Clause 42
Finance Bill
6:00 pm
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
Clause 42 relates to property abroad held by a company and to the tax consequences resulting from that. A requirement for a UK resident to hold a property abroad through a company is not uncommon, or it is, at least, to their advantage. For example, in Bulgaria it is necessary for all properties to be owned either by Bulgarian nationals or by a Bulgarian company. In France there are certain advantages to holding property through a company because of inheritance rules and in the US it is advisable to hold it through a limited liability company because of legal liability. Therefore, it is a common circumstance.
For some time, the problem has been that in those circumstances any income from that property, if it is rented out, would be treated as a benefit in kind. The Treasury has been trying to address that issue for some time. The difficulty has been distinguishing between domestic arrangements and employee benefits, which is the problem that we have here. We therefore welcome and support the objective of clause 42, but I have some detailed questions for the Economic Secretary.
The wording in the clause, and particularly in new section 100A of the Income Tax (Earnings and Pensions) Act 2003, relates to a property owned by a company—I think that the previous draft referred to “body corporate”. I understand that it has been changed to “company” to ensure that French sociÃ(c)tÃ(c)s civiles immobilières and US limited liability companies are included in the exemption, and I would be grateful for confirmation of that. Under new section 100A(1)(a), all the shares of the company have to be held by individuals. That begs the question, why not trusts? Trusts are a common manner in which property is held. The traditional objection to trusts is that they can be used as an anti-avoidance mechanism. I acknowledge that, but new section 100B(4) would appear to prevent that difficulty from arising, because it excludes from the regime an arrangement of which one of the main purposes is the avoidance of tax or national insurance contributions. Therefore, is there a good reason why a trust should not be able to hold shares in the relevant company? It also excludes a local management company, perhaps acting as a nominee. There is doubt as to whether a local management company as nominee for an individual would be able to hold shares in the company. Again, we would be grateful if the Economic Secretary could clarify that.
Another potential difficulty is that new section 100A(1)(a) refers to the fact that the director and the shareholder, or the property owner, will be the same person. It might be that the director of the company will be one spouse and the owner of the shares the other. That would appear to be excluded from the wording in new section 100A(1)(a).
Turning to new section 100A(2), the conditions on the company owning the property include that the property must be the company’s main or only asset. That is usually interpreted as more than 50 per cent. of the company’s assets, but it does not necessarily need to be more than that. Professional advisers have raised the point that the company may hold cash to secure borrowing, or have an overseas bank account which is used for running costs and/or to receive rent. So clarification as to what “main or only asset” means in that context would be helpful. Would the activities set out in new section 100A(2)(c) exclude activities relating to the management of minor assets? Can the Economic Secretary clarify the intention here?
The structure proposed by new section 100A(3) would appear to allow for a holding company on top of the company that owns the property, but that holding company has to be owned by the individuals in question. It has to own all of the company that holds the property. Professional advisers—the Institute of Chartered Accountants, I think—have asked what happens if two sets of friends own a property through two holding companies. Why deny the relief in such circumstances? It would seem to be possible to structure in such a way that that problem disappears, but is there any particular reason why such restrictions on a holding company are in place?
Proposed new section 100A(4) relates to the relevant interest in the property and states that it must be
“a right to exclusive possession of the property at all times and at certain times.”
Just for clarification, I would be grateful if the Minister could confirm that that does not cause a problem if the property is rented out, particularly with a timeshare arrangement, when the owners would have exclusive possession only at particular times, which would fall within the definition of “certain times”? Would that fall within the regime as set out in clause 42?
Finally, given that the issue is of long standing and has taken some time to be resolved, I understand that the position of HMRC is that it will not pursue tax liabilities in certain circumstances. The criteria are as follows: the property is owned by a company owned by individuals; the company’s only activities are ones incidental to its ownership of the property; the property is the company’s only or main asset; and the company is not funded directly or indirectly by a connected company. Again, will the Minister confirm that that is the policy approach of HMRC in such circumstances, while we wait for the terms of clause 42 to come into effect?