Partnerships

I beg to move amendment No. 106,in clause 71, page 47, line 9, leave out ‘sub-paragraph (1)(b),’ and insert ‘sub-paragraphs (1)(b) and (4),’.

With this it will be convenient to discuss Government amendment No. 107.

As I indicated earlier, clause 71 amends the Finance Act 2003 to counter known schemes that attempt to avoid stamp duty land tax by moving property tax-free into a partnership—that is, by the ceding of partnerships. The clause will prevent tax avoidance schemes that we initially dealt with by regulations in the pre-Budget report 2006. The two amendments that I am tabling are directly in response to representations from the property sector.

The first amendment is merely to rectify an omission from the clause; it is a minor omission, but if it was not rectified we would run the risk of confusing those trying to interpret the law. The second amendment follows some late representations suggesting that the clause could have an adverse effect on investment structures that use partnerships but are not engaged in avoidance. We have been lobbied to include a transitional provision, so that the provisions that will create the change do not apply where all the property in a partnership was acquired before Royal Assent and stamp duty land tax was paid in full on the gross market value of the property, and that is what the amendment does.

We have taken on all the suggestions we could that will facilitate those involved in legitimate, innocent transactions without creating further opportunity for those seeking to avoid tax. Of course, those developing avoidance schemes will keep on looking for new ways to avoid stamp duty land tax and we will respond by closing avoidance schemes quickly. We have a duty to the majority of taxpayers to maintain a level playing field for everybody, and of course we will keep this area under review.

I commend the amendments to the Committee.

I would like to address some of the issues surrounding the clause at the same time as addressing the amendments, to obviate the need for a separate clause stand part debate.

I appreciate that there are avoidance risks in relation to partnerships, which have not always proved easy to tackle in the past. However, there seems to me a significant risk that clause 71, like the clause that we have just discussed, could have some unintended consequences in relation to innocent transactions.

Again, some general concerns about the operation of the clause have been expressed to me by the Institute of Indirect Taxation. It believes that transactions that a taxpayer might contemplate without professional advice, such as gifts, could be affected by clause 71. It states:

“We are surprised that a Labour Government should take the view that a family that cannot afford professional advice should not expect to be able to make straightforward gifts without triggering tax consequences.”

I would like to raise two points in relation to the scope of clause 71, and I do not think that they are addressed by the Government amendments. One of them is partially addressed, but some remain and it would be excellent if the Chief Secretary could help to answer them.

The first issue concerns the deletion of the requirement of consideration. Under the old law, the relevant partnership anti-avoidance provisions did not bite on gifts, so they did not apply to a transaction where no consideration was given. The Law Society has expressed concern about the removal of the requirement of consideration by clause 71, pointing out that the consequence is that a gift of a partnership interest from individual to individual is now subject to a market value charge based on the value owned by the partnership. It should also be noted that that is a charge on the gross value of the land owned by the partnership rather than the real value of the gift, which could be considerably less where the partnership has borrowed to invest in the land. So the SDLT charge here could be quite a high one. The Law Society expressed concern that a gift of a partnership interest attracts a charge when a gift of the underlying property would not. It would be useful if the Minister could provide greater clarification on that point and explain the reasons behind the proposed deletion of the consideration requirement.

The second point is rather more worrying. It concerns one of the effects that are partially caused by the deletion of the requirement of consideration, but it also interacts with other changes made in clause 71, and it involves property investment partnerships. The point is best explained by looking at the example given by the Law Society in its briefing to the Committee. It concerns a relatively simple case, where A, B and C are in partnership, sharing income and profits equally, with partnership property of £450,000. Each partner is deemed to own £150,000-worth of property. Further property is purchased by the partnership, using its assets. If another person then joins as a new partner, providing £150,000 in cash, the value of everyone’s interest will have stayed the same, at £150,000. I am told that before section 75A, it was accepted that the addition of a new partner did not trigger an SDLT charge.

The amendments to paragraphs 14(1)(b) and 36 contained in clause 71 would throw that into doubt. Will the Minister confirm whether the enactment of clause 71 will result in SDLT being payable in that situation? It seems that it would be. If so, it could have a significant impact on property investment partnerships.

The practice of second closing—bringing a second wave of investors into a partnership some months after it is first set up—is common. The changes proposed in clause 71 would result in SDLT being payable if the partnership had acquired land between the first and second closing, even though it was bought with money put up by the original investors. If second closings are now to trigger an SDLT charge, it could severely restrict the use of open-ended property investment partnerships. Similar problems occur when partners redeem their partnership interests. Coupled with a further concern, such problems could render partnerships almost unusable in the property investment field. I hope that I am wrong, and that the Chief Secretary will reassure me.

My other concern is about changes in the profit sharing ratio in a partnership. The old law made it plain that, if a partner sold his interest for a consideration to another person, it would give rise to an SDLT liability. However, clause 71 would significantly expand the scope of SDLT by applying it not only in that situation but whenever the profit sharing ratio in a partnership changed.

That could give rise to significant problems, as profit sharing ratios can change automatically under the original partnership agreement. A common example might be an agreement that entitled the operator of a partnership to an increased profit share if the partnership reached a particular level of return. When that relevant level of profits was reached, the partnership shares would change. Under the old paragraph 36, there was no SDLT problem because no consideration had been given to changes in profit shares, and a partnership interest, as it was previously understood, had not been transferred. It now seems that SDLT will have to be paid in every case when a profit sharing ratio changes, even if it was provided for in the original partnership agreement, because of the new definition of what amounts to an interest in a partnership and the removal of the need for consideration.

Similarly, development funds using partnerships will typically include a provision to call for more money from investors: it is a well-known fact that developments frequently run over budget. Such calls are not compulsory; some investors may take them up and others not. However, in such cases, we again see that changes in the partnership ratios that to date would not have triggered an SDLT would now do so. Again, the Minister’s guidance on whether that is the case would be useful. The same problem occurs where an investor defaults or goes bankrupt—another occupational hazard in the property development business. Until now, the resulting change in partnership ratios did not trigger SDLT. It now seems that it would.

I have received representations that, if my analysis is correct and SDLT is payable, partnerships will no longer be used for property funds. That is significant, as such partnerships have played an important role in property investment. A solicitor who contacted one of my colleagues about the problem described the change as lunacy, although I would not go that far. I am willing to hear the Chief Secretary’s justification, but I want to know whether that effect was intended by the Government when drafting clause 71. If so, what was their justification for making such a significant change?

What avoidance problem was caused by property investment partnerships that justified penalising them in the way that clause 71 seems to do? What assessments have the Government carried out on the impact that the change will have on the property investment market? I would be interested to hear whether the Chief Secretary is prepared to publish the Department’s research on the impact of the change. To what extent will the amendments assist in solving the problem? They are helpful in some contexts. In particular, they help to tackle the unfairness that the change in the law creates for people who are committed to partnerships on the basis of the existing law. However, they seem to cover only partnershipsthat bought land between December 2003, when the SDLT regime was introduced, and commencement of clause 71.

While it is useful to give assistance in relation to those transactions, the Government amendments provide a very limited lifeline. In particular, they do not seem to solve any of the problems in relation to partnerships that want to carry on business in future, nor do they permit new partnerships to set up start-up arrangements in the property investment businesses. As the Chief Secretary has confirmed, they are merely transitional arrangements to ease the change that is being introduced.

A way should be found to address concerns about avoidance in this area without such radical restrictions on the use of property investment partnerships. In the debate on REITs, the Government have repeatedly stated that they wish to encourage collective investment in property. If that is the case, why are they effectively shutting down an important vehicle for doing so—the property investment partnership? The Committee should consider the likely consequences of that shutting down. The onshore alternative structures that might substitute for property investment partnerships are limited. Not all enterprises are suited to REIT status; as we debated at length in this Committee last year, REITs are usable only in certain circumstances. In particular, many property enterprises may not be large enough to justify the cost of the listing that is required for REIT status. I am concerned lest the net result of the changes is simply a shift of property investment into offshore unit trusts. I cannot believe that that is really what the Government want.

The Chief Secretary referred to Patrick Cannon’s comments on section 75A. I, too, would like to draw to the Committee’s attention to some comments by Mr. Cannon, who is a barrister. They appeared in Property Week a few days ago in an article helpfully entitled, “Latest tax clampdown is shoddy and rushed”. Let me close with a quote from the article, which states:

“The SDLT partnership provisions are an unfortunate example of just how bad tax legislation can get when you have layer on layer of anti-avoidance amendments built on to basic provisions. The provisions seem to have been worked on at different times by different draftsmen, some of whom do not seem to have a full grasp of how property partnerships function.”

I have to say, Mr. Chairman, that I am inclined to agree.

Before we progress, the hon. Lady has, perfectly reasonably, broadened this into a stand part debate. As the Committee knows, I have no problem with that so long as we do not try to cover the ground twice. However, I listened fairly attentively to what she has been saying and it strikes me that she might have placed the Chief Secretary in a slightly difficult position, because she has commented on one or two things that would otherwise have been raised under the next pair of amendments. If the Chief Secretary wishes to respond now, he might find it necessary to curtail his remarks on the next pair of amendments.

I had anticipated that you might turn this into a broader debate, Mr. Gale. The hon. Lady has got me totally confused—perhaps my right hon. Friend can help me. I had thought that stamp duty  land tax bit on land, but the hon. Lady has talked about changing profit shares in a partnership. I did not think that stamp duty land tax had anything to do with that, so I should appreciate some clarification.

That would be the impact of clause 31. If a partnership holds land and one of the situations that I have outlined, such as a new partner joining, occurs it will be subject to an SDLT charge on that land. That is the connection between the land and a partnership.

I understood that part of the argument. I am not sure that I agreed with it, but I understood it. However, I did not understand at all what the hon. Lady said about changing profit share. I hope that my right hon. Friend can clarify that.

The second point that I should like to make to my right hon. Friend is that it is often, understandably, prayed in aid in this Committee that the Chartered Institute of Taxation says at paragraph 29.1 of its submission that the proposed changes to the Finance Act 2003, schedule 15, are welcome in that they eliminate some of the anomalies in schedule 15. That is all that it says.

I welcome the remarks that the Chief Secretary made in introducing the amendments, which attempt to establish some clarity for partnerships that would be caught incidentally. In other words, they would remove genuine partnership transactions that are not seeking to avoid stamp duty land tax, which is clearly the thrust of the schedule and clauses. However, I am not sure that he has done his job as well as the Committee would normally expect him to do. I am concerned that there are incidental consequences for members of existing partnerships that go beyond the special purpose vehicle type of partnerships that he seeks to catch.

I would appreciate it if he could give the Committee some clarity here and confirm that the Government amendments do not apply to those partnerships where property interests are held incidentally to the activity of the partnership rather than specifically, and interests in those partnerships change over time. My hon. Friend the Member for Chipping Barnet, in her thoughtful contribution, showed that by changing the definition of consideration in the Bill, a partnership gift interest from one individual to another, such as a gift from a partner to his spouse, his children or a family interest, could potentially trigger a stamp duty land tax charge if the partnership happens to hold property. That is quite clearly not the intent of the clause.

I am not sure that the Government amendment is sufficiently clear. We do not have a definition of a property investment partnership although it may exist in the Finance Act 2003. I apologise to the Chief Secretary for not having seen such a definition if it does exist. Perhaps he could put us straight on that. The second point on which I seek some clarity is whether it is intended to catch gifts in the manner that I have just  described if they arise in partnership interests. If a property is held outside a partnership, such a gift would not attract stamp duty land tax whereas if it is held within a partnership it would. Is that the Government’s intention? If so, I think that it is quite inappropriate.

As I have indicated already, the clause aims to prevent tax avoidance schemes that were initially dealt with by regulations at the pre-Budget report. As with the previous clause, the regulations were time-limited and so now need to be replaced using the Finance Act. But the opportunity we have had to revise the legislation has been helpful. Not only has it allowed us to make changes to ensure that a variation on the schemes that we did not know about when we drafted the regulations can be dealt with, it has allowed us to consider whether there are any changes we can make to ensure that legitimate transactions are not affected by the legislation.

As far as the clause itself is concerned, I believe that we have been able to reassure most in the property sector that it will be clear, proportionate and effective. My hon. Friend the Member for Wolverhampton, South-West is right to draw attention to the views of the Chartered Institute of Taxation, which were communicated to all members of the Committee. It welcomed the amendments and the clause. The clause brings fairness to the property sector for taxation by ensuring that transactions using these complex avoidance schemes will be taxed in the same way as they would have been if they had been straightforward land transactions between two parties.

I should again point out that significant sums are at stake here. Until the PBR, when we made the regulations, only relatively few transactions had used these schemes, but the loss in stamp duty land tax yield is significant. These are major commercial transactions. The number would have certainly continued to rise. Closing this scheme alone will bring extra combined revenue for the years 2006-07 to 2009-10 respectively of £10 million, £25 million, £25 million and £25 million.

We believe that we have taken on all the suggestions we could that will facilitate those involved in innocent transactions without creating further opportunity for those seeking to avoid payment of the tax. As a result, we have certainly achieved a clearer and more effective clause, which hits our target of preventing avoidance without unduly affecting legitimate land transactions.

As I said during the debate on the previous clause, those developing avoidance schemes will, of course, keep on trying to find new ways to avoid paying stamp duty land tax and we must be ready to respond by closing avoidance schemes quickly, and we will. We have a duty to the majority of taxpayers, who are not using elaborate avoidance schemes, to ensure that there is a level playing field for everybody, so we will be keeping this area under review.

I would like to respond specifically to some of the points raised by Opposition Members. A concern was raised about charging when partnership interests are gifted between individuals, or by an individual to an unconnected company. I think that it was implicit in what the hon. Members asked, but I need to make it clear that charging applies only to cases where there are  property transactions. However, in such cases, I do not think that there is any reason why such a transaction should be dealt with more favourably than other transactions where tax would be due.

Regarding the concern about gifts of partnership interests now being chargeable, again they will be chargeable only where the partnership is engaged in property dealing or property investment. Other forms of trading partnership, such as farming partnerships, are not affected. Indeed, partnerships where land ownership is incidental are also unaffected by the clause.

I am grateful to the Minister for that clarification. Could he also clarify whether, in the case of an investment management partnership that manages property portfolios as part of its activity but not as its core activity, such a partnership would be caught?

I imagine that it would depend on the extent of the property interest, but I think that the answer is, quite rightly, yes. If the hon. Member wants to raise a more specific question with me, for example in a letter, I would be happy to provide him with an answer. Let me also make it clear that it is not the case that gifts of property from parents to children will be made liable to stamp duty land tax by the clause.

There are substantial sums at stake. The hon. Member for Chipping Barnet asked about the addition of a new partner who contributes cash. She is right that there will now be a charge, because the previous provisions were being used for avoidance purposes and it was necessary for us to ensure that that opportunity was blocked. She also asked about what happens when the profit share ratio between partners changes. Again, this applies only to property investment partnerships, but we think that it is right that there should be a charge where a partner acquires an increased right to income from the property.

This is a complex area, but the balance that we have struck in the clause, with the amendments that we tabled, is right. Certainly, the changes that we have made have been warmly welcomed. I hope that the Committee will support the clause, with these Government amendments.

Amendment agreed to.

Amendments made: No. 243, in clause 71, page 48, line 26, at end insert—

‘(13A) But the amendments made by subsections (6) and (10) do not have effect in respect of anything done in respect of a property-investment partnership established before the day on which this Act is passed if—

(a) the partnership does not acquire a chargeable interest on or after that day, and

(b) stamp duty land tax was paid in respect of each chargeable interest acquired before that day, by reference to chargeable consideration of not less than the market value.’.

No. 244, in clause 71, page 48, line 30, leave out ‘and’ and insert ‘to’.—[Mr. Timms.]

Clause 71, as amended, ordered to stand part ofthe Bill.

Clause 72 ordered to stand part of the Bill.