Ms Ruth Kelly (Economic Secretary, HM Treasury; Bolton West, Labour)

The amendment would introduce an unwelcome complexity to the way in which capital gains tax incorporation relief applies. First, to give a little background to the Committee, I think that it would be useful to explain incorporation relief.

Such relief enables the owners of an unincorporated business to transfer it to a company as a going concern without facing an immediate capital gains tax charge on the disposal of the assets transferred. The relief prevents capital gains tax acting as a disincentive for a growing business to incorporate. It works by rolling over the gains on the assets of the business into the shares acquired in the company. The gain comes into charge when the shares are eventually disposed of.

Incorporation relief does not always work to the taxpayer's advantage because any capital gains tax taper relief that has accrued on the transferred assets will not be inherited by the shares. That means that, if the shares are disposed of two years after the transfer, the business owner might have been better off if he or she had not received the benefit of incorporation relief.

The clause deals with that concern. It will allow the business owner to opt out of incorporation relief after the event, and incur the capital gains tax charge on the transfer of assets to the company with the appropriate taper relief intact. The rules proposed in the clause for an election to opt out of the relief are straightforward and simple. The change will reduce tax charges in the majority of cases where shares in the company are sold within two years of the transfer.

Amendment No. 65 would introduce a special provision for cases in which only some of the shares are sold in that period. That would introduce some significant additional complications, which I fear are not addressed by the amendment. For example, it would be necessary to cater for circumstances in which more than one class of share was involved and the different classes carried different rights to the assets that had been transferred. Furthermore, rules would be needed to deal with situations in which the assets transferred did not all qualify for the same rate of taper relief.

Clause 48 introduces a modest but worthwhile change that will reduce some of the stress of the incorporation decision. We are introducing it in response to specific representations that we have received. I am not attracted to the idea that we could tinker with it in order to deal with the points made by the hon. Member for Arundel and South Downs. The amendment would introduce additional significant complexity, and it is not clear how people would benefit from it.

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