SDLT: property authorised investment funds and co-ownership authorised contractual schemes

Finance Bill – in a Public Bill Committee am 12:45 pm ar 7 Gorffennaf 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss that schedule 16 be the Sixteenth schedule to the Bill.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee

This clause and schedule introduce a relief from SDLT for certain property funds and co-ownership schemes. The relief aims to remove barriers to the use of particular ways of investing in property. The transfer of property into property authorised investment funds and co-ownership authorised contractual schemes is currently subject to stamp duty.

As set out in the HMRC policy paper, this clause and schedule introduce a 100% relief from stamp duty land tax for the initial transfer, or seeding, of properties into an authorised PAIF or COACS. The measure also introduces changes to the SDLT treatment of COACSs, so that there will not be a SDLT charge on transactions in units.

In the 2014 Budget, the Government announced that they would consult on the SDLT treatment of the seeding of property authorised investment funds and the wider SDLT treatment of co-ownership authorised contractual schemes. That was in reaction to stakeholder suggestions that relieving stamp duty

“in certain circumstances could encourage more property funds to set up in the UK and facilitate greater collective investment in UK property.”

The Government therefore carried out a consultation in July 2014, to seek views on the case for action on design features for a potential seeding relief and targeted stamp duty rules for co-ownership authorised contractual schemes. Subsequently, in the 2014 autumn statement, it was announced that those changes would be made subject to the resolution of potential avoidance issues.

The explanatory note to the clause states:

“The legislation includes anti-avoidance measures to limit the application of the relief to authorised funds with a broad base of investors and a sizeable portfolio of seeded properties. This aims to minimise SDLT avoidance via the ‘enveloping’ of properties within such funds.”

We do not seek to divide the Committee on this measure, but I would like the Minister to expand on that point. Can he explain what safeguards are in place to prevent the avoidance of stamp duty through this relief? What is the Treasury’s estimate of the risk of avoidance through this relief? Are there any plans in place to review the relief after a given time to assess whether the safeguards are working?

According to HMRC’s policy paper, this measure is expected to cost £10 million in this financial year, rising to £15 million next year, and then dropping to £5 million by 2019-20. The expected impact is minimal, other than on

“life and pension companies, charities and other tax exempt investors that invest in property. They will all benefit as a result of SDLT cost reductions which may subsequently be passed on to beneficiaries of these organisations.”

However, accountants Smith & Williamson noted that the measure is likely to affect only substantial property portfolios. It stated:

“it will be interesting to see whether it will be extended to other tax-favoured property investment vehicles such as real estate investment trusts”.

Do the Government have any plans to extend the relief in any way?

We do not oppose this clause and schedule, but I hope the Minister can assure me that this new relief will not be used as a tax-avoidance scam, and that the Government have taken all possible action to ensure that it will not be.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

As we have heard, clause 122 makes changes to ensure that the tax system supports UK competitiveness and makes the UK a more attractive location for fund management and domicile. The UK investment management industry is an important and successful part of the economy. It is a significant employer that accounts for 1% of GDP and is a key part of the wider financial services sector.

Property funds are an important part of the industry, so it is right that they are taxed fairly and appropriately, and in a way that supports the aim of the Government’s investment management strategy. The Government have received many representations from the industry saying that SDLT rules do not work for two types of property funds: property authorised investment funds and co-ownership authorised contractual schemes.

Under current rules, an SDLT liability can arise even when economic ownership of properties has not changed and properties have not been bought or sold. That discourages the use of funds and is a barrier to UK competitiveness in this important area. The changes made by clause 122 and schedule 16 will ensure that property authorised investment funds and co-ownership authorised contractual schemes are treated fairly in the SDLT system.

A SDLT relief for property that is transferred into a new fund will be introduced where the underlying property has not changed economic ownership, and there will not be a SDLT charge when investors transfer units in a co-authorised contractual scheme. Those funds will continue to pay the appropriate levels of SDLT when purchasing property, but these changes will mean that SDLT will not be due when the underlying economic ownership of the property has not changed. That is an appropriate and fair outcome, costing £40 million over the scorecard period.

Under the previous Government, an SDLT exemption for the initial transfer of property to a unit trust scheme was repealed due to widespread tax avoidance and abuse of the rules. This Government are committed to addressing that kind of tax avoidance, and there are a number of crucial safeguards as part of the rules. For example, the property portfolio must be of a certain size and value to qualify for this relief. If units in the fund are sold to third-party investors within a three-year period, the SDLT relieved will be paid back to the Exchequer.

Those safeguards were not in place for the previous exemption for unit trusts and will minimise any potential tax avoidance issues. Of course, all taxes are kept under review in the normal way and the costings for this take into account the risk of avoidance.

An argument is sometimes made for extending such a measure to real estate investment trusts. Our view was that there was a clear benefit to the investment management industry and the wider economy from making these changes for the two types of funds that benefit. Evidence that similar effects would occur if the changes were extended to REITs has not yet been presented but, again, we keep all taxes under review.

In summary, the clause improves UK competitiveness in an important industry, encourages property funds to be managed and domiciled in the UK and to invest in UK property assets, and makes the UK tax system fairer. I hope that this clause and schedule can stand part of the Bill.

Question put and agreed to.

Clause 122 accordingly ordered to stand part of the Bill.

Schedule 16 agreed to.

Clauses 123 to 125 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned.— (Mel Stride.)

Adjourned till this day at Two o’clock.