Clause 48 - Chargeable interests

Finance Bill – in a Public Bill Committee at 5:30 pm on 3rd June 2003.

Alert me about debates like this

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

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

We come to the clauses that deal with chargeable interests, chargeable transactions and chargeable considerations. The clause specifically defines chargeable interests, where the acquisition of such interests constitutes a land transaction. Therefore, it relates back to clause 43. I am sure that in his reply the Chief Secretary will make similar references.

Subsection (1) defines the clause as a whole. It says:

''In this Part 'chargeable interest' means—

(a) an estate, interest, right or power in or over land in the United Kingdom, or

(b) the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power''.

Many experts who have studied this provision from an accountancy, legal or taxation point of view feel that the scope is incredibly wide. The problem is then compounded by subsections (5) and (6), in which the Government give themselves the almost endless ability to amend the power as and when they see fit. That creates the problem of a lingering uncertainty as to exactly where the law-abiding taxpayer stands. A number of people have questioned the definition of the phrase

''power in or over land''.

Is it restricted to the appointment of trustees of a settlement? Or does it extend wider? Will the Chief Secretary explain what is not included in the phrase?

There is a further example. Will the Chief Secretary confirm that subsection (1) does not apply to the interest of a discretionary beneficiary, other than as

already identified in schedule 16? I ask that because the definition of chargeable interest in subsection (1) appears to include rights of way, that is to say easements, and covenants—such as we discussed earlier—not to build on land. It appears that, in trying to strengthen the anti-avoidance powers, the Government have strayed far beyond what any reasonable person would regard as fair. That is not simply my view; it is the view of taxation experts. Much of the assurance that the Chief Secretary gave when we debated clause 43 is contradicted. I ask him to clear up the confusion and the contradiction between his assurance and the Bill.

On subsection (2), will the Chief Secretary explain the Government's understanding of a licence? I may have missed it in my intimate reading of the Bill, but in my interpretation of clauses 116 onwards, I could not find a definition of a licence. I would be grateful if the Chief Secretary would confirm his understanding of its meaning in the context.

The clause, like so many others, in many ways typifies the unsatisfactory approach to the tax. The Government want to grant themselves the widest possible powers and the ability to alter those at any point. The result is to leave maximum uncertainty. The first danger is that that creates the risk of people paying tax simply because the Treasury has not correctly identified them as being outside its purpose. Secondly, there is the danger that that will lead to more tax avoidance because of the loopholes, confusion and lack of clarity.

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

There is no confusion, lack of clarity or contradiction. The clause defines a chargeable interest. The acquisition of a chargeable interest constitutes a land transaction. The SDLT applies to land transactions. The definition in subsection (1) is broad, and subsection (2) then lists exclusions from that definition, which are defined as exempt interests.

A chargeable interest includes freeholds and leaseholds, and their equivalents in Scotland and Northern Ireland, rights over another's land, and powers of appointment exercisable in the context of trusts of land. The benefits of restrictions and obligations that bind another's land are included only in so far as they affect the value of that land.

Exempt interests are: under paragraph (a), security interests, such as mortgages; under paragraph (b), licences to use or occupy land; and, under paragraph (c), in England, Wales or Northern Ireland, tenancies at will and advowsons, franchises and manors. As would be expected, the Treasury has the right by regulation to expand the list of exempt interests.

That addresses the points that the hon. Gentleman makes. Let me just deal with the issue of powers, which seems to exercise him. In practice, the only powers that are likely to be caught by the SDLT regime are powers of appointment exercised by trustees of land. If such powers were not caught, there will be possibilities for avoidance of SDLT—a fact that is patently obvious. If it were possible for trustees to exercise a power of appointment, that would drive a coach and horses through our proposals because it would open up a new area of avoidance mechanisms.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I should be grateful if the Minister would explain the current position. If stamp duty is not payable on the sale of equitable interest in land, is it the case that the proposal will be a new tax in that respect?

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

The proposal is not a new tax. I have been asked how SDLT will apply to trusts. The Chartered Institute of Taxation asked for confirmation that clause 48(1) will not cover the interests of a discretionary beneficiary, other than is provided for under paragraph 2 of schedule 16.

I shall give a detailed answer to avoid any doubt, and I shall choose my words particularly carefully. Paragraph 2 of schedule 16 does not cover discretionary interest, but equitable interest. A person who has a discretionary interest in a trust does not have an equitable or any other interest in assets under English law. If someone is named as a beneficiary of a trust when the trustees have discretion over the disposition of assets, that person does not acquire an interest in land so there is no land transaction. The type of interest covered under the paragraph is a non-discretionary interest of which the most obvious example is a life interest in possession trust or an accumulation trust. That will mean, for example, that the purchase of a reversionary interest and an interest in possession trust when the asset is land is a land transaction. That seems obvious and necessary to stop avoidance mechanisms.

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

The Chief Secretary is talking about interest in possession trusts or accumulation in maintenance trusts. When there is an appointment or, for example, a surrender of a life interest for no consideration, I am sure he will agree that, under the present regime as under the past stamp duty regime, no stamp duty will be payable.

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

None of what I have described affects discretionary interest. Paragraph 7 of schedule 16 applies to the exercise of a discretion, and the explanatory notes set out how that paragraph works. In essence, if a person pays trustees to exercise their discretion to give him land, the acquisition of the interest in land is a land transaction under the general rules. That is obviously necessary, otherwise one would again have an avoidance mechanism. The payment to the trustee is consideration for that land transaction. It closes down what would otherwise be a straightforward way in which to avoid the tax. The purchaser could argue that the payment was for something other than for acquiring land.

Paragraph 7 of the schedule applies in the same way to a payment to exercise a power of appointment. The mischief that it is designed to avoid is the same mischief: the use of something artificial, the power of appointment or the payment of a consideration to make a trustee exercise his discretion in a particular way. However, the provision does not cover all the possibilities in respect of trusts. It is possible to avoid a charge to SDLT using trusts and powers in another way, so it is necessary to be vigilant in that regard to stop abuse.

A point has been made in some detail about why there is no definition of licence. If my memory serves me well, there is no definition of licence in statute, because licence is an ancient creature of common law. The last people who I would have expected to suggest that we throw over 1,000 and more years of tradition in the common law in order to give something a statutory definition that has never previously been so treated are those who are fighting so tenaciously to hold on to legislation that has not been reformed for 200 years.

I am surprised that we are under pressure to define licence. For a start, it would spoil the fun of countless examiners who have, over the years, presented hapless students with lists of circumstances and asked them whether they denote a licence or a lease. I note that several Opposition Members have done that, either as examiners or students.

In my experience, the best way to answer such a question is to suggest what the characteristics are of a lease and what those are of a licence, and hope to glean some marks for having got some of them right. We will not reverse established practice and statutorily define what we know is a matter of common law. A licence is a personal right; a lease is an interest in land. In general, an arrangement will be a lease if it grants exclusive possession of land, especially if it were for a substantial time and not terminable on notice. I have given a broad explanation of some characteristics of the distinction between a licence and a lease, and I do not intend to go any further than that.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon 5:45 pm, 3rd June 2003

Can the Chief Secretary help the Committee on stamp duty, land tax and trusts? What would happen if there were a gratuitous surrender of a life interest in land, so that the land reverted to the remainder man with no consideration passing. I am sure that it is fairly simple for the Chief Secretary to say that, in those circumstances, there should be no stamp duty or land tax.

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

No, I shall not say that. It would be most unwise. The hon. Gentleman must look at the substance, not the form. If I say otherwise, I shall open up the potential for an ingenious and highly paid adviser to use my words to set up a new wheeze for avoidance. We are considering the substance, not the form. That is the approach that the Revenue will take and one that I suspect the courts will take. I urge all those who seek to open up new areas of avoidance to bear that in mind. I hope that, with that assurance—if, indeed, it is an assurance; it is certainly an assurance to the honest, law-abiding taxpayer—clause 48 will be given a fair wind.

Question put and agreed to.

Clause 48 ordered to stand part of the Bill.