Schedule 22 - Chargeable gains: private residence relief

Finance Bill – in a Public Bill Committee at 9:30 am on 25th May 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 9:30 am, 25th May 2004

I beg to move amendment No. 30, in

schedule 22, page 388, line 28, leave out from beginning to end of line 20 on page 389 and insert—

'( ) Where a claim for relief under section 260 has been made in relation to a disposal of a property, the trustees' relief under section 223 above on a disposal of that property shall be limited to that proportion of the chargeable gain which reflects the period during which the property has been occupied as an only or main residence under the terms of the trust as a fraction of the combined period of ownership of the trustees and the person who claimed the relief under section 260.

( ) In calculating the proportion mentioned in subsection (1) above, the Trustees shall only be entitled to relief for periods in which the property was in actual occupation by one or more beneficiaries and not for any period of deemed occupation.'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss amendment No. 1, in

schedule 22, page 390, line 35, leave out sub-paragraph (8) and insert—

'( ) In subsection (5) of section 223 of the Taxation of Chargeable Gains Act 1992 after ''and (2)(a) above'' insert ''and section 226A below''.'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The mischief that the schedule is designed to deal with is the technique of transferring a second home into a discretionary trust as a conduit to passing it on to, for example, one's children, and later realising the property free of capital gains tax. Where the value of the home was more than a quarter of a million there would of course be inheritance tax to pay. The schedule removes the availability of principal private residence relief from capital gains tax where there has been an earlier deferral of gain under section 260 of the Taxation of Chargeable Gains Act 1992. The rest of the schedule is concerned with consequential amendments and some rewrite language. The formal inclusion of a former concession giving private residence relief to the personal representative of the deceased in certain circumstances is a positive move.

I will return to the principles during the stand part debate. The problem is that if a person has, say, half a million in cash—lucky person—and settles it into a discretionary trust, the trustees could purchase a property and then claim PPR relief on a subsequent sale of the house, assuming it had been occupied by a beneficiary, but if the settlor provides not cash but an asset that becomes a beneficiary's PPR, there is no relief available. That may be the Government's intended policy position, but it seems unfair and disproportionate. Our point is that to avoid a double charge, there should be a credit against the capital gains tax of any inheritance tax paid in respect of the same gift. I recollect that in our debate on schedule 21, the Paymaster General said that the Government were not looking to bring in double taxation. I therefore ask her how she is addressing the issue in relation to clause 112 and schedule 22.

A possible alternative might be to address the perceived mischief directly. The objection is to short-term washing-out strategies, so might it not be possible to limit the PPR relief available to the trustees to that proportion of the gain that reflects the period for which the property was occupied as a PPR under the trust during the total ownership period of the trustees and the donor? That would address those situations where trusts are used as a short-term device to wash out, without unfairly treating innocent situations or catching changing circumstances.

It is not uncommon for young adult children to be provided with a home from a discretionary trust set up five or 10 years before. They are then given the use of the property, as one would not want to give large sums of money directly to young people for reasons of prudence. One might want to have the property used by a succession of beneficiaries. In both situations, there can be bona fides cases in practice, and tax is not a primary motivation for such arrangements.

Assuming the measures stand, there are some points of detail to address, with which amendments Nos. 30

and 1 are concerned. I am sure that the Paymaster General will argue that she simply wants to block a piece of tax avoidance, fairly or not. Our argument of principle is that the anti-avoidance measures are disproportionate and put trustees who receive cash and buy a house in a different position from trustees who receive a property. There are significant long-term record-keeping requirements and tracking of claims, and no response is allowed to changing circumstances.

Amendment No. 30 is a rewrite of paragraph 6, designed to persuade the Government that the mischief can be addressed in a fairer way. It proposes that trustees are no longer entitled to the last 36 months in any event, but only if the property is in actual occupation. Amendment No. 1 is a little less easy to get one's mind round, but where the existing legislation refers to 36 months the amendment would allow the Treasury to change that period to 24 months for all purposes. Would it not be easier to do that through a much simpler wording, as in the amendment? I would like the Paymaster General to justify the length of paragraph 8(8). I shall make slightly more fundamental criticisms in the stand part debate.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I remind the Committee that clause 112 and schedule 22 are targeted at measures that are designed principally to avoid capital gains tax. That exploitation depends on there being no immediate capital gains tax charge. Subsequently, the effect of the interaction of gifts relief with private residence relief has been that capital gains tax is avoided entirely. The purpose of the measures is to ensure that the changes are appropriate in tackling that avoidance.

There are a number of reasons why I shall be asking the Committee to reject amendment No. 30, which would limit the restriction of private residence relief proposed in the schedule. The purpose of the schedule is to stop capital gains tax avoidance schemes that exploit the interaction between gifts relief and private residence relief. Such schemes aim to convert chargeable gains on disposal of residential property that would not normally qualify for private residence relief into tax-free gains by the use of the trusts. Clause 112 and schedule 22 deny private residence relief to people who dispose of a property, where the computation of the chargeable gain resulting from that disposal is affected by a claim to gifts relief relating to an earlier disposal.

In a simple case where a second home is sold and the owner wishes to avoid capital gains tax, he or she gifts the property to the trustees of a trust and claims gifts relief, so that no capital gains tax is payable at that point—it is deferred. Arrangements are then made for a beneficiary to live in the property for enough time—it can be a short period, possibly days or months—to establish an entitlement to private residence relief.

The trustees then sell the property and obtain the relief. The result is that the gain is wholly relieved by private residence relief and no tax is payable, not even in respect of the earlier hold-over gain that accrued

while the property was not the only or main residence of the person who owned it at the time. By denying private residence relief in circumstances where gifts relief is obtained, clause 112 and schedule 22 provide for the whole of the gain arising on the disposal of a second home to be taxed, irrespective of the interposition of a trust—a trust put there simply to avoid the tax on that gain.

As I understand it, amendment No. 30 would allow trustees private residence relief when they dispose of a property that has been the subject of a gifts relief claim, but would limit the amount of relief available by reference to the amount of time that the property was occupied as an only or main residence under the terms of the trust. That would render the legislation ineffectual in combating such avoidance, because it could easily be sidestepped. Committee members must ask themselves why those schemes are being used. They are being used to avoid paying the tax on the capital gain. The amendment would address only the most straightforward cases, where there is a single gifts relief claim and the trustees dispose of exactly what was gifted to them. That does not happen. There are many complex forms in that area.

The amendment would not, for example, deal with cases where successive gifts are made through a number of trusts, as frequently happens. Nor would it deal with cases where interests in a property are divided or combined and where there are a number of relevant gifts reliefs claims that have been made by different persons. Nor would it deal with cases where the final sale is made by an individual and not by those trustees of a trust who had gifted the property to that individual. It would leave open opportunities for people who dispose of second homes to be able to continue to avoid capital gains tax by exploiting the interaction of gifts relief and private residence relief.

On the other hand, clause 112 and schedule 22 deal with all such cases. I think that it would be naive to assume that those elements of the tax-planning industry that enthusiastically marketed those schemes would not be up to devising and selling variations, which could drive straight through the legislation if it were to be amended by amendment No. 30. It is not acceptable because it leaves open those possibilities.

Another reason why I will ask the Committee to reject the amendment is that even if it were effective it would impose a greater compliance burden on the taxpayers. The ultimate vendor of the property would need to know not only his acquisition costs following his gifts claim but the period or periods of ownership of the previous owner or owners. In anything but the simplest of cases, the burden might be considerable.

For those two reasons, I say to the hon. Gentleman that schedule 22 as drafted provides a more effective and equitable way of stopping this drain on the public purse than would the measures as amended by amendment No. 30.

I ask the Committee to reject amendment No. 1 as well. As drafted, it was very difficult to understand its objective, but in moving it the hon. Gentleman has clarified that. I have explained that the anti-avoidance

measure in the schedule is being introduced to prevent people from exploiting the interaction of gifts relief and private residence relief to make a tax-free disposal of a property that would not otherwise have attracted private residence relief.

We recognise that because the measure has effect from 10 December 2003 some people will have entered into arrangements before that date expecting a certain amount of relief. That is why we have included a transitional period preserving any entitlement to private residence relief, which is referable to the period before 10 December 2003. The transitional provisions also preserve entitlement to private residence relief if any proportion of the last 36 months of the ownership falls before 10 December 2003 and the relevant conditions are met. Frankly, that is as fair as we can be.

I am grateful to the hon. Member for Arundel and South Downs (Mr. Flight) for explaining that, by providing a neater way of catering for the effect of the consequential changes that would need to be made if the last-36-month rule were to be changed by Treasury order, amendment No. 1 is intended to be helpful. Although I thank him and I appreciate his sentiments, the amendment does not appear to achieve its objective, because it would have effect over the whole measure rather than just the relevant transitional rule. I am sure that that is not what he intended.

In any event, even if the amendment were to work, which it would not, its effect would be the same as that of the legislation as drafted. I appreciate the hon. Gentleman's motives, but the amendment does not deliver.

The hon. Gentleman made three specific points. The first was about cash being provided to a trust. If a person provides cash to a trust, they are not seeking to avoid capital gains tax by using gifts relief and private residence relief. The circumstances are different and therefore there is no unfairness.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 9:45 pm, 25th May 2004

I understand the Minister's point, and we are agreed on the mischief that needs to be blocked, but the other side of that coin, as I set out, is that there are perfectly bona fides situations where a property is provided, to which these measures would unfairly apply.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I was coming to that. This schedule has not changed the way in which capital gains tax and inheritance tax laws interact. There may be a charge to both inheritance tax and capital gains tax if within a seven-year period the person who has made the transfer of values that are immediately chargeable to IHT exceeds the IHT-exempt amount. CGT is due where the gain is chargeable within the rules. The effect of gifts relief is to transfer the CGT liability in respect of a chargeable gain from the transferor to the transferee, whose adjusted acquisition cost for CGT purposes reflects the fact that no CGT or a reduced amount thereof is paid in respect of the transfer. Any inheritance tax paid on the transfer is therefore allowed as a deduction in computing the transferee's gain, and none of these provisions has changed. The measure prevents people from exploiting

the interaction of the gifts relief and the private residence relief rules to realise a gain on residential property tax-free.

The hon. Gentleman also made the point that, for instance, people with a family home that came from a discretionary trust some years ago will either have to move to avoid the CGT on the sale of their home or face a tax bill like no-one else in the country. I am trying to make the point that the current rules are not disturbed. We are dealing specifically with the interaction of the gifts relief and the residential relief, at which point no tax is paid to the Exchequer. We are now seeing a considerable number of schemes exploiting this arrangement, and it is necessary that the Government move to defend that revenue.

I am sure the hon. Gentleman would agree that the tax rules are quite clear, and where a person puts in arrangements to avoid the tax charge that is clearly to be levied against the property, it is not unreasonable for the Government to move to ensure that the rules operate as they should, and to prevent that exploitation from occurring. That is precisely what we are doing in schedule 22. I hope, therefore, that he will not press his amendments to the vote, but if he does, I will ask my hon. Friends to oppose them.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

As I said a moment ago, we share a perception of what the perceived mischief is, and I felt I described it rather more simply and clearly. We are not opposed to measures to block up such mischief. Our concerns are that the measures being taken could fall unfairly on bona fides situations, although I was pleased to hear the Paymaster General's confirmation on the interaction between IHT and CGT.

I shall first ask the Paymaster General for a clarification that she will be aware has been generally sought. In paragraph 6 of schedule 22, new section 226A of the Taxation of Chargeable Gains Act 1992 allows private residence relief to continue if the hold-over claim under section 260 of that Act is revoked. In the previous paragraph, section 260 does not contain a specific right to revoke the election. Is there any time limit during which such a revocation can be made, or does the normal five years and 10 months apply? Does a revocation need to be entered into by both parties in the same way as a claim?

The Chartered Institute of Taxation has also argued that the route being employed by the Government to address the mischief is inappropriate and that it would have been better and simpler to have legislated so that main residence relief is not available on the hold-over gain. The institute is also concerned that there is an element of retrospection in the arrangements and believes that it should contain a more suitable set of commencement and transitional provisions and that taxpayers should, at least, be able to undo the effect of the earlier election and pay whatever tax would have been due if it had not been made. The institute also suggested that there should be a backstop date—for example, April 1997—with the new provisions applying only after that date.

The Paymaster General has, in general, not convinced me that bona fides situations will not be

unfairly disadvantaged. I broadly accept that amendment No. 1 may not work, but it is an attempt to simplify the drafting. She argues that amendment No. 30 would leave the door open to continuing exploitation, and I will take her word that neither amendment satisfactorily addresses the fundamental issues that we and others are concerned about. However, I would like to hear a clearer defence, if it exists, to show that bona fides situations are not disadvantaged by the proposed measures.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman asked about time limits for revocation, whether both parties need to be involved, and how the gift hold-over claim can be revoked. If a claim was made within a tax return and the window for amending that return has closed, the person who made the gift cannot undo the position and is stuck with the consequences of the decision to make that arrangement in the first place to seek to avoid the tax. Likewise, if a claim was outside a return and the window for amending it has passed because it is more than 12 months from the date that the claim was made, the person cannot undo the position and is again stuck with the consequences of that decision.

We are back to a point that we have discussed before about those who undertake such tax planning in the full knowledge that it is designed to avoid paying tax even when legislation clearly says that tax is liable on the gain. They enter into those arrangements by choice, so they cannot say, ''I made that choice and I might have got away with it, but I am not going to now, so I want to revisit my choice with hindsight and make different arrangements.'' If we cater for that, we would be saying to those who seek, through tax planning, to avoid tax for which they are clearly liable, ''If you don't manage it on the first go, don't worry, we'll let you take another run at it by undoing the arrangements that you originally put in place and seeing if there's something else you can do to avoid it, or you can play by the rules.''

The hon. Gentleman has made this point in various ways during debates on the Bill, and I have responded in various ways. If people seek to avoid payment of tax that tax legislation says is clearly liable, they must take responsibility for their choices.

On revocation, it is clear that the tax legislation does not intend that people should seek gifts relief and then trigger residence relief as if the property was their prime property, the one that they occupy. I know that the hon. Gentleman understands that. It is right that we should make such changes, and frankly it is high time that people understood that consequences flow from their choices and that the tax system is not static but can change. I am reminded of the point that my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) made on clause 162 of the 2003 Finance Bill about those who had entered into 25-year mortgages with mortgage relief. Mortgage relief was progressively reduced over time by the Conservative Government and this Government. No one argued that people should carry on receiving it or that they

should be able to revisit financial arrangements that they had made earlier. We all make choices.

I am very firm on this point and will continue to echo it through the stages of the Bill. The clear message to those who want to tax plan is that you can tax plan, but if we change the system, you are stuck with your choices. That is perfectly reasonable; that is life.

The hon. Member for Arundel and South Downs asked whether both parties would be subject to a revocation. That would be the case only if both parties were required to make the claim—it would not automatically have to be both parties. However, that will not be the case for gifts to trust. Trustees of settlements make gifts relief claims only if they are the party making the disposal.

The hon. Gentleman's final point was about claims being revoked. We have made no changes to the claims rules. Gifts relief is given if the transferor makes a claim, and the normal rules relating to withdrawal of that claim apply. That is still the case. Thus, a claim cannot be withdrawn or amended after it has become final, except in certain exceptional circumstances, which are provided for. Otherwise, it may be withdrawn at any time, and people can vary their claims as long as they are not final. Again, he well knows that that principle operates throughout the tax system for final claims, and that it is entirely reasonable.

The hon. Gentleman's arguments have not convinced me. The purpose of certain arrangements is to avoid tax. The purpose of schedule 22 is to block such opportunities. People take advice when they enter the schemes. They know full well what they are doing and that there will be consequences if any Government of the day move to ensure that the tax system operates properly. I believe that the hon. Gentleman, were he ever in the position of a Treasury Minister faced with such prospects, would make exactly the same decisions as I have, because it is the fair way to proceed.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon 10:00 am, 25th May 2004

Before I call the hon. Gentleman. I hope that the Committee does not think that I am feeling very lax this morning, but the Paymaster General's use of ''you'' in that context is entirely consistent with the fact that, unfortunately, Chairmen of Finance Bills are also covered by the legislation with which we are dealing.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The Paymaster General thinks she is being very clever by finding a route to make measures retrospective that are technically only retroactive. I have a long letter from leading counsel and as a result I have written to the Joint Committee on Human Rights about clause 84 and schedule 15. It has been a long-established practice of this House not to enact retrospective legislation. There is a very subtle difference that the Paymaster General ignores between dealing with changing the rules on tax going forward and finding a method of retrospectively impacting on an individual.

If all the Paymaster General's moral preaching is correct, I very much hope that the Government will pass legislation as a result of which the £1 million saved by the Labour party on a clever bit of VAT

avoidance, to which I have referred twice, will be made retrospective. Oh no, we have not had that; we have not had a dickie bird about that. Of course, all bodies, including the Labour party and lots of its Members of Parliament perform the tax planning that is available to them within the law; it is only human nature. I strongly object to the tone of the Paymaster General's comments.

The Government's measures are contrary to British traditions, and we will see what the Joint Committee has to say about the presentation of what is retrospective as retroactive. It is a clever way round the established rules on the difference between retrospection and retroaction.

Government and Opposition Members agree on what the mischief is, we support prevention and accept that there has been an exploitation of the interaction of IHT and CGT. The disagreements are twofold: first, we disagree on the retrospective nature; and secondly, as I said earlier, we are concerned that bona fides situations will end up liable to tax charges.

Neither of our amendments is worth putting to the vote, but we cannot support the schedule for the reasons that I have outlined.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I put it to the hon. Gentleman that his analogies are misplaced, particularly in terms of Labour party purchasing, VAT and so on. Certain people have ordered their tax affairs in a certain way. It is like betting on a greyhound race: they put their money on Running Whip in a six-dog race, halfway through the race the dog gets disqualified, and with the hon. Gentleman's approach, they want to go back and place a bet on one of the other five dogs.

The hon. Gentleman made his cheap political shots about VAT and the Labour party headquarters, but the distinction is that the greyhound race is over. It is a done deal—it is not somebody trying to change things halfway through. The tax affairs are finished. It is in contradistinction to the situation that he seems to want, in which people order their tax affairs in a certain way hoping that the tax regime will remain unchanged and that—to use my analogy—their dog will come home and win. That is not the case, because the dog was disqualified. People cannot return to the beginning, status quo ante, and put a bet on another dog.

Similarly, when the Government lowered the rate of income tax—both the basic rate and the standard rate—that was a change in the tax regime. People in that situation under those Finance Acts had already earned money in that tax year, and I suspect that the hon. Gentleman did not stand up and say, ''That's a change in the tax regime; those individuals earned money when they thought they were going to pay 23 per cent. standard rate tax, now they are going to pay only 22 per cent. That is retrospective and a breach of their human rights. They should still be paying tax at 23 per cent.'' I did not hear him saying that.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Without repeating what I have just said, the hon. Gentleman's analogy is not fair.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Perhaps so. To be as clear as possible, there is a subtle difference between when things have been viewed as retrospective from a legal perspective and when they are retroactive. Self-evidently there are all sorts of situations where Governments of all persuasions will change income tax rules and that is obviously an essential flexibility.

There are precedents for legal changes to block tax avoidance schemes going forward rather than taking measures that effectively cast back to when whatever was done was perfectly legal. The Government have deliberately—indeed, the Paymaster General has made a virtue of it and boasted about it—found routes, of which clause 84 and schedule 15 are the greatest example, but this is another, to introduce measures that technically look retroactive, not retrospective, but within the established body of legal thinking are deliberately retrospective in their impact by past or established standards. It is not a question of a dog not coming in; the law was as it was for better or worse and the measures change what the law would have been in the past. I concede that this is a grey and difficult area, even within the territory of what is retrospective and what is retroactive.

This is a dangerous path to walk. An eminent past Labour Member of Parliament phoned me this week to complain, and cited a well-known parliamentary proceeding when the previous Conservative Government were attacked by Labour Members for measures that they viewed as retrospective in their impact. There was a great parliamentary debate and changes were made. The Paymaster General is being dangerously glib and self-righteous. It is a territory that needs constitutional analysis, which is why I have referred to the Joint Committee on Human Rights to see what it has to say.

It is right to block up perceived abuses and mischiefs. The Inland Revenue should be on the ball and block them up as soon as possible, but broadly the established practice is to block them up going forward, and especially where the measures can result in bona fides situations being unfairly caught. That is not a fair way of proceeding. The basis of this country's tradition of taxation is about consent. It is bogus for Governments of either party to stand up and say that it is the will of Parliament, so be damned. Ultimately, taxation relies on the consent of those paying it.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

This is an important point about retrospection. The measure applies only to gains arising on or after 10 December 2003. Capital gains tax is an event-based tax. It is normal for capital gains tax changes, whether relieving or charging, to apply to disposals on or after the date when the change in question is announced. Any such changes will naturally affect existing arrangements because those are the ones being used for the avoidance and that would otherwise continue to be used. As the hon. Gentleman rightly identified, Governments of all persuasion seek to block avoidance when they see it.

The proposals also have transitional provisions that preserve any entitlement to private residence relief up to the date when the change came into effect. The use of that date featured in the procedure adopted by the previous Governments, and we are using it now. The conditions for entitlement and relief should take effect from 10 December 2003: the date when the change was announced. The relevant legislation and the explanatory notes were published at the same time as the announcement. Given that the hon. Gentleman has accepted that there is a mischief in this case, to allow avoidance to continue would mean an unnecessary loss to the Exchequer. Publishing the legislation and the explanatory notes makes it absolutely clear how the Government intend the legislation to operate from that date onwards.

That is not just a tried and tested route of this Government—I am not making a virtue of it, despite what the hon. Gentleman says—it is how the previous Conservative Government dealt with anti-avoidance measures, and it is perfectly proper to enact the provisions from the point when they are announced. I have said that we are not going back to undo, or returning to claims that are closed. We are simply saying that from 10 December 2003, the rules will operate and everybody has been told about that.

On that basis, I continue to argue that the measure is not retrospective, unless the hon. Gentleman is going to stand up and say that the previous Conservative Government got it all wrong when they introduced such legislation. He may disagree with the measure, but the Government rebut the accusation that it is retrospective. I am sure that it will continue to need proper scrutiny as we proceed, because it is important an important principle in taxation matters.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 10:15 am, 25th May 2004

I will not prolong the point more than I have to. We have no objection to the principle that the next Budget and Finance Bill will change the law effective from a specified date, such as last December, and as the Paymaster General rightly comments, previous Conservative Governments did that. That is not the basis of our objection. She said that the net effect was not to go back and undo. I shall oversimplify, because it is complex territory, but the point is that when past Governments took anti-avoidance measures the net effect was on a going forward basis. The scheme or arrangement was dead from the future. It was not always grandfathered in terms of what the situation had been before, but that was the general principle. As the Paymaster General has commented, in a number of ways this Government have introduced punitive measures, as if to say, ''You naughty people, you undertook this avoidance planning in the past. We are introducing proposals that make sure that you get hit because of measures that were perfectly legal at the time you took them.'' That is why we have concerns. The area is sufficiently grey that there are some aspects that, in an historical sense, have precedent, but some that do not.

I will send the Paymaster General a copy of the letter, because I was impressed by the arguments that

counsel made about why introducing a new basis of taxing things is, in substance, retrospective, even though in law it may be retroactive.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Twenty-second schedule to the Bill.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to consider new clause 11—Capital gains tax: foster carers and adult placement carers—

'In the Taxation of Chargeable Gains Act 1992, section 224, after subsection (1) insert—

''(1A) Subsection (1) above shall not apply to any part of a dwellinghouse that is used exclusively for the purposes of a trade or business which consists of the provision of:

(a) foster care within the meaning given by paragraph 4 of Schedule 36 to the Finance Act 2003;

(b) accommodation and care to people placed through an adult placement scheme operated by a local authority, an HSS trust or an independent body.'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

We have had a sort of stand part debate. New clause 11 is related, but in a different territory. It—

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. The hon. Gentleman is right, and under normal circumstances, I would have deemed that the stand part debate had taken place. However, new clause 11 is very specific and the points that it raises have not been covered.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

New clause 11 touches on the issue of where private personal capital gains tax relief should apply, part of which schedule 22 is about. Both the Low Incomes Tax Reform Group and various charitable groups have raised that issue. As we understand it, fosterers of a child or of an adult needing care—individuals who look after such people in their homes—are deemed to be operating a business and are therefore denied capital gains tax private residence relief. That seems to us to be wrong and to be a major deterrent to fostering.

The new clause would remove a capital gains tax liability on a principal private residence in such situations. I hope that the Paymaster General will tell me that that is not, for one reason or another, the case anyway, but as I understand it, it is the case. It seems to me to be morally wrong that people are penalised if they are doing good in the community by fostering children or adults.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I have considerable sympathy with the new clause, as I understand it. I urge my right hon. Friend the Paymaster General to consider the issue sympathetically, even if the wording is not quite right.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I understand that the Low Incomes Tax Reform Group made representations on new clause 11, but it is incredibly difficult to find circumstances in which a charge would arise. I will explain to the Committee how the system operates and why new clause 11 is not necessary. The hon. Member for Arundel and South Downs and my hon. Friend the Member for Wolverhampton, South-West are, I think, echoing a point that all Committee members would want to make, which is that fostering children and

providing adult care are very important. We would all want to support people engaged in such activities.

The problem comes in the following respect, regardless of whether it is a theoretical point: if those activities amount to a trade or business, the person carrying on that trade or business sets aside part of their only or main residence exclusively for business purposes. If that occurs, the rules for private residence relief should be available in respect of the part of the gain that is their private residence. However, with fostering and adult care, the carer is taking the individual into their own home, and it is difficult to see where liability would arise—although I do not intend to speculate on circumstances, because that is always dangerous.

The hon. Gentleman will understand that I am a little nervous of a blanket clause that says that a residence set aside specifically and only for the purpose of trade or business should still qualify for residence relief. I do not see the problem in the first place—it is not occurring—and I am concerned about putting in a rule that just might provide greater opportunities for other things, let me put it no stronger.

As I have said, foster carers are using their own home and taking in children as if they were part of the family. That often happens with the provision of respite care for adults. In those circumstances, where there is either fostering or a placement of an adult in respite care, it is not the case that all such carers face a capital gains tax charge on the sale of their home, as if they had used it partly for the purpose of providing care and accommodation for the people placed under the scheme. I cannot see a reason for a new provision, and I am nervous of introducing one. It would be inappropriate for private residence relief to be available on the gain for part of a property that has been referred to as a business part of that property.

I am not aware that representations have been made to us that there is an issue here with regard to real cases. Of course, I am not aware of every single case that comes to the Inland Revenue. I am saying to the hon. Gentleman that where the care is being provided in people's own home, and they are therefore not carrying out a business or trade, the residence relief is available. I am struggling to see under which circumstances such care would come under the business or trade categorisation, because then the residence would have to be wholly put aside exclusively and only for that purpose, and it would not be foster care and respite care, which are driven by going into somebody else's home—if I am making myself clear.

The hon. Gentleman, who has made his point and spoken to the new clause, has certainly caused this subject to be scrutinised in preparation for the Committee.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I did not intend to intervene at this point, but I am reminded of a constituency case—it is one I suspect hon. Members will be familiar with—in which an extension was made to a home for the purpose of fostering a significantly disabled child. When that home went on sale, that extension was regarded as an improvement, and therefore there was a

question about tax. Will the Paymaster General clarify that situation?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 10:30 am, 25th May 2004

It is difficult for me to comment on particular cases without having the full details, but the example that the hon. Gentleman has given is similar to the theoretical example that I asked my officials about. A family is foster caring for a child with disabilities and adaptations are necessary, but the home is still a residence and is not exclusively put aside for the purpose of foster care. Would that come under the business or trading rules? The issue would be whether, under the rules, the people concerned were carrying out a trade.

It is difficult. We are venturing into how other tax rules impinge on this area. In those circumstances, I am advised that, where the residence still operates as the family home and the child or adult is taken into that home, residence relief would be available.

It is always dangerous to go down the route of saying, ''What if this happened? What if that happened?'' in a Finance Bill Committee. If the hon. Members for Hertford and Stortford (Mr. Prisk) and for Arundel and South Downs have specific examples of the rules not operating as expected, I will be happy for my officials to look into those individual cases. However, I am not keen to put a general blanket provision into the Bill when I do not think that it is necessary in the first place and am a little nervous that it might be used in ways that none of us intended.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Accountants used to advise—I think they still do—that a dentist, for example, who had a surgery in her own home should hold a party there at least once a year and invite the tax inspector. That would get round the word ''exclusively'' because it would mean that it could be shown that that room within the residence was not used exclusively for dental purposes. I am told by the Chartered Institute of Taxation that the problem with foster care is that it is difficult for people to say that, once a year, they share the bedroom where the foster child stays. I am grateful to the Paymaster General for saying that she will look into the matter. That is sufficient for me.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I can understand why the Paymaster General does not want to change the law if that is not necessary. However, it strikes me that, to the extent that the issue could arise—she will be aware that not just the Chartered Institute of Taxation, but one of the key charities has raised the matter—it is unsatisfactory for the position to be at least potentially grey in an area such as this. Is not an alternative solution for the Revenue to make it clear in guidance that it does not regard fostering a child, or being an adult carer in one's house, as in any way constituting a trade for tax purposes? If that were made clear, it could resolve the problem.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman is quite correct about the ways in which the matter could be resolved if there is a problem. However, unless he writes to me with examples, I am unable to ascertain whether somebody has looked at the Bill and said, ''We can see a theoretical possibility'', although no one has actually been caught in that situation, or whether

the matter is, as he said, a little grey for some people and therefore could be clarified in Inland Revenue guidance. As a rule, because Finance Bills are already rather large, I do not include provisions to deal with theoretical possibilities that may not arise—or I try not to.

I hope that the hon. Gentleman, recognising that guidance may be another way to deal with the matter, will send me the details, so that my officials can consider them. I would be happy to reply to him and all members of the Committee if such details should—that is a big should—make clarification and guidance necessary, in which case that simple step could be taken. On that basis, I hope that he will accept that this important subject has been adequately aired, will not press new clause 11 to a vote, but will agree to leave me to find out whether the incidents are theoretical or happening and, if they are happening, what I can do about them.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. If the hon. Gentleman presses new clause 11 to a vote, it will be not today but at the end of the Bill.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I will be happy not to press new clause 11 to a vote later in our proceedings. I shall write to the Paymaster General, as she suggested. I simply end by saying that the issue is greyness, not whether such incidents are tax challenges. I cannot see any objection in principle to Revenue guidance that makes it clear that fostering and adult caring are not viewed as businesses for tax purposes. I do not believe that anyone ever thought that they should be, and I cannot imagine that any member of this Committee thinks that.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman may be aware that the Government consulted on taxation and foster carers and that there were changes in the Finance Bill last year. To my recollection, his point was not made last year—it is completely new, and that is why I am struggling with it. It was not made when we specifically asked all the associations about these issues. That is why I wish to ensure that this is a grey area before we rewrite the guidance.

Question put and agreed to.

Schedule 22 agreed to.