Clause 39 - Payments to farmers under the lump sum exit scheme etc

Part of Finance (No. 2) Bill – in a Public Bill Committee am 2:30 pm ar 16 Mai 2023.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury 2:30, 16 Mai 2023

Clause 39 makes changes to clarify that payments from the lump sum exit scheme are treated as capital receipts. It aims to set clear and fair rules regarding the taxation of the scheme. Clause 40 creates a fairer system for assessing capital gains when an asset is disposed of under an unconditional contract. Clause 41 makes the capital gains tax rules fairer for spouses and civil partners in the process of separating or divorcing. Clause 42 makes changes to ensure that individuals who pay tax on carried interest are able to better align the time a tax liability arises in the UK with that of other relevant jurisdictions, and therefore claim double taxation relief where it is due. Clause 43 makes changes to ensure that roll-over relief and private residence relief work as originally intended for members of limited liability partnerships and partners of Scottish partnerships.

I will go through the changes in detail. Clause 39 clarifies the tax treatment for around 2,700 sole trader farmers, farming partnerships and farming companies who have received, or will receive, payments from the lump sum exit scheme. That will give certainty to those receiving such payments and remove the need to consider individual cases.

Clause 40 modifies HMRC’s four-year assessment powers so that, in certain circumstances, they will operate by reference to the tax year or accounting period in which the asset is conveyed or transferred. For capital gains tax, those circumstances are where the conveyance or transfer takes place six months after the end of the tax year in which the contract is entered into. For corporation tax, the date is one year after the end of the accounting period for the contract.

Capital gains tax rules provide that the transfer of assets between spouses and civil partners is made on a “no gain/no loss” basis. When spouses or civil partners separate, no gain/no loss transfers can be made only in the remainder of the tax year in which the separation occurs. Clause 41 extends no gain/no loss treatment until the end of the third tax year after the year the parties ceased to live together, the date on which the parties’ marriage or civil partnership ended, or the date when the parties entered into a divorce or separation agreement. No time limit applies to transfers of assets that form part of a formal divorce or separation agreement. The clause also makes changes to the rules that apply to the sale of the former family home. The other change applies to individuals who have transferred their share in the former family home to their ex-spouse or civil partner and who are entitled to receive a percentage of the proceeds when it is eventually sold.

Amendment 6 corrects an issue with time limits. Where a divorce agreement has not been entered into, spouses and civil partners should have up to three full tax years in which to transfer assets between themselves on a no gain/no loss basis. As it is worded currently, clause 41 provides a day short of that, so we want to correct that. Amendment 7 clarifies that the new rules also apply to divorce agreements entered into after spouses and civil partners have ceased to be married or have ended their civil partnership.

The changes made by clause 42 will introduce a new elective basis of taxation for carried interest, a type of reward for asset managers. For those who opt to use the elective basis, it will tax carried interest in the UK at an earlier time than under the current rules. That will mean that individuals receiving carried interest may be able to claim double tax relief in other jurisdictions more easily, avoiding disproportionate tax outcomes. That will help to remove barriers to international trade and support the health of the asset management sector while accelerating, but not reducing, UK tax.

Amendment 8 seeks to refine the calculation of carried interest for the purposes of clause 42. It modifies the calculation methodology so that it works in circumstances where managers are entitled to more carried interest if investors receive fund profits earlier. That means that the measure will better deliver in practice the opportunity to claim relief from double taxation on carried interest, as intended.

Clause 43 will ensure that roll-over relief and private residence relief work as originally intended for members of limited liability partnerships and partners of Scottish partnerships, by clarifying that the reliefs are available to them when an exchange of interest in land or private residences takes place, in the same way as they are when the land is held by the individual members or partners.

This group of clauses will provide greater certainty, consistency and fairness in the taxation of chargeable gains. I therefore commend them to the Committee.