(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23 and 33 and certain new clauses and new schedules) - Clause 212 - Higher rate for certain transactions

Finance Bill – in a Public Bill Committee at 4:30 pm on 26th June 2012.

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

Photo of Peter Bone Peter Bone Conservative, Wellingborough

With this it will be convenient to discuss that schedule 34 be the Thirty-fourth schedule to the Bill.

I call Cathy Jamieson—no, sorry, Catherine McKinnell.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I appreciate that it might be preferable if one of my colleagues contributed to this part of the debate, Mr Bone, but I am sure you are pleased to hear that it is me again. [Interruption.] I thank Government Members for the warm welcome. It is a pleasure to serve under your chairmanship this afternoon, Mr Bone.

Clause 212 and schedule 34 introduce a new 15% stamp duty land tax that applies to the acquisition of UK residential property by certain “non-natural persons” where the consideration exceeds £2 million. The policy objective, as stated in the explanatory notes, is

“to dis-incentivise the ownership of high value residential property in structures that would permit the indirect ownership…of the property to be transferred in a way that would not be chargeable to SDLT.”

The 15% SDLT charge will apply to acquisitions by companies, collective investment schemes such as unit trusts, and partnerships that have a company as a partner. The charge will apply to both UK and non-UK entities.

I will not go into much detail on the technicalities of the clause, as I am sure that the Minister will respond to any queries relating to them. However, I want to raise a few concerns. Although stamp duty is paid by the purchaser, the seller implementing the schemes has still tended to gain, as properties free from stamp duty tend to command higher prices. The Chancellor said that he wanted the measure to be seen as a sign that he is

“throwing the book at avoidance”,

but there are myriad problems with the plan.

The measure is aimed at owner-occupiers who acquire residential property that is wrapped up in a company, and who avoid or minimise SDLT on transfer. However, the measure catches far more than that. Some say that it  is a sledgehammer to crack a nut, in that it catches every transaction whereby a company acquires a residential property via a company subject to narrow exemptions. It catches not only owner-occupiers but investors, including institutional investors, and commercial landlords. Will the Minister say what he intends to do to make sure that residential development will not be hit? Has he considered the alternative of introducing a transfer tax on the sale of a company that would generate the same SDLT as if there had been an asset sale? For example, we might apply a tax that would be the same as SDLT of 4% or 5% on an asset sale. I understand that Her Majesty’s Revenue and Customs think that is difficult to administer, but the Germans, French and Dutch have something similar.

The definition of “non-natural persons” is wide and, broadly, catches everything apart from individuals and very simple partnerships. The exemptions are narrow. Will the Minister explain the intention behind that? We support the principle of the measure—indeed, we called for it to be introduced before the Budget—but we called for it as a way of raising money to protect families from cuts to tax credits, not to give a tax break to the super-rich.

Of course rich individuals should not be able to avoid tax by buying properties through complex structures, but neither should they be rewarded for avoiding the 50p tax rate, which has been abolished. This is one of the measures that is said to compensate for that. The measure is one tiny element of a much wider approach that we need to take to get a fair amount of tax from the richest 1% in the country. Bigger stamp duty on expensive homes and a crackdown on stamp duty avoidance is not unacceptable. What is unacceptable is the pretence that these measures will plug the huge gap in wealth taxation that abolition of the 50p tax has left. Will the Minister respond to those points to allay the concerns of Committee members?

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

It is a pleasure to serve under your chairmanship, Mr Bone, for what is perhaps the Committee’s last sitting. [Hon. Members: “Hear, hear.”] Several of my colleagues seem to be much relieved at that idea, although I am sure that most of us would prefer to spend our time discussing the intricacies of Finance Bills on a permanent basis—and of course we may have to do so, as this one seems to have been unravelling at such a pace.

Again, this is a matter on which there is a risk of a knee-jerk response. How much revenue would this measure generate? On one level, if it is to close a loophole whereby people have purchased very expensive properties through the mechanism of a company to avoid the previous level of tax at 5%, it seems unlikely that people will even want to use such a mechanism at the proposed 15% level, so it will not raise any revenue. That may be legitimate in itself—we may want to stop certain practices rather than to raise revenue—but it would be interesting to hear the Minister’s view on whether the measure is designed to bring in revenue or simply to stop such transactions. Is he confident that it will close the door on these transactions, or will people still be able to do it in a different way?

People often say that our tax code is too long—the longest in the world, or the universe, probably—but one of the reasons why we have such lengthy Finance Bills is  to stop people doing things that they have worked out can be done to avoid tax, so do we anticipate further legislation, or will this be conclusive?

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to welcome you back to the Chair this afternoon, Mr Bone, for the last time in the course of our proceedings this year—unless we have a pleasant surprise, for whatever reason.

The clause introduces a new rate of stamp duty land tax for residential properties worth over £2 million purchased by certain non-natural persons. The new rate is part of a package of measures announced at the Budget to tackle stamp duty land tax avoidance. The purchase of high-value properties into, for example, a corporate envelope allows for the future avoidance of SDLT by a subsequent purchaser of the property wrapped in the envelope. The enveloping of property is common among the purchasers of high-value property.

The clause introduces a 15% SDLT rate for residential transactions over £2 million by certain non-natural persons, with an effective date on or after 21 March 2012. The new 15% rate is part of a package of measures both to ensure that individuals and companies pay a fair share of tax on high-value residential property and to tackle avoidance.

The 15% rate will apply to purchases by non-natural persons, including acquisitions by a company; acquisitions made by or on behalf of a partnership where one or more of the members is a company; and acquisitions made for the purposes of collective investment schemes. Companies acting in their capacity as trustees of settlements, and property developers with a record of development of two years or more, will be excluded.

I draw the Committee’s attention to an error in the tax information and impact notes, which were published at the Budget, regarding the transitional arrangements for the 15% rate. I wish to clarify that the rate does not apply to a transaction for which a contract was entered into on or before 20 March 2012, and is subsequently unchanged for a transaction that is to complete on or after 21 March 2012. In such cases, the transitional rules will apply, and the rate chargeable will be 5% rather than 15%. Where a contract has been entered into on 21 March 2012 for a transaction that is to complete on or after that date, the transitional rules will not apply, and the rate chargeable will be 15%.

I shall now address some of the questions asked in our short debate. First: does the 15% rate unfairly hit, for example, property investment companies that do not avoid paying their taxes? The package outlined by the Chancellor was designed both to ensure that individuals and companies pay a fair share of tax on residential property transactions, and to tackle avoidance. We understand the concerns raised by bona fide property investment companies, and the Treasury is in conversations with a number of affected interested parties. The current consultation on the annual charge seeks comments specifically on the coverage, and once that has been completed we will carefully consider all representations before making a final decision on coverage for the annual charge. The conclusions reached in relation to that coverage may also inform any changes to the 15% SDLT rate, but before making any changes to current  legislation, we will have to take into account the need to ensure that the core aim of the policy, which is to tackle avoidance, is not compromised.

On a related point, the hon. Member for Newcastle upon Tyne North asked whether the definition of a non-natural person was too broad. It is broad because we want to prevent avoidance; too narrow a definition could leave loopholes. A long-standing problem with SDLT has been that, in too many cases, those who have arranged their affairs in such a way that a property is held through a company or other non-natural person have essentially been able to sell the property without the purchaser incurring SDLT, which adds to the value of the property. The hon. Lady was right that that can be the economic effect of being able to sidestep the SDLT rules. That is not fair, and we have consequently taken action to address the concern because we think it is right that we do precisely that.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

With the higher SDLT rate in the Budget, is it not important that strong anti-avoidance measures are in place to ensure that people do not sidestep the higher charges?

Photo of David Gauke David Gauke The Exchequer Secretary 4:45 pm, 26th June 2012

My hon. Friend is absolutely right. Given his considerable expertise in the area, he will know, as will many members of the Committee, that there was a growing concern that wealthy individuals were able to sidestep the requirements of SDLT, whereas our constituents living in properties of much lower value would face SDLT when making a purchase or a sale. In some of the wealthiest properties, SDLT was not applying. That clearly is not fair and the Government were determined to take action to redress it. Perhaps the matter should have been addressed years ago, but I am pleased that we have been able to take steps to deal with it. The clause is part of that general desire to address the matter, and I hope that the clause will stand part of the Bill.

Question put and agreed to.

Clause 212 accordingly ordered to stand part of the Bill.

Schedule 34 agreed to.