be here, as ever. I can understand the idea behind the Government’s desire to simplify capital gains tax and I have some sympathy—albeit limited sympathy—with the view that was just expressed by the hon. Member for Islington, South and Finsbury. There has been relatively low inflation, although one also should remember that, within a 15-year period, the compound impact of even 2 per cent. or 3 per cent. inflation is still pretty considerable and leads to distortions in the rates that apply for valuation.
The contributions made by my hon. Friend the Member for Fareham and by the hon. Member for South-East Cornwall rather hit the nail on the head. One of the biggest concerns was the lack of any consultation and indeed the lack of any sensible transitional arrangements to allow those people who have been long-standing owners of land or other assets to be able to make other arrangements accordingly.
One of the difficulties is that I suspect that the effect of this measure goes well beyond the agricultural sector. My hon. Friend the Member for Fareham rightly pointed out that he had had representations from Farmers Weekly and from Farmers Guardian; I assume that the latter publication is the preferred publication for left-wing farmers, but I stand to be corrected on that matter. I suspect that it probably has a very small circulation.
On a more serious level, I suspect that it is not just the agricultural sector that will be affected. There may well be a considerable number of other sectors that, unknowingly, will be affected by this change because there has not been a proper consultation process and there has not been the opportunity of having a transitional arrangement, so those sectors will also lose out as a result.
I am very much in favour of simplification; it is the right thing for the tax system. Ideally, it is the right thing in the longer term, indeed even in the medium term, to try to phase out the taper relief, indexing and the like. However, without repeating arguments that we had in our previous sitting, the Government need to remember that one of the great strengths of the British financial system over many decades has been that sense of certainty—that economic decisions can be made by investors, both investors on these shores and from abroad, on the basis of certainty.
What the Government are proposing is a retrograde step and I hope that they will pay due attention to the amendment and at least give an opportunity for a proper consultation process and indeed a transitional arrangement, to allow for those long-term investors who have understandably made decisions on the basis of a stable CGT regime to make their arrangements in whatever way they need to, in order to ensure that the tax burden does not become unbearable.
Jane Kennedy: The CGT regime that we are removing charged CGT at headline marginal rates of 10 per cent., 20 per cent. and 40 per cent, with a tax-free annual exempt amount of £9,200, as I said earlier. It had taper relief, which distinguished business assets from non-business assets. It also meant that, for those paying the highest rate of income tax, the effective rate on business assets came down from 40 per cent. to 10 per cent. after two years, the effective top rate on non-business assets for CGT. For those people in that highest-income bracket and paying the highest rate of income tax, the effective top rate after 10 years on non-business assets reduced from 40 per cent. to 24 per cent.
I will return to this point in a few moments, but we believe that it is reasonable to ask those people who are benefiting from capital gains of this sort, particularly where the gain is not being reinvested in the way that was intended by the taper relief, to contribute more in taxes. The new regime will charge CGT at a new rate of 18 per cent. The tax-free annual exempt amount remains at £9,600. We are withdrawing the taper relief and indexation allowance because, as I have explained, it was effectively benefiting everybody irrespective of whether it was reinvested.
There are other technical changes to simplify the rules. The entrepreneurs relief, which applies from 6 April onwards, targets business owners and material investors—in practice, anyone who has a 5 per cent. or greater shareholding—and will deliver a 10 per cent. tax rate for the first £1 million of lifetime capital gains. I believe that it remains a relatively generous regime, and bears comparison internationally.
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Mr. Peter Bone (Wellingborough) (Con): Is there not a principle here? The purpose of the indexation was to try to remove the inflationary element, so the gain was taxed—that is what capital gains tax is about. The gain that should be taxed is not the inflationary gain, but the actual gain. That is why it applied to everyone, and why it was fair.
Jane Kennedy: I shall come to that point, which is a fair one.
It has been suggested that people who have built up a business over a long time will not be able to fund their retirement—that is one concern that I have heard—but people who sell their business will benefit from an effective 10 per cent. rate on the first £1 million. Farmers are treated in the same way as everyone else for capital gains tax purposes. Capital gains tax is paid only if a farmer leaves farming. If they sell and reinvest, the gain can be rolled over and there is no immediate tax to pay. Farmers are treated in exactly the same way as anyone else disposing of an asset. Removal of indexation stands alongside a number of other changes.
I turn to the point raised by the hon. Member for Wellingborough. When indexation was introduced, capital gains tax was 40 per cent. It is now 18 per cent., or just 10 per cent. with the new entrepreneurs relief. We are not sacrificing fairness for supposed simplicity, as the hon. Member for Fareham suggested. We are committed to simplifying the tax system, and the changes to capital gains tax are a massive simplification.
We pre-announced the capital gains tax reform in the pre-Budget report so that people could rearrange their affairs if they wanted to. Whether someone pays more or less tax depends on their circumstances. The Government believe that it is right for people with capital gains above the tax-free annual exempt amount to make a contribution to public finances via capital gains tax.
The hon. Member for South-East Cornwall suggested that we did not consult sufficiently, but we have engaged with a wide range of individuals and groups to listen to views on capital gains tax reform, and it is widely known that that included the Confederation of British Industry, the British Chambers of Commerce, the Institute of Directors, the Federation of Small Businesses and the Engineering Employers Federation.
Mr. Breed: I am sure that the Minister consulted, and I am sure that there was broad consensus for simplification and some changes, and that the principle of capital gains tax should be considered, but I am also sure that the consultees pointed out that some groups will be harder hit, that there should be transitional arrangements, and that people should be given time. There may have been broad agreement for simplification, but I am certain that the consultees suggested that time should be provided for people to adjust their affairs and that specific groups should have been considered.
Jane Kennedy: I hear what the hon. Gentleman says, but the announcement in the pre-Budget report, with implementation in April this year, was intended to allow people time. It could be argued that that is not much time, particularly as we then introduced further changes, and the entrepreneurs relief in January.
Mr. Hoban: The Minister says that people were given adequate notice to reorder their affairs, but part of the problem was that there was so much uncertainty about what the reforms would be, because the Chancellor dithered for months about whether there would be any backtracking on the reforms. People had only a short window in which to plan and reorder their tax affairs.
Jane Kennedy: If the primary purpose of a reform is simplification, introducing a transitional period reintroduces complexity to the process. We also took account of feedback from HMRC’s consultation with tax experts and others following the announcement in the pre-Budget report. The Treasury does not generally consult on tax rates, but once the change was announced, the Government engaged with a wide range of groups, as I said.
The hon. Member for Fareham asked whether we considered transitional relief. As I said, to have introduced a transitional process would have reintroduced complexity. Disposal before April 2008 attracted indexation allowance where it was relevant. We considered that it was right to remove indexation as an integral part of the simplification of capital gains tax. He also asked what work had been done on different sectors affected by the scrapping of indexation allowance—the hon. Gentleman speaking for the Liberal Democrats made the same point. The Government consider all relevant aspects of such changes when we work on policy changes. Removing indexation is just one element of the capital gains tax reform, but we did consider the impact on different sectors.
Mr. Hoban: Can the Minister identify which sector she believes will be most affected by the abolition of indexation allowance, other than the farming sector?
Jane Kennedy: As the Exchequer Secretary to the Treasury, my hon. Friend the Member for Wallasey says, because this is a tax on an individual’s disposals, it will depend on that individual’s circumstances. But when we are considering reforms of this nature, we examine all relevant aspects. Individual tax bills will depend on individual circumstances. It is worth noting that some people with second homes will no longer benefit from indexation allowance. Amendment No. 3 seeks to preserve indexation allowance for periods of ownership prior to April 1998. When we introduced these reforms, we recognised that it would be inappropriate to remove indexation allowance without warning. Consequently, disposals made before April 2008 continue to attract indexation allowance where that was applicable. Following that brief period of transition, we believe it is now right to remove the allowance as part of the broader reform and simplification of the capital gains tax regime. In particular, the removal of indexation allowance streamlines the capital gains tax calculation and facilitates the major simplification of the share identification rules also delivered by schedule 2. If indexation allowance were retained, these welcome simplifications would be lost.
I note that the amendment makes no provision for the necessary consequential changes to the share identification rules in that respect. It makes no provision for recouping the revenue that would be lost if indexation were retained. Because indexation allowance was frozen in 1998, only a minority of disposals now qualify. In addition to maintaining complexity, the amendment would benefit only the relatively small group of individuals who acquired assets before 1998. Indexation allowance works by reference to the acquisition cost of the asset in question, so it is of no benefit where the acquisition cost is low or zero, for example, for someone who has built up a business from scratch.
Mr. Hoban: I am grateful to the Minister for her explanation. It goes half way towards addressing my concerns, but not the full way. She referred to a process of simplification—a point that the hon. Member for Islington, South and Finsbury made in her brief contribution. Part of the challenge of simplifying the complex system of taxation is to do it in a way that is planned, well thought through and achieves a particular end. I am afraid that the reforms that the Chancellor introduced in October were the tax equivalent of a handbrake turn. There was no sense that they had been the Government’s direction of travel. I shall return to that point on stand part. There was a sudden change in direction; there was no sense that the Government were heading towards the abolition of either indexation allowance or taper relief. That sudden change has angered people.
The Minister says that the Government do not normally consult on tax rates, but this is a significant restructuring of the taxation of individuals. It is not just about tax rates, but about changing a whole range of rules. She referred to taper relief, but the changes also affect pooling arrangements for shares, the kink test and the halving allowance. There are to be quite significant changes to the structure, not just the rate, of taxation.
The way in which the decision was taken unsettled people. It was unpredictable and created uncertainty, and it was difficult for people to know where the Government were going to end up. There seemed to be a slow and steady march back from the reforms that the Chancellor announced in the pre-Budget report, and there was great uncertainty until his announcement in January.
Mr. Jeremy Browne (Taunton) (LD): Does the hon. Gentleman share my view that although the Government might not consult on rates, it is perfectly proper for them to consult on timing? The effect of the truncated time scale was that some people who, perfectly reasonably, were not able to make reasonable and necessary adjustments to their affairs were hit by a tax that had the characteristics of a retrospective tax.
Mr. Hoban: I understand the hon. Gentleman’s point. A number of people were able to make changes to their arrangements and reorder them, and I am sure that many lawyers and accountants were grateful for that work in the run-up to 6 April. There have been many stories in the paper about it. Lord Sainsbury, who I think was the largest personal donor to the Labour party, reordered his tax affairs prior to 6 April to take into account the capital gains tax changes, and he was not alone in doing so. People had to cobble their responses together, which relied on their having access to proper advice and sometimes to funds to help them to restructure their arrangements. It was not a very good way of dealing with tax policy.
Emily Thornberry: When considering the levels of income and assets of people who will be paying CGT, one ought to keep one’s feet on the ground. It does not apply to homes, pensions, anything over £5,000 a year, individual savings accounts, personal equity plans or tax-exempt special savings accounts. One feels that the complaint from the Opposition is that it is not fair that the rich have to pay taxes.
Mr. Hoban: The hon. Lady rattles the sword of class warfare. She should think about the 250,000 people who are in employee share schemes. It is estimated that they will lose out as a consequence of the reforms. The changes will affect not just people on high incomes or owning the quantity of shares that Lord Sainsbury holds, but people with modest holdings in the business in which they work. They will find themselves paying higher tax as a consequence of the reforms. She talks about keeping our feet on the ground, but she should listen more to people on the ground who will have to pay higher taxes—not just the rich but people across the whole income strata. The sword of class warfare should be put in its scabbard for the time being and she should move on.
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John Penrose (Weston-super-Mare) (Con): Does my hon. Friend agree that the people who are more likely to suffer are not the rich, who can afford to pay the high short-notice lawyers’ fees necessary to adjust their affairs, as Lord Sainsbury did? The people who will be hardest hit are those who are not up on that sort of thing and who do not employ high-class tax lawyers. They are more likely to be the hard-working middle-class families that the Labour party always says it is trying to help.
Mr. Hoban: This could turn into a battle for middle England, with people fighting on both sides. My hon. Friend makes an important point.
Jane Kennedy rose—
Mr. Hoban: I will give way to the Minister, as she has been gracious in giving way during this debate, but first I will finish responding to my hon. Friend’s point. He is right. Some people will be able to afford the fancy legal advice and the structures that accountants are good at putting together in order to respond to such changes. I spoke to one accountant after the pre-Budget report who planned to dust off some of the schemes that they had used before to convert income into capital, because a differential has opened up in tax rates, as the Liberal Democrats have been keen to point out in previous debates. Some people sitting on relatively modest portfolios of shares, which they may have inherited or built up over time, will miss out in consequence. One example that I saw was somebody in their 80s who had shares that they had held for 20 or 30 years. They will miss out as a consequence. As ever, people with access to good advice will be able to reorder their affairs, but that is not always available to everyone.
Jane Kennedy: I think that the hon. Gentleman is wrong about employee shareholding schemes. I understand that employees making disposals of their shares will not pay capital gains tax if the gain that they make when they sell the shares, when combined with any other gains, is less than the threshold, which is generous. Equally, if someone holds shares from their employer under an approved share incentive plan, the cost of the shares that they can deduct in working out the gain on the sale is the value of the shares when they were taken out of the SIP. That will not be affected by the capital gains tax rules. I do not want the hon. Gentleman to suggest that such schemes will be disadvantaged.
Mr. Hoban: The Minister should be aware that the organisation ifs ProShare wrote to the Treasury about the issue towards the end of last year, pointing out that, in the schemes that it examined in conjunction with some of its members, there were situations where employees’ gains exceeded the annual exemption of £9,200, and would therefore be subject to CGT—I will touch on this point in the stand part debate, so I do not want to spend too much time on the matter—because they are affected by the abolition of taper relief. When the Chancellor was asked by the Select Committee on the Treasury about the impact on employee share schemes, he had no idea what the impact would be. Ifs ProShare did some work on the matter. I shall touch on that later.
I am concerned about indexation allowance. It was introduced for good reasons. Yes, inflation is lower now than it has been, but as my hon. Friend the Member for Cities of London and Westminster pointed out, even at relatively low inflation rates, the base cost of an asset can increase significantly on a compound basis, and there can be a significant element of inflationary gains. Such inflationary gains may have been made when inflation was a little higher, but they will be taxed through the abolition of the indexation allowance. The impact of the abolition will depend on when those assets were bought: the longer assets have been held, the greater the impact will be.
Will the Minister comment on that, if she has the information to hand? The issue will decline over time. As I mentioned in my opening remarks, the last set of statistics from Her Majesty’s Revenue and Customs website indicated that about half the value of assets sold would have qualified for some form of indexation relief. Can she give an estimate of how, if indexation relief remained in place, it might decline over time?
Stephen Hesford (Wirral, West) (Lab): Unless we are in a state of rampant inflation—it has been mentioned before in relation to why indexation came in—what is the difference between asset appreciation and inflation in the normal sense? Is it not double counting? Is not an inflationary rise in an asset the same thing as an increase in an asset’s value?
Mr. Hoban: I am not sure that the hon. Gentleman is right. He needs to distinguish between nominal and real growth in the value of an asset, in the same way that, in dealing with GDP, we would strip out nominal growth in GDP when looking at the figures overall. It is possible to distinguish between the two, and clearly it was a matter of sufficient concern to lead to the introduction of the indexation allowance.
I can see where the Minister is going with simplification, and we agree that simplification is the right approach to tax reform. The Opposition have advocated it for some time. However, it needs to be done in a measured and thoughtful way, with mindfulness as to the consequences and the losers. Thought should be given to the consequences of what is done and whether it would be appropriate to mitigate losses. I do not think that the Government have demonstrated that they have thought through the process particularly well in the run-up to the reforms. I do not know whether the Minister wants to make any further comments about how she approached the matter.
Jane Kennedy: I do, in the stand part debate.
Mr. Hoban: The Minister does. I shall perhaps return to the subject at a later point. The debate has been fruitful and perhaps hon. Members on both sides of the House should have an opportunity to discuss the issues on Report, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That this schedule, as amended, be the Second schedule to the Bill.
Jane Kennedy rose—
The Chairman: I suspect that the hon. Member for Fareham wishes to speak. If he rises, he will catch my eye.
Mr. Hoban: I was not entirely sure, Sir Nicholas, whether the Minister would choose to open the debate on the schedule. I was being polite, as my mother taught me, and allowing a lady to go first.
I suppose I start, in discussing the schedule, almost where I left off. If simplification is to be successful the Treasury needs a clear understanding of its impact. It must understand who the winners and losers will be, and the impact of the reforms, and must work that through. On Tuesday the Minister and I agreed on the importance of consultation on change, and on how important it is to engage tax advisers and the business community in consultation. The schedule provides a very good example of how consultation could have saved the Government’s blushes.
Mr. Browne: Does the hon. Gentleman share my concern that some Labour members of the Committee seem somewhat complacent about future prospects for inflation? I readily acknowledge that inflation has been consistently low in Britain in the past 10 years, and that is a record of genuine achievement by the Government, but there are many inflationary pressures now, including those on food prices and energy bills. Many of our constituents do not recognise the official inflation rate as representative of their day-to-day experiences at the moment. Would many people not regard it as a strange time to be taking away indexation when all of the pressures on inflation seem to be upwards?
Mr. Hoban: The hon. Gentleman makes a valid point. I think that people are concerned about inflationary pressures. I do not think that anyone can afford to be complacent about inflation, and anyone who talks about its death is being premature. We benefited hugely from the falling value of imports from places such as China and we have benefited historically from low food prices. Inflationary pressures there demonstrate that inflation is not dead. We should be mindful of that and not be complacent.
Mr. Field: Have not Opposition Members repeatedly expressed concern about the reliability of public statistics? Over recent months, given the price of petrol and food in particular, there have been big concerns among politicians about the official statistics and inflation figures, in particular, which seem so out of kilter with what the public at large regard as inflationary. If we do not at least begin to empathise with public feeling and their everyday experiences, we will run the real danger of creating even more cynicism not just about statistics, but about the political process as a whole.
Mr. Hoban: My hon. Friend makes an important point that all politicians need to be mindful of. Whether buying petrol by the litre or barrel, it is important to understand the costs. I find it difficult sometimes to rationalise the gap between how I see food and fuel prices rising and inflation rates. It is all very well to say, “Official inflation rates include a basket of goods, and some things will be falling in price, such as white goods, DVD players or televisions”, but of course people do not buy a television every day, so they will not experience that fall in price. It is right, therefore, to empathise and understand the plight that families face when confronted with rising food costs—although I fear that none of that is related to capital gains tax.
Dr. Nick Palmer (Broxtowe) (Lab): Given that we have ventured down this avenue, is the hon. Gentleman saying that the Conservatives would introduce a new measure of inflation other than the consumer price index?
Mr. Hoban: We have said that we believe that independent statistics are an important part of the triple lock on stability. However, I also think that part of the challenge that we face as politicians is to empathise with people as well as rely on the statistics and facts. For many people, perception is reality. I am very careful about what I say about statistics, because the Titchfield office of the Office for National Statistics is in my constituency, and I know that it does all that it can to ensure the reliability, accuracy and integrity of its statistics.
Mr. Siôn Simon (Birmingham, Erdington) (Lab): May I invite the hon. Gentleman, on behalf of the official Opposition, to think again about the Liberal Democrat notion that we must all be shy of indexation in case it causes inflation? That is essentially what he said. That is not a very grown-up or intelligent economic point, which he knows perfectly well. Surely, we do not have to go down this silly Liberal road.
Mr. Hoban: I shall spring to the defence of the hon. Member for Taunton—for a change. I am going to disappoint the hon. Member for Islington, South and Finsbury, but she and I have discussed this before. He said that we should never be complacent about inflation, that it might return and that we should think, therefore, about an indexation allowance. I do not think that he was saying that inflation would rise as a result of indexation allowance. I do not think that he was trying to draw that causal link—
Mr. Simon: What is the causal link? What is the point then?
Mr. Hoban: The point is that, historically, during times of inflation, people were taxed on inflationary gains. Gains that were not accruing because of an increase in the real value of the asset were simply increasing because prices were going up. That was the point of indexation—to compensate for and reflect that some gains were not due to the real increase in the value of an asset. That is why the indexation allowance was introduced.
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That was why people were keen to ensure that inflation was reflected in the calculation of gains. We are in danger of going back to the debate on amendment No. 3, which reflected that, as a consequence of the tax reforms introduced by the Chancellor, historical inflationary gains would be taxed, whereas previously they would have been untaxed.
Dr. Palmer: Will the hon. Gentleman give way?
Mr. Hoban: I will, but I am keen to move forward as I am mindful that we are losing half an hour in the next sitting.
Dr. Palmer: I was trying to find a full stop at the end of the hon. Gentleman’s sentence. I would like to clarify the Conservative party’s position. Is it to continue with current inflation measurement, but with added empathy?
Mr. Hoban: I think that it is to reflect the fact that there are two measures of inflation. Many people become alienated from politicians who say, “Ah, but RPI is only X,” when their daily experience is that it is higher. Not everyone feels that the rate of inflation measures their personal experience. One reason why the ONS enables people to produce their own inflation rate on its website is so that they can see how prices change for the basket of goods that they buy.
Emily Thornberry: That is a soundbite. What is the hon. Gentleman going to do about it?
The Chairman: Order. The hon. Lady is very articulate, but if she wishes to speak, I trust that she will be on her feet, not in a sedentary position.
Mr. Hoban: If I had thought that inflation would be a suitable topic for debate during the Finance Bill, I would have tabled a probing amendment on it, but on a wider basis than simply the indexation allowance.
Let me return to the stand part debate on schedule 2. I do not believe that the Government fully thought through the impact of the simplification. They wanted to capture the political agenda with a bold measure in the aftermath of the speech made by my hon. Friend the Member for Tatton (Mr. Osborne) at the Conservative party conference in Blackpool. They thought that simplifying capital gains tax would be the answer and that they would get widespread support for that. Interestingly, they managed to pull together all four leading business organisations in opposition to their reform—an achievement in itself. In going for that bold headline, they missed the point that this is a complex tax and that they should proceed carefully with any simplification of it.
John Penrose rose—
Mr. Hoban: I shall give way, but I trust that my hon. Friend will not ask me about inflation.
John Penrose: I promise not to ask about inflation. I should like to illustrate my hon. Friend’s point. Does he agree that if the Government’s agenda was purely to simplify capital gains tax by reducing indexation relief, and if they had thought through all the implications, the logical way to do it would be to reduce the headline of the CGT, because, if we are to get rid of indexation relief, the two would equal each other out? They did not do that, which means that their motivation was not purely simplification.
Mr. Hoban: My hon. Friend raises an important point. Even after the Chancellor’s climbdown on the entrepreneur’s fee, the CGT reforms are still going to raise an extra £700 million for the Exchequer. My hon. Friend makes an important point about how people perceive simplification packages.
The Chairman: Order. Will the hon. Gentleman address the whole Committee, as well as the Chair?
Mr. Hoban: I am sorry, Sir Nicholas. I was trying to avoid seeing the rest of the Committee so that I could make some progress without having to respond to more interventions.
If people see a simplification package simply as a tax-raising measure, they doubt the motive behind it, even if that doubt is unfair.
I want to deal with three issues in this debate: the abolition of taper relief, the impact of the repeal of sections 77 to 79 of the Taxation of Chargeable Gains Act 1992, and the abolition of halving relief.
Taper relief was introduced to encourage assets to be held for the long term. By providing an enhanced rate for business assets, it also provided a further incentive for entrepreneurs to invest in start-ups and for people to hold AIM shares; indeed, it perhaps also encouraged employee share ownership.
Last week, in the stand part debate on clause 6 in the Committee of the whole House, my hon. Friend the Member for Braintree referred to the former Chancellor’s remarks about the introduction of taper relief. Interestingly, the 1998 Red Book says:
“The Government believes the capital taxation system should better reward long term investment particularly in economically productive business assets. The Government also wants capital taxation to be simpler and fairer to understand.”
Given the thought that would have gone into introducing the system in 1998, it was presumably simple, but the Government should clearly make it even simpler. Here we are, however, 10 years later, scrapping the incentive for long-term investment in economically productive business assets.
It is difficult to fathom quite why the Chancellor decided to abolish taper relief, which is one of the elements of his reforms that has come in for the most criticism. In the early part of last year, there was considerable debate about the taxation of gains and the speed at which the lowest rate could be obtained. The focus of that debate happened to be the private equity industry, and there was concern that, in two years, private equity bosses could pay taxation at as little as 10 per cent. on gains on their carried interest. There was great debate about that, and there was some suggestion that a special deal had been made for private equity, but taper relief was available for a wide range of individuals and business assets. Indeed, I think that the boss of Gala Bingo who pointed out that every employee of the firm was able to claim taper relief on the shares that they held.
If that debate about private equity and the speed at which the 10 per cent. rate was achieved were the trigger for the present reforms, why did the Treasury not look at extending the period of the taper and taking it back to the level that it was at in 1998? That would have achieved the goal of restoring the emphasis on holding assets for the longer term and of retaining the framework that people understood. The 1998 reforms also incentivised people to invest in economically productive assets and to hold them for longer. There was a tax incentive for people to invest in high-risk assets, such as shares on AIM or new start-ups, rather than to invest in listed companies or second homes.
By abolishing the differentiation between business and non-business assets, the Chancellor’s reforms will send a signal through the tax system that the Government are neutral about whether people invest in high or low-risk assets. That has led to a position where a second home is taxed at the same rate as the profits on the sale of a successful business, if the person concerned has exhausted the entrepreneur’s relief.
Mr. Field: My hon. Friend is making a good and thoughtful point. Perhaps the raw politics was that the Government had a somewhat long-term agenda in 1998, but that that had become much more short term by last autumn. Does my hon. Friend agree, however, that one of the biggest problems with the taper is that it has not applied for long enough periods? Decreasing those periods, as happened in the early part of this decade, to just two years for the 10 per cent. relief—not only in private equity, but beyond—goes against the admirable goal of encouraging long-term share investment. I fear that it is a reflection of the economy in which we live that even shareholdings held for four years are regarded as long term, when shareholdings held for far longer periods should have been rewarded. Is that not very much what my hon. Friend has in mind for the sort of longer term reforms that we in Conservative party would like to introduce to encourage long-term and stable investment?
Mr. Hoban: My hon. Friend makes an important point. I do not consider two years as being long term. It does not give people an incentive to hold on, perhaps for the growth of a business. It simply says that after two years people will get the lowest rate of tax. In retrospect, the Government might think that shortening the taper to two years was a mistake. However, rather than stick with the present structure of capital gains tax, which people understand, they decided to go for a much more radical simplification, and there will be a degree of pain to bear as a consequence.
Stephen Hesford: Is the hon. Gentleman making a spending commitment? He suggests not only reintroducing the taper, but lengthening it so that there will be a loss of revenue to HMRC. Is this a Tory spending commitment?
Mr. Hoban: I have not yet spotted a spending commitment. I am trying to tease out from the Government their rationale for abandoning a feature of tax policy within months of the new Chancellor taking office. Why did he throw out reforms that were a centrepiece of his predecessor’s agenda to encourage investment and stimulate entrepreneurialism? I am trying to expose their thinking and bring it into the open, rather than saying how we would do this ourselves. I am not writing our 2010 Budget today.
Stephen Hesford: It looks as though the hon. Gentleman would.
Mr. Hoban: No. If I were to follow the hon. Gentleman’s advice, I would have to sit like a Trappist monk throughout our proceedings and say nothing. That is not the purpose of the Opposition, although Labour Members could say nothing and let business progress—something that they have failed to do this morning.
I wish to expose the Government’s thought processes to a wider audience. We are undertaking a valuable service. It would help if the Minister were to explain why the Government sought to move away from the central plank of the previous Chancellor’s approach to stimulating investment and chose instead to abandon the distinction between business and non-business assets. That abandonment sends a particular signal to people.
I turn to employee share schemes, which are important, although we skated over them in a previous debate. They allow an opportunity for the interests of employees to be aligned with the company and other shareholders. They give people a much more long-term interest in the success of their employers. Those schemes in place enable people who hold shares to qualify for the business asset taper. Even if they invest in listed companies, they have access to taper relief in a way that others do not. Under the scheme, the basic rate taxpayer who held shares for more than two years would have paid tax at 5 per cent. on the gains. They will now be landed with a bill of more than three times that amount, with the tax now at 18 per cent.
The estimate of ifs ProShare, which was shared with the Treasury, was that about 250,000 people would lose as a consequence of the reforms. Those are people whose gains exceed the £9,200 annual exemption. Those investors are employees of firms with household names who have built up their shareholdings in a series of save-as-your-earn schemes and savings for retirement. A large number of people will lose, and not only the rich. People on modest incomes who were putting money aside from their salary every month to buy shares in their employer, which I think is a good thing, will also lost out.
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As I said, ifs ProShare looked at the issue. I am concerned about how well thought through the reforms were and whether the Government thought about those groups affected. In Treasury Committee evidence, the Chancellor said:
“I am not sure how many employees who have shares will be in the happy position of having an annual gain of £9,200”.
That is another example of the way in which the reforms have been done on the hoof.
Another example that I forgot to mention earlier relates to the sectoral impact of the reforms. The Minister and her colleague the Economic Secretary would have received representations from the insurance sector about the impact of the reforms on the comparable tax treatment of mutual funds and insurance bonds. The sense that I got from talking to some people in the insurance sector was that the Government had not really thought the impact through before they introduced the reforms of the CGT in October last year.
I know that the Government have kept CGT under review. They consulted in 2001 on reforms to capital gains tax. They also consulted on simplification. It is interesting that in the response to the consultation, people put forward such outlandish notions as the abolition of taper relief and indexation allowance. The Treasury dismissed those suggestions in 2001 because it was happy with the existing structure. Suddenly, between 2001 and 2007, without anyone knowing about it, the Treasury decided that those outlandish reforms were quite good ideas really. The Treasury’s process of thinking was not shared with the industry; hence the reason why I used the expression “handbrake turn” in relation to the proposal. People knew the direction in which the car was travelling until the driver slammed on the handbrake and did a complete U-turn, and when people do handbrake turns, the passengers become rather unsettled and critical of the driver. Therefore, it is not surprising that the Government took a hit over the issue. It is also not surprising that people think that the UK tax environment has a poor reputation for certainty and predictability. It would be helpful if the Minister explained a bit more about why the Government suddenly decided to throw over taper relief, which was seen as such a structural part of the way in which the Government encouraged entrepreneur activity in the UK.
I shall move on to two slightly technical issues. The first is the repeal of sections 77 to 79 of the Taxation of Chargeable Gains Tax 1992. The explanatory note to the repeal is very rocky. It states that the reforms mean that there is no need for those sections to remain on the statute book because the rate of capital gains tax is the same for the settlor and trustees of a trust in which the settlor is deemed to have an interest. We have received representations on that issue in relation to two sets of circumstances. The first is where the settlor has an interest in the trust and the second is where the trust has been created for a vulnerable person—a term defined in law.
Sections 77 to 79 mean that where a settlor has an interest in a trust, if there are chargeable gains, they accrue to the settler. Under section 78, the settlor is entitled to recover the amount of the tax from the trustees. The existing rules also enable the personal losses of either the settlor or the vulnerable person to be used to reduce the chargeable gains on the trust. The concern expressed by the Law Society and others is that the repeal of sections 77, 78 and 79 precludes the losses of either the settlor or the vulnerable person to be used to reduce the chargeable gains. I understand that that emerges as a consequence of the cross-reference in section 77 to section 2(2) of the same Act, which enables allowable losses to be offset against chargeable gains.
It appears that repealing sections 77 to 79 will mean the loss of the ability of the settlor or vulnerable person to use their personal losses to reduce the tax liability that arises on the trust. I do not think that that the Government intended to make that change. Will the Minister clarify whether that is the case and whether, as in the case of Government amendments Nos. 53, 54 and 55, it is an omission that ought to be rectified?
My second technical point is on the abolition of halving relief. It harks back to the discussion that we had about indexation allowance, which I shall not reprise. The relief was introduced to relieve accrued pre-1982 inflationary gains that were trapped in assets as a result of the application of a deferral relief, by which the gain was held over or rolled over to a later period. In cases in which part of the gain accrued before the introduction of the indexation allowance, but the taxation of that gain was held over, the notional gain triggered at the date of transfer was halved when the tax was paid. That was a way of giving relief on pre-1982 inflationary gains.
The abolition of halving relief will mean a tax increase, as all the heldover gain will be subject to tax. Presumably the Government thought through the implication of the abolition of the halving relief, and it is certainly consistent with how they dealt with the indexation allowance, but it will have an effect on people who had rolled over their gains and expected a lower tax bill.
The Chairman: Before I call the next speaker, I remind the Committee that I shall be obliged to adjourn until 1.30 pm in about two minutes’ time. I call Colin Breed.
Mr. Breed: Thank you, Sir Nicholas.
I think that there is a measure of agreement across the House about the need for simplification and the fact that it is appropriate to tax capital gains. However, we also accept that fairness plays an essential part in taxation in general and in the proposals. That fairness should be ensured by recognising that certain groups and technicalities, which have just been pointed out, need to be considered—for instance, employee share schemes, longer-held assets and, in many parts of the country, second homes.
Those matters could and should have been addressed in a much fuller consultation, and some groups could have been treated more fairly. Some things perhaps even ought to have been exempted, such as employee share schemes, and transitional arrangements for others could have been implemented without any great increase in complication. For those reasons, the Government should be given the opportunity to reconsider the whole issue of indexation in the capital gains tax regime. On that basis, the schedule should not stand part.
The Chairman: I call Stewart Hosie—50 seconds.
Stewart Hosie: I feel that I may be speaking again at 1.30 pm.
The hon. Member for Fareham spoke about winners and losers, and there has been a great deal of discussion about employee share schemes and save-as-you-earn schemes. The Minister has given some explanation of how they will be treated, but I hope that she will address the issue of share options, which has not been addressed so far. Like actual shares, they are given as a reward for loyalty or as a bonus, for example. In the case of a plc takeover, those share options crystallise into real shares to allow the—
It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at One o’clock.
 
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