This I think is probably the most important section in the whole Bill, that is to say the most important section which needs amendment. I shall describe my problem with regard to it in this way. A capital gain arises on the disposal by the owner of an asset. He is charged the rate of tax, which is to be imposed by this Bill, when enacted, on the difference between what it cost him to acquire it plus what expenditure he incurred on enhancing it, which still survives in the form of the asset. If it does not survive, if the enhancement has disappeared through an alteration, it is not allowed. He is allowed certain expenses as an individual but, strangely or somewhat obsessively, interest is not allowed. In the case of a person dying under the provisions of this section there will be no disposal and, therefore, no occasion arising for the charge to tax under the death but a charge to tax under the section or under the administration of the estate will arise only for smallish estates, or for illiquid ones whether small or large. There will then be a charge to tax.
Unlike the position in the United Kingdom, where there is a far more favourable treatment, the charge to tax will be in respect of the gain based on the owner's cost of acquisition, expense of enhancement and other allowable expenses. Now, let us forget about the fact that there is not a current problem, because we start at the base date of April, 1974 and we are thinking about the future. In the UK there is, again, not deemed to be a disposal but the legatee receives it at the market value at date of death and all the previous costs, all the previous lifetime gains, the inflationary effect of monetary depreciation on the value involved are wrapped up in the market value and it is only the post-death gain which then is taxed. That is the current position in the United Kingdom, the position which has existed since 1971.
The position which existed before 1971 was I think a better one than that proposed under this Bill. Under the previous position, in 1965, death was a disposal but there was only a taxation in respect of the gain over a specified figure, which in 1965 was the relatively modest one of £5,000. A fair amount of inflation in the last ten years might reasonably have increased that figure.
I am totally unaffected by being told that what exists in the United Kingdom now existed because of the change made by the Conservative Government and that at some time in the future the Labour Government will change it. From the point of view of the administration of estates this is the worst of all because of the obligation of the personal representative to go back and discover from the records, if there be any, what did the deceased pay for the thing. How much did he spend on it that would be allowable? If he retiled the roof that would be allowable, if the roof is still there. If there was a subsequent piece of damage done to the roof by a storm and he spent money on that, that would be disallowable, because the house and the exemption for private residence for the realisation of gain from private residence, does not apply to a sale by a personal representative. The house is deemed, for the point of view of discovering what is allowable, to have been a business asset although it never was. The personal representative has to investigate all of that, maybe during a period of 20 or 30 years, and we are legislating for the future.
The people who are now administering modest establishments will have to keep records—of course they will not because we are not a record-keeping people—for the benefit of the personal representative. The personal representative will have a duty if he does not sell the property whatever it may be. It may not be a house where you can easily discover from the title deeds what it cost. It might be an armchair. It might be a kitchen table. It might be a dining-room chair. It could be this, that or the other thing of which there is no record but this rule applies to the whole lot of them, whether sold or not. If sold there will be a gain immediately. The provision exempting gains of £500 a year does not apply to a sale by a personal representative. The provision exempting sales of chattels of no more than £2,000 does not apply to a personal representative. The provision enabling people making small gains with modest income to come under the half income rule does not apply to a personal representative. The position exempting or limiting the taxation of foreign domiciled persons to the amount that they actually remit to the country does not apply to a personal representative.
I very strongly urge the Minister, between now and the Report Stage, to make the required change in this section to enable the deemed acquisition to be at the market value at the date of death. If the personal representatives have the history of gain made by the deceased on which he paid tax and they incur losses in realising the assets in which he has reinvested these gains, these losses are not allowable against the previous capital gains tax. There is a distinction, which everyone involved in the administration of estates knows, between personal representatives and trustees. If the personal representative incurs losses having to realise part of the assets to pay debts to provide a cash legacy, and they are handed over to trustees or to a legatee, the losses are not available for either the trustees or the legatee.
If the property is settled on trust, say a young man dies leaving a widow and children and he establishes a trust for the loss, as he very often may do, then at some stage the property has to be taken out of the trust. If it is a discretionary trust it is almost compelled in certain circumstances to be taken out of the trust because the discretionary trust will be subject, unlike the British proposals, to a wealth tax. That taking out of the trust will itself be a disposal giving rise to a capital gain based not on the value at the time it was vested by the personal representatives, by their assent in the trustees, not at the value which could be determined as at date of death but at the cost to the deceased plus enhancement and other expenses. That is, in general, my case with regard to this extremely important section.
It needs amendment, not merely in relation to the question of the value at which the individual takes it. Could I anticipate what the Minister might say to me by way of response? This problem will not arise if the house is in the joint names of the husband and wife. Many houses are not. It may be desirable they should be. This problem will not arise if the property can be vested in a legatee and he can sit on it. This problem will not arise if there is advantage taken of sections 26 and 27 with regard to retirement or disposal outside the family.
I am talking about the kind of estates which do not have farms and businesses to settle, modest situations where you have a house subject to a mortgage and, hopefully, a life policy and some bit of speculation that the chap is trying to make for himself. His estate will be subjected to capital gains because of the exigencies of the situation with regard to indebtedness and making a proper position. With regard to the situation which so often exists when during the minority of children capital has to be realised to complete their education, each doling out of an asset for cash will give rise to capital gains and enormously complicated calculations. The costs of compliance with this are very considerable.
The real importance of this section is to be discovered if you set it against the pre-existing situation where you had a franking from estate duty if you had a widow and dependent children situation up what had become quite a decent provision. There is no provision of any kind for it here. At the very least, market value should be substituted and the provisions with regard to individuals contained in the various parts of this Bill, should be extended to the personal representatives of the individual in the course of the administration of the individual's estate.
I have one final remark to make. That relates to subsection (6) of this section, the provision with regard to a deed of family arrangement not being regarded as a dispossession. Of course, there will be family arrangements, hopefully if there is something to justify an arrangement, if there is enough property around to justify an arrangement. In very many cases, where you have minor children—this arises really under the next section but is relevant in this—you will have readjustments of settlements when children come of age and somebody is discovered to have the talent to run the place, if it be a business or a farm. Somebody else concedes this and takes cash and there is a variation of rights to deal with this. In a tragic case that cannot be done within two years because the children will be minors. That will be a disposal and give rise to capital gains tax on the basis not of the value at the date of the deceased husband's death or spouse's death but on the basis of what it originally cost him after complicated and expensive calculations have been made to discover what it is.
Anyone who knows anything about the business of administering estates knows the executor's year, which used to be talked about for administering an estate, is a piece of nonsense. It cannot be done in a year in most cases, unless it is all orderly. Who is so orderly as to sit down on the eve of his death getting his estate duty affidavit or its equivalent filled in for the benefit of his personal representatives? Letters will be sent all over to discover what the value is. Things will have to be valued. The calculations here requisite for a personal representative to do his duty to his beneficiary will take time.
Two years is far too short. There may be a will, there may be a probate suit about it and they will be lucky if it is heard in two years. There may be an application under the Succession Act. That is contemplated in the definition of a legacy, as amended, and rightly so. There are times given to the widow or the spouse to decide whether or not he or she will exercise his or her legal rights. There may be an incapacitated child and it may be necessary to bring such a child into wardship. It may be necessary to get the consent, if it is a minor child, apart from being handicapped.
Somebody may be abroad. Somebody may be feckless and refuse to join in. There should be some provision whereby at least somebody, like the Revenue Commissioners, could decide having regard to the facts submitted to them, that that period of two years could be given a certified extension so that advantage could be taken of this subsection. At least it ought to be two years after the attainment of the majority of an interested party whose consent may have been requisite to the arrangement.
There are things which I could say about a lot of this Bill which I do not propose to say. The rejection of indexation, which we have more or less had after the concession of the validity of the argument, is disappointing. Much of my criticism would fall to the ground if this section were amended because much of the injustice that I see, which could be done by this, would get removed. I recognise that we are here trying to reform the capital taxes. I favour the capital tax code. I believe it is right and I believe there is resentment. I resented being an income earner and not a capital gainer, seeing people getting capital gains that they did not pay tax on whereas I was paying tax on what I earned.
We should reform to achieve justice. The desire behind this is to collect revenue, irrespective of the impact in terms of justice on the people who will pay it. Let us face it, people of size and substance will not be affected. They can lock themselves in and not realise. They will take the advantage of postponement, which, in terms of inflation means that they will be paying a depreciated currency when they do pay. It is the people who will be compelled to sell, of which there are many, we should be concerned about. The most normal case is where the personal representative is to realise the family asset in the shape of which its most substantial one may be the residence, to move to a smaller place.
It is all very well if there is such complete confidence between husband and wife that the husband gives it to the wife and the wife does the same. Exemption is all right in that case, but that may not be the situation as there may not be a surviving spouse. There may be only orphans and there may be a compulsion to sell to get into more modest circumstance because of the premature death of the surviving spouse. In that case there will be capital gains tax based on the whole period of occupation of the deceased and any subsequent gain before realisation.
There is much good in the Bill. If this section were amended I would wear the absence of indexation though I think the argument which was offered here yesterday against it was completely unimpressive. The real argument against the absence of indexation is that without it you have a taking of part of the real property. It is a wealth tax not described as a wealth tax without any threshold payable by people without much money. Whether they have £100,000 or £10,000 they will pay this wealth tax without indexation. If they are in a position to hold on and if market value is given at the time of death, they can then avoid the impact of this selective wealth tax capable of selection only by the well-off who keep themselves liquid to avoid realisation. I recommend an amendment of this section.