Taxation of chargeable gains: review of treatment of commercial property held by persons with foreign domicile

Finance Bill – in a Public Bill Committee am 2:15 pm ar 24 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

“(1) The Taxation of Chargeable Gains Act 1992 is amended as follows.

(2) After section 14 (non-resident groups of companies), insert—

(1) Within three months of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the taxation of chargeable gains held by persons with foreign domicile.

(2) The review shall consider in particular the implications if the treatment of commercial property were to be the same as the treatment of residential property under section 4BB(2).

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.’.” —

This new clause requires a review to be undertaken of the treatment of capital gains on commercial property disposed of by UK taxpayers with a foreign domicile.

Brought up, and read the First time.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

I beg to move, That the clause be read a Second time.

It is a pleasure to serve under your chairmanship, Mr Walker. I am conscious that several members of the Committee may wish to take part in the emergency debate on universal credit—a subject close to many of our hearts—so I do not intend to speak for a long time. However, we ought to get value for money out of these Committee sittings and, indeed, this Bill, so I hope that my new clause gives the Government some ideas about how we can solve the pressing problem of the public finances and the lack of funding.

Government Members often argue that Labour only wants to spend money, but my proposals very much seek to save money for the country. Indeed, they present a way to protect UK taxpayers and British businesses, generate potentially billions for the Exchequer, and address the pressures on the housing market. I am sure that none of us would want to lay claim to the magic money tree, but I believe that my new clause would provide for a concrete cash cow in which the Government could invest, and I hope to convince Ministers and Government Back Benchers to support it.

The new clause relates to a proposal by the previous Chancellor of the Exchequer—I am not sure how many jobs he has now, but he is currently the editor of the Evening Standard—about the way in which capital gains tax was applied to property sales.

Photo of Kelvin Hopkins Kelvin Hopkins Llafur, Luton North

I am interested in the former Chancellor and how many jobs he has. It is particularly interesting to learn how much he is being paid for those jobs.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

I am afraid that I do not have that figure to hand, but I do have figures relating to the amount of money that the new clause could raise for the public Exchequer. I hope that my hon. Friend will be as pleased with and as interested in those numbers as I am.

Historically, only UK residents or those with a permanent UK base have been subject to capital gains tax. In April 2013 that was changed to include the disposals of UK dwellings owned by non-resident companies, partnerships and collective investment schemes, which were subject to an annual tax on enveloped dwellings. In April 2015 that was extended to all non-UK residents disposing of UK residential property, and the critical point is that that was about residential property. The argument that non-doms should be paying capital gains tax on the disposal of property was put forward by the previous, and indeed current, Government. The question is: why did they make it apply only to residential properties? As I hope to prove, that has created a loophole through which some people have chosen to put their properties.

We are talking about a rate of tax that is between 18% and 28%, or 20% for corporates. The standard OECD double tax treaty expressly preserves the right of countries to tax non-residents on capital gains from the disposal of local real estate. Many of us will have seen at first hand in our communities the impact of this country’s over-inflated housing market and the connection between the residential and the commercial property market. The Adam Smith Institute reckons that there are 1 million non-doms in the UK, although only 110,000 are declared. Those people are part of our communities, but they are benefitting from an advantageous tax position because of this loophole.

The Bill tries to address issues relating to inheritance tax and holding property through UK companies, so the Government are interested in where people might be using companies to avoid paying tax. Indeed, that is one of the debates that we have been having. The new clause addresses another issue, which is the ability to designate a property as a commercial property to avoid paying the residential charge that this Government introduced in 2015. We know that that is hitting UK companies competing with non-UK companies. In tabling this new clause, I am making a plea to the Minister to be on the side of British businesses that are being unfairly treated in our tax system. We know that people set up property holding companies to avoid those charges. By changing the loophole, we would be able to apply the charge fairly across the board. Indeed, it has to be asked why anybody would hold UK real estate through a foreign company except for tax purposes.

The Minister might say that this about a competitive tax advantage for the UK. Let me reassure him that almost nowhere else in the world exempts foreigners from tax on selling real estate. By closing the loophole, we would simply bring ourselves into line with Canada, Australia and indeed the rest of Europe. The Minister may claim that there are anti-avoidance rules that would take precedence, but if a non-resident company operates in the UK through a UK permanent establishment, the disposal will be subject to UK capital gains tax. That is not the requirement we are talking about; we are talking about organisations that hold property in the UK through offshore companies and designate that property as commercial property. It is the difference between the residential and the commercial that we need to deal with in terms of this loophole.

In 2015, the then Chancellor predicted that the changes to the non-dom rules that included residential properties would bring forward £1.5 billion in the lifetime of the then Parliament, so we are not talking about an insubstantial sum, but if we properly closed the loophole and treated UK and non-UK businesses fairly in the sale of commercial property, I would wager there is a lot of money to be made. I have done my own sums, but the new clause is about getting the Government to do their sums to see how much tax is being avoided through the loophole.

I will give the Committee an example that I hope my hon. Friend the Member for Luton North will be interested in. There is £600 billion of commercial real estate in the UK. About one fifth of that commercial real estate is sold every single year. In 2015, £115 billion of sales was registered. Almost a quarter of all commercial real estate in the UK is held through offshore companies. Typically those companies are in tax havens or structured so that they pay no tax on the capital gain anywhere else in the world.

If we assume average real estate growth of around 8% a year, we are potentially missing out on £8 billion of tax revenue. The Minister may tell me that number is over-inflated, and that the real number is closer to £1 billion. I would be happy for him to prove me wrong, but the only way he can do that is by publishing the data on that quarter of properties. Through that we can understand how many are sold and how much capital gains tax this country is missing out on because we do not give British businesses the fair treatment they deserve when they are competing against non-dom companies.

Photo of Ruth George Ruth George Llafur, High Peak 2:30, 24 Hydref 2017

Does my hon. Friend think that the definition of commercial properties would include properties that were previously residential, such as those in my constituency in the Peak district? They were residential homes, but they were sold to owners who live outside the area and are now used primarily as second homes, although they are rented for a very small number of weeks during the year. That has turned them into commercial properties, severely depleting the number of homes available to local people, particularly in rural areas of outstanding natural beauty.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

My hon. Friend has shown how simple it is to evade the tax by avoiding the loophole—the previous Chancellor tried to close it by ensuring that non-doms paid capital gains tax on the sale of residential property—simply by repurposing a building as commercial property. Even given the rules on closed companies in existing legislation, people can get around the charge. I am suggesting that the figure could be as much as £8 billion. I certainly think that at least £1 billion of public revenue could come from closing the loophole and simplifying the way we treat non-doms with capital gains tax. The Minister may have a different number, but the point of the new clause is to get the number.

The Bill is about how we manage public finances. Giving this tax loophole to non-doms means that our British businesses are unfairly treated and our property market faces artificial pressure. We are missing out on vital funds that could go into our public services. The new clause is not a magic money tree; it is a concrete cash cow. If the Minister will not agree to publishing the data, will he commit to looking at how we can close the loophole?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

New clause 2—I think it is now known as the concrete cash cow clause—provides us with an opportunity to discuss the rules surrounding UK commercial property and those who are foreign-domiciled. As the hon. Member for Walthamstow explained, her new clause would require HMRC to review the taxation of capital gains on commercial property disposal by UK taxpayers with a foreign domicile.

There is no question but that all UK residents, whether UK-based or non-domiciled, are chargeable for tax on profits from selling UK land. That includes non-domiciles who are taxed on a remittance basis, where foreign income and gains are taxed only when they are brought into the UK. Our tax base is predominantly those who are resident in the United Kingdom. As the hon. Lady has drawn to our attention, recent changes removed non-residents into the UK tax base for the sale of UK residential property. The new clause raises the fact that that treatment does not extend to non-residents for the sale of commercial property in this country. While I understand why she suggests that extending the laws would raise revenue, I should point out that this is a very complex area, which needs to be carefully considered.

The 2015 rules were designed to catch individuals and ways in which a person may hold title over a dwelling such as via trusts and closely held companies. They do not apply to companies with lots of shareholders. The structures that are used to own commercial property are different from residential property, often more complex and involving corporates, joint ventures and specialist property vehicles. We would need rules that address such structures and get to the heart of the ultimate owner.

Will the hon. Lady consider this illustration? I might live in Canada and own 50% of a home in Walthamstow. I might easily conceive, if I did not know for sure, that selling my part of the house in the UK would mean paying some UK tax. However, imagine instead that I own a handful of shares in a fund of some kind, which in turn owns half an office block in Walthamstow. Being such a minor shareholder, I may not even know how my money is invested. To send the tax man chasing round overseas for the little shareholder in a commercial building would hardly be cost-effective. We would need to design balanced rules that look at how the market works and what would yield the Exchequer the best return.

Extending the current rules to include any UK property is not a simple matter of striking through “residential property” and inserting “all UK property” into the current provisions, as this would not take into account the intrinsic differences in the way that commercial properties are owned and dealt with.

Photo of Ruth George Ruth George Llafur, High Peak

Does the Minister agree that now that we are seeing residential property increasingly acquired by such complex structures, and that by eradicating the omission for commercial properties, it would simplify the legislation? HMRC would not have to establish whether a property was commercial or residential because there are so many grey areas, as my hon. Friend the Member for Walthamstow pointed out.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The point I was trying to make was not so much whether one classified a property as residential or commercial. My point was that where it is commercial, the ownership arrangements can be so complicated that this kind of approach is far from simple.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

I think the Minister is making a strong case for the new clause and providing the data. He may want to update his colleagues on the fact that the closed company model is five or fewer participants. Were there to be six participants, that would extend the limitations he is talking about. I also want to ask him, now that we have the residential rules in place, whether he will commit to publishing how many properties that were previously cast as residential are now categorised as commercial use since that legislation came in. We might begin to get an understanding of whether people are using this loophole to evade the capital gains tax to which we are entitled.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I am certainly happy to look into the issue of what data are available that might reasonably be released for those properties that might have changed from residential to commercial. My point is that the existing rules for residential property involve, for example, consultation with external experts over a period of two years. They are arguably, for reasons that we have been discussing, more simple and straightforward than the arrangements that would need to be in place for a commercial property situation. To ensure that legislation works effectively, HMRC would be able to collect taxes from overseas taxpayers.

The UK commercial property market is even more complex and inextricably linked to many other markets and investments both in the UK and overseas. Bringing non-resident companies into these rules would bring with them a whole tax code for corporates, which would need to be considered and applied consistently in the context of someone who may have no other UK tax footprint.

Of course, there are existing exemptions and reliefs for the UK investor that would need to be considered to see whether and how they might apply to an overseas equivalent and whether such exemptions could be used to undermine the idea as a whole. Any change to further broaden our base would require consultation with the public, tax experts and affected sectors, particularly those involved with funds and pensions, to ensure they were clear, enforceable, robust to avoidance, and achieved their intention. I assure the hon. Member for Walthamstow that we keep all taxes under careful and continuous review to ensure that the tax system works effectively for the taxpayers of this country.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

Again, the Minister makes a compelling case for the new clause, which would enable exactly such an information-gathering exercise. As he points out, this may be a complex area. I note, however, that the Bill deals with overseas companies and their inheritance tax positions. I fail to understand why Ministers accept that we need to address the use of commercial entities to avoid inheritance tax but do not accept that we need to address their use to avoid capital gains tax. Will he say a little about that?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

As I have said, I assure the hon. Lady that we keep all taxes under careful review to ensure that the tax system works effectively for the taxpayers of this country. I favour that, rather than requiring HMRC by statute to conduct reviews, as the best way to develop tax policy. I heard what she had to say about those taxes, and I will certainly consider the questions that she raised, but I urge the Committee to reject the new clause.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

I am afraid that I am not satisfied that the Minister has made a strong enough argument against his own argument that this is a complicated area in which we need information. The new clause would not commit the Government to closing the loophole; it would simply start the process of asking how much the loophole costs us and recognising that, where we create a category for one type of property and people can apply it to another, that may generate a loophole that is exploited to the detriment of the UK taxpayer. With that in mind, and in full support of the British businesses that are being penalised as a result of the Government’s failure to address that loophole, I wish to test the will of the Committee on this matter.

Question put, That the clause be read a Second time.

The Committee divided:

Ayes 9, Noes 10.

Rhif adran 18 Seasonal Working — Taxation of chargeable gains: review of treatment of commercial property held by persons with foreign domicile

Ie: 9 MPs

Na: 10 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

New Clause 3