I shall try to be brief, but at the same time to provide a bit of context for the amendments in order to satisfy Members on both sides of the Committee, who will be interested to know the detail of the schedule.
The schedule contains a range of measures to clarify and simplify miscellaneous life assurance tax provisions, most of which arise from the life assurance tax rules consultation process. I shall discuss the first of them, covered by paragraphs 1 and 2, when I highlight the amendments. The other important measure in schedule 10, packaged in paragraph 3, is a reform of the treatment of so-called structural assets held by a life insurance company in its long-term insurance fund. Structural assets are held by an insurance company as part of its trading structure, as opposed to assets that are expected to be turned over in the course of its trade. A major example, and one included in the Bill, is shares in subsidiary companies that themselves are insurance companies.
However, where structural assets are held in a company’s long-term insurance fund, inappropriate tax rules can arise, because the life insurance tax rules assume that all assets held in a long-term fund are held or sold in the course of the company’s insurance business. For example, dividends from insurance subsidiaries through structural assets are subject to corporation tax, whereas dividends from structural subsidiaries of other types of trading company are exempt.
As taxation of life insurance companies is based on their regulatory returns, it follows that write-downs can result in a tax deduction where there is no economic loss. Following consultation with the life insurance industry, we have introduced paragraph 3, which will reform the taxation of structural assets, treating them as capital assets rather than trading assets. Dividends from structural assets will be exempt from tax, giving the insurance industry parity with other traders.
A further measure in paragraph 4 will remove the restriction on use of capital losses where a life insurance company sells holdings in an authorised unit trust or an open-ended investment company to the manager of that trust or company, and that manager is a member of the same group of companies as the life insurer. The capital gains rules impose restrictions on the use of capital losses on all disposals between connected parties, such as members of the same group. The policy reason is that connected parties have opportunities to manipulate the circumstances of the disposal that are not available to independent parties.
However, where a life insurer disposes of holdings in unit trusts or open-ended investment companies, both Financial Services Authority rules and life insurance tax rules ensure that the disposal is at market value and minimise opportunities for manipulation, regardless of who acquires the assets. For that reason, the life insurance industry has argued that it is unfair to restrict any losses arising. The Government accept its argument, and schedule 10 will remove the restrictions.
The remainder of the schedule comprises a general tidying up of life insurance tax rules, modernising definitions, removing duplication by putting all definitions in one place and repealing spent or obsolete provisions. I look forward to the scrutiny of my hon. Friend the Member for Wolverhampton, South-West and to seeing whether obsolescence and obscurity have been fully tackled.
The amendments will modify the new provisions in response to our consultation. Paragraph 3 will reform the taxation of structural assets, treating them as capital assets rather than trading assets. Dividends from structural assets will now be exempt from tax, giving the insurance industry parity. The schedule defines structural assets initially as shares in and loans to subsidiaries of insurance companies that themselves write insurance business. The measure also includes a regulatory power to add to or amend the list of structural assets; however, the life insurance industry will be consulted before that power is exercised.
A short time ago, the Association of British Insurers and other parties sent a number of representations to Her Majesty’s Revenue and Customs about the new measures. At the time, it was thought that the schedule would be debated last week, so HMRC was able to deal immediately with only two straightforward points, which are covered by Government amendments Nos. 91 and 92. But when debate on the schedule was deferred to today, I agreed that further amendments—Government amendments Nos. 130 to 133—should be tabled now, rather than on Report, to give effect to many of the ABI’s requests for clarification and relaxation.
On a point of order, Mr. Illsley. I am slightly confused as to whether there are two groups of amendments to schedule 10 or one. There seems to be some interrelationship between the two. I am not sure whether we are debating one group or two separate groups.
There are two groups—Government amendments Nos. 90, 92 and 94 to 96, and Government amendments Nos. 130 to 133, and 91 and 93. I assumed that the Economic Secretary was referring to a group of 10 amendments, that he was not moving amendment No. 130, which will be in the following group, and that he was simply referring to the fact that they all apply to schedule 10. However, there will be separate debates on both groups.
I apologise to the hon. Member for Fareham: I did not read fully and correctly the punctuation of the schedule before us. It seemed to me that, to understand these amendments, it was important to put them in the context of the schedule. With your permission, Mr. Illsley, I should like to frame all the amendments together, accepting your right not only to determine that we should vote on separate groups but to allow a second debate on the second group, if you prefer. It seems that the amendments are all of a piece, as they emerged from a detailed set of consultations that I have been able to update in recent days. There was not a principal distinction between the two groups, but I am happy to take your guidance, Mr. Illsley.
I will be guided by the wish of the Committee. If it has no objection to taking both groups together, I have no objection. If hon. Members have no objection, we can proceed on that basis, in which case with Government amendment No. 90 it will be convenient to take Government amendments Nos. 92, 94 to 96, 130 to 133, 91 and 93.
This is not about a difference of scope or subject. Because we have had more time, we have been able to add further amendments in recent days at the request of the ABI, particularly Government amendments Nos. 131 to 133. We have tried to add those amendments to meet the needs of the industry. There is one case where we have changed the legislation to ensure that a company cannot generate a loss earlier than it would do so naturally by moving the asset around the company or its group.
That is not fully to the liking of the industry, but it was necessary to ensure that we protected the Exchequer. However, I have asked HMRC to monitor that rule carefully to ensure that it works properly, and not harshly. I also know that the industry does not like the way in which section 83XA(6) deals with the capital gains treatment of structural assets. That is not something that we have been able fully to bottom in the consultation. The ABI’s preferred solution seemed to skew the results too far towards an Exchequer loss, and both sides accept that that may be a theoretical, rather than a substantial, point of difference. However, it is an area where we are trying to do the right thing, while protecting the revenue base. I am happy to give an assurance to both the ABI and Opposition Members that we will keep that under review. The amendments ensure that the structural assets are given in all cases, including where the substantial shareholding exemption is relevant, and where there is a transfer of business. I am happy to commend the amendments to the schedule to the Committee.
I thank the Minister for his explanation of the amendments, and of paragraph (3) on structural assets, which is a difficult part of the legislation, as it affects life assurance companies. Many such companies hold many structural assets in their funds, which are available for use in certain circumstances to meet the policy holders’ liabilities. There are some quite difficult interactions with FSA rules and tax rules about the valuation.
I should like to raise three areas with the Minister in connection with those rules. The first is the treatment of gains, which he has already touched on, but I want to come back to it in a little more depth in a minute. As I understand it, paragraph (3) excludes the movement in value on insurance dependants from tax, so ending the double taxation of insurance subsidiaries. Certainly in the past, although I am not sure that it is the case now, life funds have held other trading businesses within their funds. A distinction has been between those involved in insurance business and those involved in non-insurance business. I should like to understand why it is only insurance dependants that have been excluded from tax.
The second point concerns interest. Movements in value on loans for insurance subsidiaries will not be taxed and nor will the interest on those loans. However, my understanding is that the interest deductions on the other side of the loan transaction will be relievable against tax credit. If the interest payable is subject to relief, why is the interest receivable not going to be taxed? Does the Minister think it appropriate for debts and loans to be included in our structural assets? There is a slight risk that an asymmetrical treatment will arise where life assurance companies engage in tax planning, recognising the difference in treatment on the interest payable on loans.
The third point goes back to the central issue of the treatment of gains, on which there is most debate between the Treasury and the ABI. Taxation is charged when a qualifying asset leaves the long-term fund of the life assurance company. That is determined by taking the difference between the historic cost of the asset and its admissible value at the relevant time, which is 1 January 2007 for existing assets, and the time that the non-profit fund of the life assurer acquired the assets, for assets acquired after that date.
The ABI believes that such gains should be taxed as capital gains and therefore should attract indexation to give them the same tax treatment as other companies. There should also be an opportunity to compute such gains using either the higher of the original base costs or, where relevant, the market value at March 1982. Again, that is the same treatment that is available to other businesses. It is a consistency point between assets held by life assurance companies and assets held by other companies. Will the Economic Secretary give us some background on the reason why there is a difference in treatment? Certainly, other businesses go through the process of being able to have indexation gains and looking at the base cost of the 1982 market value cost where that is appropriate. There seems to be a mismatch between general business taxation and the taxation of life assurance companies. Some issues of shareholder capital losses also float through. It is not a particularly straightforward piece of legislation which is why, despite the consultation that has been taking place since June last year, we are still making changes as we approach the end of May. The Government are still proposing changes, with the tantalising prospect of further amendments to come. I should be grateful for some clarification on those points.
This is the last time that I will raise this matter, but I do so because I am getting sick of it. Amendment No. 93 starts with the word, “But”. It is not only ungrammatical but completely redundant. I have been making the point throughout the Bill that I hope at least in next year’s Finance Bill we can have some decent and grammatical wording and not include redundant words.
This morning, the Economic Secretary waxed lyrical about the consultation process. He stressed its importance and the openness and trust that has built up between the industry and the Government. Indeed, he was very open and honest about some of the difficulties that arose in the autumn of 2005, which he put down in part to a lack of consultation. Why, therefore, does the ABI state in its briefing to members of the Committee:
“HMRC have tabled last minute amendments, which have not been subject to the consultation process and we are concerned at the late changes to legislation that had previously been discussed at length”?
Let me answer those questions as briefly as I can. On the subject of the word, “But”, we shall reflect and try to draw wider lessons as part of the Finance Bill process about the excessive use of that word at the beginning of sentences. The hon. Member for Fareham made three points. The first concerned the definition of structural assets and insurance dependants. Insurance dependants are by far the most significant set of assets, which is why the provision provides for them expressly. However, the schedule includes the power to add other assets by means of regulation. Discussion will continue, and if other assets need to be added to the same category, that will be possible.
There is a misapprehension on the second point; interest receivable will be taxed, so there is no asymmetry. On the third point, I refer the hon. Gentleman to the industry views that I quoted in my introduction to this part of the Bill. Ernst and Young’s Budget website said:
“A key lesson from the life tax consultation is the efficiency of the working group approach. The use of the working group as the primary means of progressing issues of both broad policy and fine detail is now deeply embedded as a feature of the regular working relationship between HMRC, industry and advisors.”
That constitutes substantial progress from where we were 18 months ago, so although I do not hesitate to say that improvement was clearly needed, I hope that that has been delivered.
There were late representations from the ABI and others in relation to the new provision—I do not use the word “late” in a value-loaded way, I mean merely that the issues arose late in the consultation. We could easily have decided to postpone any attempt to sort those issues out, but we decided that we could deal with Government amendments Nos. 91 and 92 consensually, when more time was available. The ABI requested clarification and indeed relaxation, and our judgment in relation to Government amendments Nos. 130, and 131 to 133, was that clarification was the right course, even if we could not deliver the degree of relaxation that the ABI wanted. I know that it is disappointing that we cannot go as far as the industry would like, but we judged that maximum clarity at this stage would be the better choice.
As I have said, the issues are very complicated—even more so than some of those that we have already debated in connection with the relevant clauses. We do not know how much the problem is theoretical rather than real, and the best commitment that I can give to the ABI and to the Committee is that we shall closely monitor the operation of the system. If it works heavy-handedly or if there are indeed problems in relation to capital gains treatment, we shall revisit the legislation. I have already expressed my willingness to table further amendments or regulations before next year if necessary.
I was not sure whether the Minister was about to conclude, so may I prompt him to deal with my point about the different treatment of gains on structural assets. Structural assets held by a non-life insurance company will be subject to a different capital gains tax regime from that which will apply to structural assets held within life assurance funds. I should like to understand the reason for the difference.
I believe that I already answered that when I referred to the discussions on differential treatment in section 83XA(6), which deals with the capital gains treatment of structural assets. It is a complex issue, which we are still trying fully to understand, and the best that I can do is repeat that discussions with the ABI will continue in the coming weeks. If I can give more detail to the hon. Gentleman after that, and after further expert consultation, I shall be happy to write him a letter. Pre-empting that would be foolish, however.
I am grateful for the Economic Secretary’s offer, but I would quite like to know now why there is a difference rather than hear about how the problem might be resolved.
With your permission, Mr. Illsley, to avoid further detaining the Committee by attempting a detailed, complex definition, I shall write to the hon. Gentleman, which will enable him better to understand the ongoing consultations.
Amendments made: No. 130, in schedule 10, page 163, line 16, leave out
‘by an insurance company held in a non-profit fund’
‘held by an insurance company in a non-profit fund.
(1A) For the purposes of subsection (1) above—
(a) an increase in the value of structural assets includes any amount by which their fair value when they cease to be structural assets, or come to be held otherwise than in any of the company’s non-profit funds, exceeds their admissible value at the end of the preceding period of account, and
(b) a decrease in the value of structural assets includes any amount by which the admissible value of the assets at the end of the period of account in which they become structural assets, or come to be held in any of the company’s non-profit funds, is less than their historic cost.’.
No. 131, in schedule 10, page 163, line 29, after ‘be’ insert
‘a structural asset or comes to be held otherwise than in any of the company’s non-profit funds and, immediately before it came to be a structural asset held in any of the company’s non-profit funds it (or any part of it) was’.
No. 132, in schedule 10, page 163, line 34, leave out from ‘the’ to end of line 46 and insert
‘relevant period of account.
(4A) For the purposes of subsection (4) above “the relevant value difference”, in relation to an asset, is— H C — A V
HC is its historic cost, and
AV is its admissible value at the relevant time.
(4B) In subsection (4) above “the relevant period of account” means—
(a) in a case within paragraph (a) of that subsection, the period of account in which the asset ceases to be a structural asset or comes to be held otherwise than in any of the company’s non-profit funds, and
(b) in a case within paragraph (b) of that subsection, the period of account in which the asset first comes to be held otherwise than by the company or (where the company is a member of a group) otherwise than by a company which is a member of the group;
and section 170 of the Taxation of Chargeable Gains Act 1992 (meaning of “group” etc) has effect for the interpretation of this subsection.
(4C) In this section “historic cost”, in relation to an asset which is or has been held in any of the company’s non-profit funds, means—
(a) where the asset came to be held in any of the company’s non-profit funds on acquisition from another person, the consideration given by the company for the acquisition of the asset, and
(b) otherwise, its fair value when it came to be held in any of the company’s non-profit funds.
(4D) In subsection (4A) above “admissible value”, in relation to an asset and a time, means the value of the asset as shown in column 1 of Form 13 of the periodical return for the period ending with that time (or as would be so shown if there were a periodical return covering a period ending with that time).
(5) In subsection (4A) above “the relevant time” means—
(a) in a case where assets become structural assets held in any of the company’s non-profit funds by virtue of the commencement of this section, 1st January 2007, and
(b) otherwise, the time when the assets become structural assets held in any of the company’s non-profit funds.’.
No. 133, in schedule 10, page 164, line 3, after ‘to’ insert ‘its’.
No. 91, in schedule 10, page 164, line 20, at end insert—
‘(4) In section 211 of TCGA 1992 (transfers of business: application of section 139 of that Act), as amended by paragraph 14 of Schedule 9 to this Act, after subsection (2) insert—
“(2A) The reference in subsection (2) above to assets included in the transfer does not include structural assets within the meaning of section 83XA of the Finance Act 1989.”
(5) In paragraph 17 of Schedule 7AC to TCGA 1992 (substantial shareholdings exemption: special rules for assets of insurance company’s long-term insurance fund), after sub-paragraph (4) insert—
“(4A) The reference in sub-paragraph (2) to an asset of the investing company’s long-term insurance fund, and the references in sub-paragraphs (3) and (4) to shares or an interest in shares held as assets of its long-term insurance fund, do not include a structural asset, or structural assets, within the meaning of section 83XA of the Finance Act 1989.”.’.
No. 92, in schedule 10, page 170, line 33, leave out ‘amendments made by paragraph 1 to 3’ and insert
‘amendment made by paragraph 1 has effect on and after 10th May 2007.
( ) The amendments made by paragraphs 3,’.
No. 93, in schedule 10, page 170, line 35, at end insert—
‘( ) But the amendment made by paragraph 3(4) does not apply where the transfer of business concerned took place before 10th May 2007.’.—[Ed Balls.]