I move: "That the Bill be now read a Second Time."
This Bill represents a further step in the Government's announced programme of reform of the capital taxation code. The main objective of the Bill is to mould the tax on capital gains into a form which, while reinforcing the tax on speculators and "get-rich-quick" merchants, will, at the same time, refrain from penalising the person who has devoted much time and effort to building up a business. Almost everyone will, of course, gain from the proposed adjustments for inflation contained in the Bill.
As I mentioned in my budget statement in February of this year, this government have never opposed the principle of a tax on capital gains. However, we do believe that such a tax should not have the effect of penalising hard work and inhibiting enterprise. The Government believe in a more refined system which will not penalise genuine effort and unduly bear on gains accruing from hard work and investment. In opposition, the present Government were highly critical of certain aspects of the Capital Gains Tax Act, 1975. We believed that the Act contained a number of major faults, chief of which was that it did not distinguish between gains which were the returns of investment and hard work over the years, and speculation which aimed at a quick profit with little or no economic input. A second major fault with the 1975 Act was that it did not distinguish between real gains and paper gains resulting from the high inflation of recent years. In such circumstances a person could be taxed on a purely nominal gain, whereas there was a loss in real terms. The continuation of such a situation is unacceptable to this Government and amending provisions are, accordingly, provided for in the present Bill.
A further unsatisfactory feature of the 1975 Act was that a person, subjected to compulsory acquisition of his property by a local authority or other body, could find himself not alone compelled to give up his property but also liable for capital gains tax on that involuntary disposal, even though payment of that tax might have been deferred under the provisions relating to roll-over relief. We consider that in such cases the vendor should be at least entitled to acquire property, similar to that which was compulsorily acquired, without being taxed on what was after all an involuntary disposal.
The Bill now before the House, as well as rectifying these major flaws in the existing legislation also changes some other features of the capital gains tax code, particularly in relation to property passing on a death and to disposals within the family by persons over 55 years of age.
I now turn to the individual provisions of the Bill.
Section 1 is the Interpretation Section and is self-explanatory.
Section 2 increases the basic rate of capital gains tax from 26 per cent to 30 per cent. This increased rate will apply in the case of those disposals which will not be able to benefit from the special tapering relief contained in section 4.
Section 3 proposes a fundamental reform in capital gains tax. It provides that, in calculating the gain on the disposal of an asset, the allowable expenditure (such as the cost of the asset and certain enhancement expenditure) may be adjusted in line with changes in the All Items Consumer Price Index between acquisition and disposal. When the Capital Gains Tax Act, 1975 was before the House I pointed out that the lack of any such provision was a major flaw in that legislation especially in the light of the very high inflation of that time. While this Government have taken steps which have had the effect of contributing significantly to the lessening of inflationary pressures, it is, nevertheless, desirable as a matter of principle that such provision should be made at this time. We do not consider it satisfactory or equitable to impose capital gains tax simply on the basis of an increase in the monetary value of an asset between one given date and another. In the circumstances of recent years one could easily be in the position of being taxed on a paper gain which was, in fact, a loss.
The effect of this section is that any increase in the value of an asset due to inflation as measured by the consumer price index should be taken into account in deciding the real gains consequent on the disposal of that asset. It is not proposed that the new indexation arrangements will operate in such a fashion as to charge an amount in excess of the monetary gain or to transform a monetary loss into a gain. Also, the new procedures will not operate so as to increase a monetary loss or transform a monetary gain into an allowable loss.
Special provision is made for assets held on 6 April 1974, which was the commencement date for capital gains tax. Under the 1975 Act either the market value at that date, or a time apportionment method, would have been appropriate in order to determine the gain in the case of assets held on that date which were subsequently disposed of. Section 3 (2) provides that the market value on that date will be the determining factor in future. Because only the gain since 6 April 1974 will be liable for taxation in the case of disposals of such assets, and since it will be necessary for indexation purposes to obtain a valuation of those assets at that date in any event, the time apportionment method is no longer appropriate.
Section 4 proposes a further fundamental change in the rate structure of capital gains tax. The new structure is based on the principle that the rate of tax should be related to the length of time for which an asset is held between acquisition and disposal.
A basic aim of any capital gains tax should be, I believe, to discriminate between the speculator and the genuine entrepreneur or businessman or farmer. Equity clearly demands that investment and hard work should not be penalised while economic logic demands that a capital tax should not act as a disincentive to economic activity. A man who builds up a business over 15 or 20 years, putting time, effort and money into its improvement and expansion, should not be taxed on the same basis as somebody who simply buys and sells an asset within a short time, relying solely on market forces to increase the value of the asset in question.
One way of making a distinction between the two categories in the capital gains tax system is to have the rate of tax depend on the period of ownership. The length of ownership can be regarded, in general, as an indicator as to whether the owner acquired the asset as a genuine non-speculative investment or whether he acquired it merely in the hope of disposing of it to achieve a short-term gain as soon as market forces were favourable. Accordingly, section 4 proposes that there will be a reduction in the rate of tax payable for every period of three years during which an asset is held before disposal, leading to total exemption after 21 years. The period of 21 years will run from the date of acquisition of the asset, irrespective of when it was acquired. In passing I may say that a distinction between long and shortterm gains—the latter being generally regarded as being in the nature of income—is clearly recognised in the taxation systems of more than half of those OECD countries which tax capital gains.
As development land gains and gains arising out of the discovery of mineral deposits normally arise from factors other than the time and efforts of the owner of an asset, this tapering relief will not apply to such gains or, consequentially, to gains from disposals of unquoted shares deriving the greater part of their value from such land or assets. In addition, the relief will not apply in the case of disposals by companies. However, tapering relief will normally apply in relation to the sale by an individual of his shareholding in a company.
Section 5 rectifies another major omission in the 1975 Bill. It provides that, where certain assets are compulsorily acquired and the whole of the compensation received is invested in similar or comparable assets, the assets compulsorily disposed of and the replacement assets will be treated as a single asset and, for the purposes of capital gains tax, a disposal will be treated as not having taken place.
In keeping with our belief that the taxation code should not act as a disincentive and should treat people fairly, it is considered that a man should not be penalised on the occasion of a compulsory disposal of an asset provided he reinvests the compensation in a similar or comparable asset. In such a case his possession of the asset in question has been terminated through no fault of his own and it is clearly inequitable to tax him in such circumstances as if it were a normal realisation of assets. If, however, a man chooses not to reinvest the compensation in similar or comparable assets, then he is using the occasion of the compulsory purchase proceedings to realise his assets and so his liability must be dealt with under the normal rules. If an amount greater than the amount of compensation received is invested in the new asset, the extra amount will be treated, for the purposes of sections 3 and 4, as having been invested in the purchase of a new asset. Of course if a part of the compensation proceeds is not reinvested there will be a part disposal of the original assets for the purposes of the capital gains tax.
These provisions should help to ensure equity in cases of compulsory disposal of assets and to encourage reinvestment of compensation moneys.
Section 6 changes the law concerning the transfer of assets on death. Under existing law, if a person inherited an asset and subsequently disposed of it, any gain on the disposal was calculated by reference to the cost of the asset to the deceased owner and not by reference to the value at the time of the deceased's death. This valuation approach has several drawbacks. First, it means that a beneficiary could be liable for capital gains tax on gains arising during a time when he did not own the asset. Secondly, it encourages the retention of business or farming assets in the hands of successors who might not have the capacity to use these assets to their best economic advantage. Thirdly, where the successor or executor has to sell the inherited property in order to pay debts incurred by the deceased or for other reasons, the imposition of a charge to capital gains tax could create a financial problem in certain circumstances. The arrangements I am introducing in section 6 avoid these drawbacks by providing that assets acquired on a death are valued by reference to the market value at the date of the death. The transfer of assets on death continues, of course, not to be an occasion of charge to capital gains tax.
Section 7 is concerned with the acquisition of settled property by an absolute owner on the death of a life tenant and provides for a new valuation arrangement as at the date of death of the life tenant in line with that set out in section 6.
Section 8 extends the relief provided under section 27 of the Capital Gains Tax Act, 1975 in three important ways. Section 27 gave total relief from capital gains tax in the case of disposals of certain business assets on retirement by a parent to a child or, in certain cases, to a niece or nephew, if various conditions were fulfilled. One of these conditions was that the value of the assets transferred did not exceed £150,000. The existence of this qualifying limit meant that any person with a farm or business worth more than £150,000 was discouraged from transferring the property to the younger generation during his lifetime. The removal in this Bill of the £150,000 limit will encourage the early transfer of family property into younger and more active hands, which is desirable on both economic and social grounds.
The second change made in the section 27 relief under this Bill relates to the proportion of the total assets transferred. Up to now, the relief would apply only if the entire farm or business property was transferred. No provision was made for a situation where a father wished to hold on to a small part of his farm for himself while transferring the major part to his son, or to a situation where he wished to transfer say half to his eldest son at a certain date and the remainder to a younger child at a later date. Section 8 remedies this deficiency by enabling the section 27 relief to be given if either the whole or only part of the asset is disposed of to the child.
The third change allows the parent to benefit from both the section 27 and section 26 reliefs contained in the 1975 Act. The section 26 relief relates to disposals outside the family where the consideration does not exceed £50,000. Up to this, the two reliefs were mutually exclusive and consequently the situation, where a father wished to sell part of his business or farm for cash outside the family, say to provide for his old age, while transferring the remainder of the property to his children, was not catered for. Under the provisions of section 8, the two reliefs can now apply in any particular case if the other conditions governing the reliefs are fulfilled.
Section 9 is concerned with the interaction of the new reliefs provided in sections 3 and 4, that is, indexation and tapering rates, respectively, with the operation of the roll-over relief arrangements contained in section 28 of the Capital Gains Tax Act, 1975.
Section 10 amends the anti-avoidance provisions in section 39 of the 1975 Act relating to disposals to and by charities and certain other bodies in order to adapt those provisions to the new provisions for indexation and tapering rates. It is not intended, however, to interfere with the exemption given to genuine charities under section 22 of the 1975 Act.
Sections 11, 12, 13 and 14 provide for amendments of a technical nature to the Corporation Tax Act, 1976 to bring the corporation tax code into line with the changes introduced by sections 2 and 3 of the Bill.
Section 15 brings the period for lodging appeals against a capital gains tax assessment into line with the period of 30 days allowed in the case of income tax assessments.
Section 16 and Schedule 1 are concerned with the technical details of the operation of the indexation and tapering reliefs contained in sections 3 and 4, including, in paragraph 6 of the Schedule, a provision to counteract avoidance of tax by manipulation of the tapering relief by certain shareholders in close companies.
Section 17 and Schedule 2 provide for the necessary repeals in the Capital Gains Tax Act, 1975, as a consequence of the measures introduced in this Bill.
I commend the Bill to the House.