Clause 47 - Exchanges

Finance Bill – in a Public Bill Committee at 5:00 pm on 3rd June 2003.

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

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The clause also refers in part to paragraphs 5 and 6 of schedule 4 and we wish to ensure that there is a full debate on it. Indeed, I hope that the Chief Secretary will be able to respond to a number of questions.

The clause would remove the relief provided by stamp duty on exchanges. At present, the stamp duty is paid by the purchaser of the more expensive property. By abolishing the relief, both parties would pay stamp duty land tax, as the clause interprets such an exchange as not one transaction but two.

Members of the House and those outside have a number of concerns. The first one is perhaps a little more technical. Given the wide definition of consideration, which is set out in more detail in paragraph 5 of schedule 4, what is the purpose of clause 47 (1)? I shall not labour the point by reading that subsection in detail, but many lawyers have looked at it and asked whether it is superfluous.

Subsection (3) refers to paragraphs 5 and 6 of schedule 4. I do not intend to stray into schedule 4 more than that. Yet, paragraph 5 of schedule 4 seems merely to restate subsection (1) almost word for word. Can the Chief Secretary tell the Committee what the precise purpose of paragraph 5 is? What does it add that is not already elsewhere in the Bill but is needed to define the scope of the tax?

That is my first concern to which I hope the Chief Secretary will respond, but I have others of a less technical and more practical nature. The clause will create significant distortions—for example, when a landlord and tenant exchange properties or leases. I shall refer to one example and I am grateful to the Law Society of Scotland for raising it with me. The society argues that when a landlord accepts a renunciation of

a lease for no cash consideration but as part of a deal to provide the tenant with a new lease at market value rent, it is not clear how the clause and schedule 4, to which it relates, will apply. I shall return to A and B for the sanity of the Chief Secretary. Suppose that tenant A renounces a lease to landlord B and, as part of the transaction, B grants to A a new lease on a new building. Paragraph 5(3)(a) of schedule 4 seems to suggest that if landlord B's interest in the lease that is being renounced has a value, the renunciation will be taxed on that value and the new lease will be taxed on the rent.

Schedule 5 governs the taxation of the rent. If the renunciation was seen to be the supply of services, it would create a chargeable consideration for the purposes of paragraph 9 of that schedule and the market value of that chargeable consideration would become taxable, possibly at 4 per cent. Can the Chief Secretary confirm that that is not the Government's intention? The Bill is unclear and his confirmation that that is not their intention would assuage the concern of many people. Does he accept that the rate should not include the value of a lease that is then subject to renunciation?

That is one example of the way in which the clause will distort the marketplace. The danger with urban renewal schemes is that the clause could act as a restraint on proactive agencies and developers who decant businesses from older properties so that they can be refurbished because it would prevent them from moving those decanted businesses into newer or refurbished properties. That activity is crucial to urban renewal and if the process is not available, much urban regeneration of our cities will be prevented. After all, the Government recognise the need to provide relief for residential relocation in clause 59, so why are they ignoring company relocations? Can the Chief Secretary explain the logic of that and, if he accepts that an exchange of properties is not a double transaction but a single event, why impose a double charge?

The Chief Secretary has been enthusiastic in pronouncing the aims of the new tax. The consultation and his comments during earlier debates emphasised the need for fairness, modernisation and reflecting commercial practice. However, the clause and the way it will affect the marketplace do not reflect commercial practice today and most certainly are not fair, so why impose the double charge? I hope that the Chief Secretary can explain the thinking behind the clause and how he believes it will fulfil the objectives of what he still claims to be modernisation of stamp duty.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

The concept that there are two transactions in the exchange fascinates me because in other areas of tax, such as capital gains tax on an exchange of shares, there is deemed to be one transaction.

With something like roll-over relief, one transaction rolls into the next and the gain is held over until the final transaction, but the Bill seems to break with that way of thinking. I would be interested to hear the Chief Secretary's views on why that decision has been taken.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

Stamp duty land tax is paid on the chargeable consideration for a transaction and that chargeable consideration comprises money or money's worth. Money's worth can include another interest in land being given in exchange for the interest being acquired. Subsection (1) of the clause makes it clear that if interests in land are exchanged in that way, each acquisition of an interest counts as a separate acquisition on which tax may be payable.

There is nothing new in that situation, which reflects the stamp duty position since 1994. However, since 1994 the Inland Revenue has, by concession, allowed a scheme known as the single sale route to attract only one payment of stamp duty rather than two. Members of the Committee may know how the scheme works. Let us say that two individuals agree to exchange their houses. If the transaction is described in the documentation as an exchange, with each individual agreeing to buy the other's house, two stamp duty liabilities will arise. However, if individual A agrees to buy individual B's house and agrees to satisfy the payment for the house by transferring his house to B, only one stamp duty liability will arise.

To return to the principles that run through the legislation, an aim of stamp duty land tax is to ensure that tax arises on the substance rather than the form of transactions. In the example that I have just given, the form is everything. Therefore, to go to the heart of the matter—the transaction—it is necessary to make it clear that under the new dispensation there is no place for the single sale route, which always relied on documentation being drafted in one form rather than another. Subsection (2) makes it clear that the single sale route will no longer be available.

Of course, the Government recognise that urban renewal has an important role to play and that recognition has been the linchpin of the Labour party's approach to such issues. Therefore, I have no problem in giving the hon. Member for Hertford and Stortford the assurance that he seeks. I do not want to get party political at 12 minutes past 5 in the afternoon, but no one can say that we have not done our bit in promoting urban regeneration. Undermining it would be the last thing that we would do.

The Government recognise that simply abolishing the single sale route might cause hardship, particularly for housebuilders who have used the route as a tax-efficient way of offering part-exchange deals to potential buyers of their properties. As I said in earlier debates, there is no intention to interfere with that. The Government have listened to representations—consultation has worked—and clause 58 therefore contains a targeted relief for part exchanges of that type.

As the hon. Gentleman said, the method of calculating the chargeable consideration for exchanges is dealt with in paragraphs 5 and 6 of schedule 4, which we shall consider later in conjunction with clause 50. Schedule 4 also introduces additional reliefs for the exchange of minor interests and the partitioning of property.

The Government believe that the clause, when considered in conjunction with the reliefs that are being introduced, fulfils the principle of taxing the substance of transactions rather than the form. The part-exchange relief will guard against a particular hardship for housebuilders that the blocking of the single sale route might otherwise cause. I hope that the Committee will not have difficulty with the clause, particularly when one considers my response to the specifics raised by the hon. Gentleman.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon 5:15 pm, 3rd June 2003

Is not the point, therefore, that we are talking not about a question of avoidance, but a new tax?

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

It is not a new tax. We are closing loopholes and ensuring that opportunities for avoidance are removed.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

It would help the Committee if the Chief Secretary explained the current law. If two properties each worth exactly £1 million were exchanged, what would be the stamp duty repercussions under current law?

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

May I come to that in conjunction with the detailed responses? I hope that it will then be made clear.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

No, I am afraid not. The right hon. Gentleman will have the opportunity to intervene on my response to the intervention of the hon. Member for Torridge and West Devon.

I have been asked what the clause is for. Given the wide definition of consideration in schedule 4, is it really necessary? That is the substance of the charge. The clause and exchange paragraphs in schedule 4 contain special rewards for chargeable consideration when land is being exchanged. The general rule for chargeable consideration is that it is the market value of the consideration given for the transaction, which would imply that one values the land one is giving to determine tax on the land one is receiving. That would be unnecessarily complex, so instead the parties are charged on the market value of the interest that they are acquiring, which is the same as the current position under stamp duty. The clause and schedule simplify the rules in relation to exchanges rather than adding to them. There is nothing otiose or superfluous about the clause. It simplifies matters, and I would have thought it would be welcome.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Chief Secretary has perhaps misheard me. My concern about the superfluous nature of clause 47(1)—not subsection (3) that he is now referring to—is that subsection (1) is almost verbatim a copy of schedule 4(5). It was a narrower point. I am grateful for that wonderful tiptoe through the clause as a whole, but I was saying that subsection (1) is almost identical to schedule 4(5). I think that the Chief Secretary was trying to answer a different question.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

I do not think so because my point bears repeating in the context of the schedule. It is necessary for the avoidance of doubt that it should be included in that way. I do not think that the hon. Gentleman would want us to remove it—if we did so, it might well lead to one of the famous lacunae of the hon. Member for Torridge and West Devon. That would never do. The provision is included for the avoidance of doubt, and I hope that it is accepted as such.

At the instigation of the Law Society of Scotland, the hon. Member for Hertford and Stortford pointed out how the change will affect surrenders and re-grants that arise from operation of law. We touched on that earlier. Surrender and re-grant of a lease can occur by operation of law when the duration of that lease or its area is amended. It is assumed that the existing lease is replaced with a new lease on the same terms save for the amended duration or area. That could lead to a fresh liability to pay stamp duty land tax on the new lease. There is nothing new about that because it was also a potential problem in relation to stamp duty. In the modernised regime, we want to improve the situation by including paragraph 14 of schedule 4, which we will discuss later. The tax will still be payable based on the net present value of the rents due under the re-granted lease. In fact, a surrender and re-grant by operation of law can be fairly easily avoided and it is not something that should normally arise; for example, an extension of a let area could be documented by way of a supplementary lease of the additional area. We do not therefore see any pressing need for a further change to stamp duty as a result of modernisation.

Further representations have been received from a variety of sources that want more reform that would go beyond that that is available in relation to the stamp duty regime. We will happily consider any representations during the consultation on lease duty. I hope that on that basis the hon. Gentleman will, for the time being, feel that the point made by the Law Society of Scotland has been dealt with. Concern has also been expressed about how the treatment of exchanges will adversely affect the building trade.

Photo of Michael Jack Michael Jack Conservative, Fylde

In his remarks to justify clause 47 to date, the Chief Secretary has prayed in aid the property exchanges that occur between a housebuilder and somebody who wants to buy a new house. Can he explain how the process that he describes differs from clause 58, which appears to deal with the same thing differently? Why do we have two different ways of dealing with exchanges?

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

A study of the Bill will reveal that the context of clause 58, to which we shall come in due course and to which amendments have been tabled, and that of clause 47 are different. On the change in the treatment of exchanges adversely affecting the building trade, a new relief will apply when a developer acquires a property in part exchange for a new property. The relief will re-enact the current single sale route in a modified form for that situation—that is contained in clause 58. A further relief will apply when

certain minor interests in land are exchanged for each other. If the two reliefs are taken together, their effect is to represent a better deal for builders than that which was proposed in the original consultation document. The original proposal caused a certain amount of concern in some quarters. Those concerns were made known to us, we listened to them and as a result we have the current proposals.

I shall deal, albeit briefly, with one other matter related to exchanges: exchanges linked to transactions. That issue was raised by the hon. Member for Huntingdon (Mr. Djanogly) and touched on by the hon. Member for Hertford and Stortford. If a taxpayer acquires two properties in exchange for one, the two acquisitions will be linked to each other and the rate of tax will be based on the aggregate value. However, the two sides of the exchange will not be linked to each other because the party who is the purchaser on the one side will be the vendor on the other. Therefore, if two £300,000 properties were exchanged the rate would be 3 per cent., not 4 per cent., because the consideration of £300,000 on each side would be aggregated due to the link: the purchaser on one side and the vendor on the other. I hope that that explanation of how the links work addresses the hon. Gentleman's concern.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

For the sake of clarity, is the Minister saying that the effect would be to disaggregate those, so that rather than getting the stamp duty in one part, which could be a lower rate, the Government would get it in two parts, which could be a greater amount?

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

The point is to be fair and not aggregate the two, otherwise it would be £600,000. This is modernisation, but it is also fair. The charge falls at 3 per cent., not 4 per cent.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

Will the Chief Secretary confirm that there will be one charge to tax on an exchange of two properties worth £300,000 each, as in his example, and that it will be for the parties to work out and calculate who pays what proportion of the tax?

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

Where the party who is the purchaser of one property is the vendor on the other, in an exchange in which two properties are exchanged for one and the two acquisitions are linked to each other, the rate will be based on the aggregate value. In the example I have given the Committee, where the exchanges will not be linked to each other because the party who is the purchaser on one side is a vendor on the other, the value is £300,000, attracting a rate of 3 per cent. One charge on an exchange of two properties that are each worth £300,000 will create a situation in which two charges go to tax, but only at the 3 per cent. rate, not 4 per cent.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The Minister will know that such transactions are usually done on one deed that says, ''In consideration of transfer A, we transfer B'', and vice versa. In such circumstances, there is one deed. Let us say that there is exact equality of consideration and the value of each property is £300,000. The Committee

would like to know what would be the charge to stamp duty and how it would be apportioned between the parties.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

That goes back to the point made earlier on an exchange of two properties worth £1 million. At present, stamp duty can be avoided and paid on only £1 million if documents are drafted in a particular way. That wheeze will no longer be available. That is the point. We are considering the substance, not the form. That applies whether it is £1 million or £300,000.

We want to be fair as well as to modernise. That is why we want to bring forward the release in the way we do. The right hon. Member for Fylde (Mr. Jack) effectively found in clause 58 a relief that applies to clause 47. That is the connection between the two. Is there a charge? Yes there is, to prevent the type of avoidance wheeze that I outlined. At the same time, there is a relief when one is due. I hope that with those assurances the Committee will find it in its heart to agree to the clause without further debate.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am well aware that the Chief Secretary has dealt with this matter at some length, so I do not intend to detain the Committee any further than is necessary. I feel, however, that it is important to respond. I do not accept his argument that by making two transactions chargeable in both cases, which is not the case at this stage, that means everyone suddenly has a better deal. He referred to clause 58, which we will come to in due course, although he will know, as members of the Committee who have studied that clause know, that it contains a limited relief that in no way helps the cover that he has suggested. It is not a wide application of relief; it is very narrow.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury 5:30 pm, 3rd June 2003

This is the point that the right hon. Member for Fylde made. He asked why clauses 47 and 58 treat the same thing in different ways. The answer is that clause 58 is effectively a relief applying to clause 47. Surely the hon. Gentleman welcomes the relief. We recognise that a relief is due; we provide one. Certainly the clause is drafted in such a way as to prevent avoidance, but that is what the Committee is about—preventing avoidance and the sort of wheeze outlined by the hon. Member for Torridge and West Devon.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Chief Secretary describes clause 58 in a way that most professionals who read it would not accept. I do not intend to stray too far into clause 58, because, as he will know, that provision is available only for the small number of people who wish to trade up and not down. However, I shall not press that point further.

I hope that in the parallel consultation that is taking place while we are trying to consider the Bill—I again register my concern and protest about that process—the Government will listen to the representations and amend the clause accordingly.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

Does the hon. Gentleman agree that one can hardly characterise the arrangements that I outlined of one document and two properties being exchanged as a wheeze? It has been a matter of fact and something that has happened for many years, probably for the duration of stamp duty, and is considered by most professionals to be a legitimate exemption.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

We come to the nub of the issue about the way in which reliefs are removed wholesale—subsales are a good example, if you will pardon the pun, Sir Nicholas, and exchanges—and then narrow and prescriptive targeted reliefs are provided later.

This approach will create many more loopholes and will incense many law-abiding taxpayers, because they will see it as inherently unfair. That is why, as we have said on a number of clauses, we believe that the tenor, the aspects and the way in which the clause and others are drafted will not help the Revenue to draw in and tackle genuine attempts to get rid of taxes. I accept the point that the hon. Member for Torridge and West Devon made.

Question put and agreed to.

Clause 47 ordered to stand part of the Bill.