(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 91 - Charge to tax

Finance Bill – in a Public Bill Committee am ar 13 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Amendment proposed (this day): 15, in clause 91, page 54, line 2, at end add—

‘(10) The Treasury shall within three months of Royal Assent of this Act publish an assessment of the impact of the charge to tax in this section if subsection (2)(b) did not apply.’.—(Catherine McKinnell.)

Question again proposed, That the amendment be made.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

I remind the Committee that with this we are discussing the following:

Clauses 91 to 106 stand part.

Government amendments 70 and 71.

Clauses 107 and 108 stand part.

Government amendment 73.

Clauses 109 to 113 stand part.

Government amendments 74 to 76.

Clause 114 stand part.

Government amendments 77 to 79.

Clauses 115 to 129 stand part.

Government amendment 80.

Clauses 130 to 133 stand part.

Government amendment 81.

Clauses 134 to 147 stand part.

Government amendments 82 to 85.

Clause 148 stand part.

Government amendments 86 to 91.

Clauses 149 and 150 stand part.

Motion to transfer clause 150.

Clauses 151 to 160 stand part.

Government amendments 95 to 100.

That schedule 31 be the Thirty-first schedule to the Bill.

Government amendment 92.

Clauses 161 and 162 stand part.

Government amendments 101 and 102.

That schedule 32 be the Thirty-second schedule to the Bill.

Clauses 163 to 166 stand part.

That schedule 33 be the Thirty-third schedule to the Bill.

Government amendments 93 and 94.

Clauses 167 to 172 stand part.

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to welcome you back to the Chair this afternoon, Mr Amess, and to respond to the thorough—some might say lengthy—debate that we had this morning. I welcome back those hon. Members who have returned after lunch.

As we heard, clauses 91 to 172 and schedules 31 to 33 introduce the annual tax on enveloped dwellings, or ATED, which is an annual charge on residential properties valued at more than £2 million owned by certain non-natural persons, which is a term that encompasses companies, partnerships that include a company member and collective investment schemes. For brevity during the debate, which could do with some brevity, I will generally use the term “companies” as shorthand to describe non-natural persons.

If I may, I will now provide an overview of the tax and its background. It is the will of Parliament that stamp duty land tax is paid on transactions of land. While the majority of people pay their property taxes, some try to avoid paying their share. The Government are determined to address that and to ensure that those who own residential properties in Britain pay their fair share.

Enveloping describes a process by which a property is placed into a company, often as its only asset. The property can then effectively be transferred to another owner by selling the shares of that company and such a transaction would not be subject to stamp duty land tax.

Her Majesty’s Revenue and Customs estimates that the stock of enveloped residential properties valued at more than £2 million in 2011-12 was more than 5,000. About 300 further properties were enveloped during 2011. Research published in April 2012 by the estate agent Savills, to which the hon. Member for Newcastle upon Tyne North referred, indicates that some 12% of sales of £2 million-plus residential properties are effected at share level or involve a company as vendor or purchaser. That is a high-profile form of tax avoidance that creates a cost to the Exchequer and needs to be addressed to maintain the long-term credibility of stamp duty land tax. I remind the Committee that that is the purpose behind the provisions before us.

Let me now set out what action the Government have taken. We announced at Budget 2012 a package of measures to tackle tax avoidance, including the wrapping of property in corporate and other envelopes, and to ensure that non-natural persons holding high-value dwellings pay their fair share. The package included the introduction of a 15% rate of stamp duty land tax on residential property valued over £2 million for companies other than property developers with a two-year track record, the introduction of an annual charge on enveloped properties and the extension of the capital gains tax regime to disposals of high-value property by non-UK residents.

We consulted on the changes during 2012 and 2013 and the legislation before us today is the outcome of much discussion and consultation with interested parties. Indeed, the Chartered Institute of Taxation commented that the Finance Bill’s

“draft clauses have benefitted considerably from the well-managed consultation process to frame reliefs from both ARPT and the higher rate of SDLT that will take genuine businesses out of the scope of the charges.”

I will now outline how the new tax will work. It is introduced with effect from 1 April 2013 and each chargeable period runs for a year. The first tax return in the first year of operation of the tax will be due on 1 October 2013, rather than 30 April—as will be the case in subsequent years, with payment of the tax in the first year by 31 October 2013. The amount of tax due will be determined by the value of the property, with four bands ranging from £15,000 for properties valued at more than £2 million, but not more than £5 million, up to £140,000 for properties at valued at more than £20 million. If the property were within the scope of the charge for only part of the year, the tax would be reduced proportionately.

The amount of tax chargeable under each band will be uprated each year by the value of the consumer price index in September of that year. The provisions contain reliefs and exemptions to exempt genuine businesses that hold their properties in structures within the scope of the tax but do so solely for commercial reasons, including property rental and development businesses, properties opened to the public, farmhouses, charitable companies, and public and national bodies.

The hon. Member for Newcastle upon Tyne North went through the various clauses and I do not intend to repeat that process, but I am grateful for her thorough explanation of the provisions. I shall, of course, turn to the various questions that she asked in respect of them. However, before doing so, I draw attention to amendment 15 to clause 91 tabled by Opposition Members. It would require the Treasury to

“publish an assessment of the impact of the charge to tax in this section if subsection (2)(b) does not apply” within three months of Royal Assent of the Finance Bill. Essentially, subsection (2)(b) applies the tax to a company, partnership or collective investment scheme. The amendment’s intentions are clear. The Opposition believe that, by not applying subsection (2)(b), the annual tax on enveloped dwellings would turn into a mansion tax.

As for (2)(b) or not (2)(b)—that is the question—it is better to suffer 2(b) than not. [Laughter.] Opposition Members are asking for an assessment of the impact of the mansion tax rather than explicitly for the introduction of a mansion tax, but they have given us an opportunity to discuss the matter a little. An amendment to introduce a mansion tax would widen the scope of the tax and would therefore be excluded from being debated in Committee. However, asking for an assessment does not change the scope of the tax, but allows the Opposition to raise the issue.

We reject the amendment. Introducing a mansion tax has been debated twice. The Government are clear about their position, and the matter does not need to be debated again. In Committee of the whole House, we expressed our real worries about the introduction of a mansion tax. One third of properties in London worth  more than £2 million have been in the same ownership for more than 10 years. As such, a mansion tax could hit asset-rich but potentially income-poor households. A family could live in a house worth £2 million, but have a £1.6 million mortgage. That would mean that its net wealth would be £400,000 and the family could not easily afford a mansion tax. A mansion tax would be administratively burdensome for HMRC to operate at a cost to taxpayers, not to mention intrusive for those having their homes inspected. I shall turn in detail to the distinction between a broader mansion tax and the measure that we are discussing later in my remarks.

Photo of Chris Evans Chris Evans Llafur, Islwyn

The Minister cites the example of a £1.6 million mortgage—a huge sum. The mortgage income multiplier is roughly three-and-a-half times someone’s wages and, as a former financial adviser, I know that to secure such a mortgage a person would have to be earning a six-figure salary. A mansion tax of 1% a year would be affordable in that instance. To refer to only £400,000 is a little simplistic. Does the Minister agree?

Photo of David Gauke David Gauke The Exchequer Secretary

No, I do not. We heard from the hon. Member for Newcastle upon Tyne North that the Opposition would have a mansion tax that would raise £2 billion to fund the reintroduction of the 10p rate of income tax—I appreciate that the Opposition’s policy on the 10p tax rate tends to move around a little, but that is their current policy. We must bear in mind that, according to the most up-to-date assessment we have, 55,000 properties are worth more than £2 million. If a mansion tax were to raise £2 billion a year, the average contribution for each one of those properties would be just over £36,000 a year. That strikes me as a fairly significant sum of money, given that the vast majority of properties worth more than £2 million are in fact only just worth more than that—they tend to be clustered more towards the lower end of that price range. The sum involved is significant and makes some Government Members think that if the intention really is to raise £2 billion a year, the threshold will have to be significantly lower than a £2 million value for a property and the mansion tax will very rapidly become a homes tax.

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian

Households in my constituency have been told they will have to move out of their houses because they have an unoccupied bedroom. Will the Minister help me to explain to those households that it is not okay to say to someone living in a house with a value of over £2 million that they need to do their bit to bring down the deficit as well?

Photo of David Gauke David Gauke The Exchequer Secretary

I take it from the hon. Lady’s intervention that she is happy to support a rate of £36,000 a year for a home worth £2 million. Perhaps she is, but the point I would make is that she should look at what the Government are doing across the board to ensure that the wealthy pay their fair share. Indeed, the biggest contribution towards deficit reduction is coming from the wealthiest.

Photo of Sheryll Murray Sheryll Murray Ceidwadwyr, South East Cornwall

Does my hon. Friend agree that the comparison made by the hon. Member for East Lothian is not a good one? The constituents to whom she referred are in social housing;  if somebody owned a house with an extra bedroom that they could not afford, they would sell their house and downsize.

Photo of David Gauke David Gauke The Exchequer Secretary

They are two very different matters: one concerns the spare room subsidy, the other would be a substantial charge on properties owned by individuals. There is also the question of whether, given their supposed interest in controlling welfare spending, the Opposition maintain the position that they would reverse the spare room subsidy changes the Government have made.

Photo of Marcus Jones Marcus Jones Ceidwadwyr, Nuneaton

My hon. Friend is putting forward a very interesting argument against what the Opposition propose. Does he agree that those proposals are a Trojan horse and are probably the prelude to a future council tax revaluation? Many of our constituents would have to pay more council tax if the Opposition were in government.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend makes a very good point. As I have said, given the Opposition’s ambitious target of raising £2 billion and the relatively small number of properties worth more than £2 million, one cannot help feeling that the base would be broad; to coin a phrase, this is a policy for the many, not the few. My hon. Friend is right to raise concerns about that.

We are already taking steps to ensure that the wealthy pay their fair share, as I said a moment ago. That is why we have introduced the 5% and 7% rate of stamp duty land tax. Anyone purchasing a new home costing £2 million or more has to pay stamp duty land tax at 7%.

In addition, the amendment does not achieve the result that the Opposition would like it to. Further changes to the legislation would be required, for example, to clause 93, which provides rules for the person liable to the charge—rules only for the named non-natural persons. It does not provide that an individual should be a chargeable person. There would therefore appear to be a charge to tax, but no one who was liable.

Difficulty would also arise in other areas of the legislation. For example, clauses 106 and 107 would not operate properly. Not applying subsection (2)(b) of clause 91 would not turn ATED into a mansion tax, as the Opposition wish, so an assessment of the impact of the charge to tax under the condition would be fruitless. For all those reasons and because of our fundamental position on the matter, we do not support the amendment. I will certainly ask the Opposition to withdraw it. Indeed, I shall give the hon. Member for Newcastle upon Tyne North an opportunity to do so now.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 2:15, 13 Mehefin 2013

I appreciate the technical points that the Minister makes, but the whole point of the review is to assess the impact as though subsection (2)(b) or not (2)(b) would not apply and therefore it would take into consideration the technicalities that he refers to, which would need to be adjusted in order to ensure it applied properly. It does not take away the fact that it is asking for a basic assessment of the impact of applying the charge to  individuals in the same way that the Government are proposing to apply it to enveloped dwellings. I appreciate that there is a policy difference between the Government and the Opposition on this issue, but the Government cannot hide behind technical reasons to oppose the amendment.

Photo of David Gauke David Gauke The Exchequer Secretary

There are technical difficulties with the amendment. If I were to be generous to the hon. Lady, I would say that she is right to say that any review would no doubt highlight all the technical difficulties. None the less, it does not quite do what the Opposition want it to do. I appreciate that she spoke to the clause and amendment at short notice. She may want to raise her concerns with her hon. Friend the Member for Nottingham East, who failed to pick up those points in other clauses. That is something that we would certainly not have expected from the hon. Lady. However, let me not try to stir up difficulty on the Opposition Front Bench.

The hon. Lady is right to say there is a difference of view with regard to the mansion tax. In 13 years, the Labour party never introduced any proposals for such a tax and showed no enthusiasm for it for some time after the general election. Indeed, we have had an indication that there was no enthusiasm for it during coalition negotiations. I am still interested to know whether the Opposition are comfortable with a rate of £36,000 a year for every property worth more than £2 million, because that, on a quick calculation, is what it would cost. That seems to me a very significant cost indeed.

Turning to Government amendments 70 to 102, there are a series of minor, technical amendments to the legislation: amendments 81 and 92 to 102. Drafting changes will clarify the intention of the legislation and remove any potential cause for confusion. I do not intend to go through them line by line.

There are two sets of more substantial Government amendments that I will describe in a little more detail. Amendments 70 to 72 adjust the aggregation of interest rules in clauses 107 and 108, and amendments 73 to 80 and 82 to 91 adjust the relief from ATED for charities outlined in clauses 148 and 149.

Along with the removal of clause 108, the amendments to clause 107 make changes to prevent any separate interests held by an individual in a dwelling from being aggregated with an interest held by a connected company, if the taxable value of the interest held by that company is not more than £500,000. That will further target the ATED only at circumstances where tax avoidance is a risk, and will exclude cases where a connected company owns an interest in land worth comparatively little for genuine reasons, such as to satisfy a third-party landlord’s requirements. Those changes will allow the policy objective of the tax to be better met.

In response to representations from charities, I have also tabled more substantial amendments in relation to one of the reliefs from the ATED charges: the rules relating to charitable companies relief. The rules in clauses 148 and 149 currently refer to the substantial donors legislation used elsewhere to prevent abuse of income tax relief for charitable donations. That legislation is being prospectively repealed or replaced by rules in schedule 3 of the Finance Act 2011, which are known as the tainted donations rules. They are targeted at ensuring that tax relief cannot be claimed by the donor where the  donation gives rise to a financial benefit to the donor. The first set of amendments will therefore base the anti-avoidance provisions in the charitable companies relief on the new tainted donations rules, instead of on the old substantial donors rules.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth

Will the Minister give some clarification about who from the charitable sector made representations to him? As he will know, I used to work in the charitable sector and previously have worked on many of these issues, so I was wondering whether he had heard from across the sector, from sector-wide bodies, or from a particular group of charities.

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful to the hon. Gentleman for his question and I am keen to give him an accurate and precise answer, or an indication, at least. While addressing other points, if I may, I shall think deeply to see whether I can recall the exact details to respond to his excellent question.

Clauses 148 and 149 concern the nature of any arrangements between the charitable company and the person making the gift to allow that person or an associate to occupy the property. Where the gift and the arrangements would not have been entered into independently of one another, the gift is potentially tainted. Where that occurs, the charitable company will come within the scope of ATED.

We are aware that some properties are genuinely donated to a charity on the condition that the donor or the donor’s family will be allowed to continue to occupy the property. The family’s presence often adds to the historic significance and setting of the property, and they may facilitate public access by opening the property.

To allow the tax to be better targeted, the second set of amendments will allow the relief for charities to be claimed if, in such a situation, the property or its gardens are normally open to the public for at least 28 days per year, and that is on a commercial basis or for charitable purposes. The amendments are intended to ensure that the right balance is struck between the need to protect ATED from potential abuse and the need to protect charitable companies from unnecessary or potentially onerous obligations. For that reason, the final change to the legislation will be to change the provision from being a relief, which needs to be claimed annually, to an exemption. The effect of this will be that charitable companies will not need to file returns except where they are within the anti-avoidance rules.

Given that I have set out the amendments we have tabled as a consequence of representations received from the charitable sector, let me respond to the question raised about where some of those representations came from. They included the National Trust—I should declare an interest as a member; Stewardship, a conglomerate of charities; the Wellcome Trust; and representations through HMRC’s charity tax forum. Therefore, a broad range of charities raised those issues.

Let me turn to some of the points raised in debate. I touched earlier on administration, in particular the comparison made with the mansion tax. With regard to the ATED, there are around 5,000 enveloped properties above £2 million a year. About 1,000 of those are likely to be liable to the tax. That compares with 55,000  properties in the UK valued at or over £2 million. Immediately we can see that there is a difference in scale of administrative challenges.

The ATED takes a self-assessment approach. We believe that is the appropriate approach given the number of properties involved. HMRC can then take a risk-based approach to checking those. If all properties over £2 million were included, there would be a much stronger need for a formal valuation process by the Valuation Office Agency.

A valuation exercise by the VOA would cost around £10 million and take about 24 months, with further ongoing costs of around £2 million per annum. It would be extremely complicated because, at the high end of the market, the evidence of comparable transactions is limited. The specific characteristics of a property could have a significant impact on the valuation.

The set-up costs for HMRC in year one are in the region of £700,000, to establish IT support and returns, plus £500,000 to £1 million in year one for VOA costs, with an annual running cost of about £400,000, which is a small percentage of the revenue that is to be raised.

The hon. Member for Newcastle upon Tyne North asked how advanced the process is. I understand that HMRC believes it is on track for delivery of this tax and the first returns by 1 October. It will be staffed to assist queries, now and over the introductory period. As the impact is limited, the number of staff needed will be small.

The hon. Lady asked why very expensive properties are charged at a lower rate measured against the value of the property. We believe the charges are sufficient, with the 15% SDLT rate, to discourage enveloping. We must remember that that is the purpose of the legislation.

I was asked who will do the valuations, how many would be done and whether the VOA is staffed appropriately to deal with it. I will provide comfort to hon. Members by saying that the VOA is adequately staffed. I have run through the costs, many of which are set-up costs, not annual costs. The valuations will focus on boundaries and those properties that may be close to falling outside ATED or moving into a different band. At this stage, it is not possible to say how many properties will fall into each charge band. We will know that with sufficient confidence only once the legislation is in place.

As for why we set the bands where we have, I come back to the rationale behind these clauses: to discourage SDLT avoidance. Given that it is not possible to identify how many properties will be in each band, we cannot make a specific estimate of how much will be raised from each band or type of corporate persons; that will not be available until we get the first returns in.

I was asked whether there were ways in which ATED could be avoided, for example, by de-enveloping or by using a trust structure instead. It is worth reiterating that if a property is taken out of an envelope, ATED has achieved its purpose; that is what we seek to address. Trusts have been excluded from the scope of ATED as the sale of interest in trusts is rare and complex. If it becomes apparent that there is exploitation of trusts for the purpose of disposing of high-value property, the Government will address that.

A point was raised with regard to partnerships, the Chartered Institute of Taxation’s comment on the portability of interests and whether clause 165 overrides case law, with a partner potentially being taxed on the full value of interests, and what the intention is on charging partnerships. The legislation was amended in response to the CIOT’s comments. It is clear that partners have a beneficial interest and the legislation is clearly intended to catch those situations. On the question of capital or full share, it is the intention to charge the partnership on the property irrespective of the capital share of individual corporate partners. It is important to note, however, that most partnerships carry out a genuine business and will benefit from the available reliefs.

A question was asked about uprating under CPI. We believe that it is fair that the amount payable is uprated by CPI, the usual measure for uprating in the tax system. Otherwise, in real terms, those paying the tax would be paying less than they did in the previous year, which would be at odds with the aim to discourage the holding of property in envelopes. As to why there will be no increase in the bands by property index, it is correct to say that the thresholds will not be uprated annually. That is for reasons of simplicity. Otherwise, valuations would need to become more frequent, which would increase the administrative burden. There are real advantages to having clear boundaries on rounded numbers.

I turn to the questions on reliefs. On how many businesses will be impacted by those, as I said earlier we estimate that about 5,000 will be within the charge but 4,000 will be relievable. Therefore, 1,000 will pay and the other 4,000 can make use of interim relief.

In terms of double tax relief, whether ATED will be eligible and whether relief from income tax will be given on money remitted to the UK to pay the charge under the remittance basis, there are no provisions to relieve tax levied by any overseas fiscal authority. This is a tax on UK property. The remittance basis of tax provides a generous allowance and the Government have no intention of increasing that.

To return to administration, on the question about how much the ATED helpline cost and whether it is ready for first returns or whether additional staff will be needed, advice has already been given to the public in relation to that. The staff are in place for processing the returns, which will number about 5,000 and be managed as business as usual by that unit. The cost of running the phone line is included in the overall numbers I have already given.

As for how mixed-use properties will be treated and who will determine whether a property is suitable for use, in the Harley street example, it is highly likely that business rates will be paid for the commercial part, with the residential part designated as such by the council. A property that is used for business and cannot be occupied as a residence due to planning law will not be deemed suitable for use as a dwelling. Whether a property is suitable for use is a question of fact to be determined by the tax tribunal, and HMRC will publish guidance on that.

A question was raised about the impact across the country. It is true that the regional impacts were not set out in the tax information impact note. Some properties in rural areas that meet the ownership conditions will  be within the charge, but we anticipate that the majority of returns will come from London and the south-east, reflecting the national distribution of high-value properties.

On historic houses and the concern that the relief is too generous, the relief requires the property to be run on a commercial basis. Charging an impossibly high fee to visit or not advertising appropriately is not commercial. Therefore, a property in those circumstances will not be eligible for relief. HMRC will take a risk-based enforcement approach to ensure that the relief is not abused.

There was a question about clause 110, and about where the definitions—for example, the meaning of dwelling—can be found. HMRC will provide guidance by the end of July, before Royal Assent. A question was asked about what happens if a company holding the property has no income or funds to pay the charge. If the company does not have available funds, then in the absence of money being put into the company, HMRC will take robust collection action, and the people who own the company would need to decide what to do, as per any normal company debt.

As for the questions about whether one group files returns and about groups with multiple properties, each company in a group needs to file its own returns. Where a relief is claimed, a single return can be made per return by each company. Where there is a liability to make a payment, one return per property is required. In terms of the administrative burden, the Government believe that the five-year system of revaluation will limit the potential burdens, but new returns will be required from a small number of taxpayers.

The amendments are intended to ensure that the right balance is struck with ATED. The annual tax on enveloped dwellings is a tightly drawn tax with specific purposes. It will counter the avoidance of stamp duty land tax, which was allowed to go on for too long by the previous Government. It will ensure that those who own high-value residential property in a contrived fashion pay their fair share of tax. We have undertaken extensive consultation on the tax and responded to concerns about how it will affect genuine businesses.

I hope that my overview of the new tax and the clauses is helpful to the Committee. I urge the Committee to reject Opposition amendment 15, and I hope that clauses 91 to 172 and schedules 31 to 33, as amended by Government amendments 70 to 102, stand part of the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 2:30, 13 Mehefin 2013

I thank the Minister for his comprehensive reply to our comprehensive debate. However, we are not convinced that all the issues that we want to see explored have been covered, such as how the ATED tax could be extended to apply to residential and individual properties, as well as the enveloped dwellings that are already included in the measure. We have two Liberal Democrats in the Committee who will, I assume, be able to support the measure. Our proposal would enable the Government properly to explore the possibility of a mansion tax. We will press the amendment to a vote, because we want them to look seriously at the matter and decide, using the resources that they have available, whether this might be a way to pay down the deficit and contribute to a fairer tax system.

Question put, That the amendment be made.

The Committee divided: Ayes 11, Noes 16.

Rhif adran 8 Decision Time — (Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 91 - Charge to tax

Ie: 11 MPs

Na: 16 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

We now have quite a lengthy procedure to go through. We will put the questions necessary to dispose of the remaining amendments, clauses and schedules in part 3 of the Bill. I propose to deal with amendments to the same clause together, and to deal with consecutive clauses or schedules with no intervening amendments together. I shall, however, take clause 108 stand part separately, because the Government propose to remove the clause. If any hon. Member requires a separate Division on any other clause or schedule, or on any amendment, will they please let me know?

Clause 91 ordered to stand part of the Bill.

Clauses 92 to 106 ordered to stand part of the Bill.