Clause 103 - ATED: reduction in threshold from 1 april 2015

Finance Bill – in a Public Bill Committee at 3:00 pm on 10 June 2014.

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

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

With this it will be convenient to discuss clause 104 stand part.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

With your permission, Mr Streeter, I would like to include clause 105 stand part in this group.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Thank you.

Clauses 103 and 104 extend the annual tax on enveloped dwellings, known as ATED. From 1 April 2015 properties held in corporate structures worth more than £1 million and up to £2 million will be subject to a charge of £7,000 per year. From April the following year the tax will be extended further and properties worth more than £500,000 and up to £1 million will be subject to a charge of £3,500 per year.

Clause 105 reduces the threshold at which non-natural persons, usually a company or partnerships with a corporate member or an investment scheme, have to start paying 15% stamp duty land tax from £2 million to £500,000.

To provide some background, ATED was introduced in the Finance Act 2013 and came into effect on 1 April that year. It is paid by companies or partnerships with corporate and collective investment schemes that own interests in UK residential property valued at more than £2 million.

Most residential properties are owned directly by individuals, but in some cases they may be owned by a company, a partnership with a corporate member or another collective investment vehicle. In those circumstances the dwelling is said to be enveloped because the ownership sits within a corporate wrapper or envelope. ATED is an annual tax and is charged in respect of chargeable periods running from 1 April to 31 March. The amount of tax charged is based on the value of the property on 1 April 2012. The property is revalued on 1 April every five years.

The Chancellor announced the reduction in the ATED threshold from £2 million to £500,000, which will be introduced over two years. In future years the charges will be indexed in line with the previous September’s consumer prices index. Several reliefs are available that might result in exemption from ATED. An ATED return has to be sent to HMRC in order to claim the relief. There are several ways in which ATED relief may apply to a dwelling, including when it is let to a third party on a commercial basis and is not at any time occupied or available for occupation by anyone connected to the owner; or when it is open to the public for at least 28 days per year. If part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will therefore apply to the whole property.

The background to clause 105 is that schedule 4A to the Finance Act 2003 provides for a higher rate SDLT charge of 15% for acquisitions of a higher threshold interest by a non-natural person. A higher threshold interest is an interest in a single dwelling of more than £2 million or one of a number of interests in a single dwelling acquired in linked transactions where the aggregate charge exceeds £2 million.

Clause 105 will amend the 2003 Act to reduce the threshold to £500,000. There are some exclusions from the higher rate, namely acquisitions by trustees for the purposes of letting, trading or redevelopment; trades involving a dwelling being made available to the public; and providing dwellings for occupation by certain employees or for use as a farmhouse. The measures are expected to raise £365 million over the next five years, and it has been estimated that approximately 12,000 individuals will be indirectly affected through their interests in NNPs that purchase UK residential property, such as companies and collective investment schemes.

The Institute of Chartered Accountants in England and Wales has raised some concerns about the treatment of NNPs envisaged in the clause. It states that many more NNPs will now be brought within the scope of ATED, but that many will also qualify for an exemption. Such companies will have to file a return in order to claim the relief, which the ICAEW fears will be a significant compliance burden. It cites the example of landlords, who often use a company to own commercially let residential property and who will be exempt from the charge but will still but will still have to report annually. Will the Minister comment on those concerns and on what efforts are being made to ensure that the burden is minimised and that all NNPs, particularly such landlords, will be made aware of how to comply with the new rules?

The measures include no graduation in charges, about which the ICAEW is particularly concerned. A property worth £500,000 incurs no charge while a property worth £500,001 will incur a charge of £3,500. Has the Minister received any representations about graduating the sums that apply to properties of different values? Why did he decide to go with the current ATED system within HMRC?

There are also no transitional provisions to allow a company to de-envelope a property without incurring excessive tax charges. Many stakeholders are concerned about the lack of transitional provisions, and it would be helpful to learn whether the Minister considered such provisions and why he decided not to go ahead with them.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover 3:15, 10 June 2014

Does the hon. Lady accept that this anti-avoidance measure is the right thing to do? Does the Labour party accept the measure’s principle and that this manner of organising matters is right?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

The hon. Gentleman will be aware that we supported the ATED changes that were introduced in the previous Finance Act and will support  today’s measures. The measures relate to envelope dwellings, and we have a separate policy on residential property—our support for a mansion tax, which we would use to fund the reintroduction of the 10p rate, which we have discussed at length previously in Committee. I fear that I would get into trouble if I went beyond the scope of the clauses in this group.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Let us say that a form of tax, such as a stamp duty similar to the measure currently under discussion, was introduced for properties worth more than £2 million. How many such properties are there in the UK?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I fear that the hon. Gentleman is trying to draw me into a much wider discussion about property taxation, which takes us beyond envelope dwellings and properties owned through corporate structures of the type that we are discussing. I am happy to have a separate debate with him at another time about residential property taxation, but he is asking me to go beyond the subject matter of the clauses.

On the valuation of property, the ICAEW expects more people to be dependent on the pre-return banding check, as the owners of lower-value properties will not want to pay for a Royal Institution of Chartered Surveyors valuation. It says that that means that HMRC will need to additional resources for those valuations and for compliance. When the Minister responds, will he explain whether those additional resources are available and how much the cost will be? In addition, the impact note states:

“Processing additional ATED returns will require IT systems changes and additional staff resource.”

As earlier, I would like further details about the amount of additional resources that will be needed for both the cost of IT systems changes and the additional staff—how big are staffing resources at the moment, and how much are they expected to increase by?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I wish briefly to make the point that I campaigned for this anti-avoidance measure for a long time before it was brought forward. Further, it is really a measure for people who are not resident in the UK. Enveloped properties are owned in a corporate vehicle that does not pay any capital gains tax on sale, and the company will typically be located somewhere such as the Channel Islands.

The measures the Government have already introduced are right, as are these changes. We have to stop the sort of systematic abuse of our tax system that we saw for too many years. In fact, I would go further: we should look at catching capital gains on UK land more closely and look further at that kind of avoidance. The avoidance of stamp tax and the issue of companies being sold overseas so that no receipt is made are wholly wrong, so these measures are absolutely right.

We need to be clear about the scale of the measures, however. It would not be right to think that they are an easy hit and will raise a lot of revenue. This is an anti-avoidance measure to deal with an abuse, not a measure that will raise vast quantities of revenue for the UK. I therefore say gently to the Opposition that when they talk about whether the measures should be extended to all properties with a value of over £2 million, they  should bear in mind that only 55,000 residential properties in this country are worth over £2 million. The Opposition’s policy to raise £2 billion from the owners of those properties is ill thought out, and would mean an annual tax on such properties of £36,000. It is the tax policy and economics of the madhouse. It is undeliverable, ill thought out and absurd, and shows that the Labour party has learned nothing and forgotten nothing from its time in office.

Photo of David Gauke David Gauke The Exchequer Secretary

Tempting though it is to renew our discussions on the Labour party’s proposals for a mansion tax, Mr Streeter, shall I turn to clauses 103, 104 and 105?

Photo of David Gauke David Gauke The Exchequer Secretary

Clauses 103 and 104 extend the annual tax on enveloped dwellings, or ATED, a charge paid by a company, a partnership with a corporate member or a collective investment scheme—for brevity, I will refer to those three entities as companies—that owns UK residential property valued at more than £2 million. Purchases of such property by those entities are subject to a higher-rate stamp duty land tax charge of 15%. Clause 105 reduces the starting threshold for the 15% charge from £2 million to £500,000.

Before I set out the detail of the clauses let me remind hon. Members why we introduced the annual tax on enveloped dwellings and the SDLT higher-rate charge in the first place. Some individuals choose to put the ownership of their homes within the wrapper of a company that they control, a practice often referred to as enveloping. Once the property is enveloped, it can effectively be sold by transferring the shares of that company. That transaction will not be subject to the normal rate of stamp duty land tax and is therefore a tax avoidance device.

The Government have made our position clear: this form of tax avoidance is not acceptable. We therefore introduced a package of measures to tackle this form of avoidance, to ensure that owners of enveloped residential properties pay their fair share of tax. The annual tax on enveloped dwellings was part of that package of measures. The other measures were the 15% rate of stamp duty land tax charged on enveloping a property and the extension of the capital gains tax regime charged on the disposal of the enveloped property. The annual tax on enveloped dwellings includes a number of reliefs aimed at legitimate commercial businesses—for example, property developers and traders, and property rental businesses—which can reduce the tax liability to zero. Similarly, acquisitions of residential property for legitimate business purposes are excluded from the SDLT higher-rate charge.

Clauses 103, 104 and 105 extend the scope of ATED and the SDLT higher-rate charge further to discourage people from using such avoidance devices. Furthermore, the extensions will discourage the use of corporate envelopes to invest in UK housing that is then left empty or underused. The Government recognise that the structure of ATED can create administrative burdens for some legitimate businesses—for example, property developers and traders—so we will consult on simplifications to the administration of the regime to reduce the compliance burdens for that group.

Clause 103 reduces the existing £2 million valuation threshold for ATED to £1 million. From 1 April 2015, there will be an additional band for enveloped properties worth more than £1 million and up to £2 million, with an annual charge of £7,000. ATED is a self-assessed annual tax, and returns and payments are usually due by 30 April each year. The clause includes a transitional rule, so that those caught by the new £1 million to £2 million band will be required to file returns by 1 October 2015 and to make a payment by 31 October 2015, instead of the normal deadline of 30 April 2015. The extra time will help to smooth the administration of the tax following the extension, particularly in view of potential further changes to the administration of the regime as a result of the consultation over the summer.

Clause 104 introduces a further reduction in the valuation threshold to £500,000. From 1 April 2016, there will be an additional band for properties worth more than £500,000 and up to £1 million, with an annual charge of £3,500. HMRC estimates that a further 21,000 properties will be brought within the scope of the regime as a consequence of the extensions. Of those 21,000, HMRC estimates that 9,000 properties will meet the conditions to qualify for a relief from the tax. The additional ATED revenue is estimated to be £5 million in 2014-15, rising to £25 million in 2015-16 and £50 million in 2016-17.

Clause 105 reduces the threshold above which SDLT may be charged at the 15% rate from £2 million to £500,000. The 15% charge replaces the normal SDLT charge, which would otherwise apply at 4%, 5% or 7%, depending on the amount paid for property. The new £500,000 threshold applies where the effective date of the purchase—usually the date of completion—is on or after 20 March 2014. Transitional provisions will, in the majority of cases, preserve the existing £2 million threshold where contracts were entered into before 20 March 2014, but are completed on or after that date. Other aspects of the 15% charge—including the exclusions that apply where the purchase is undertaken for genuine commercial purposes, such as property letting, redevelopment or trading—are unchanged. We estimate that as a result of the change the number of transactions that attract the 15% SDLT charge will rise from about 80 to about 350 per year, and SDLT revenue will increase by £30 million in 2014-15, with that figure rising to £35 million in 2018-19.

Let me turn to some of the questions raised in the debate. First, there is the issue whether the extension of ATED increases the compliance burden—particularly on genuine businesses—and whether that will result in any difficulty complying with the regime. We recognise the potential for the structure of ATED to create administrative burdens for genuine property rental, trading and development companies. The Government have therefore committed to consult over the summer on possible simplifications to the regime to reduce compliance burdens for bona fide businesses. In fact, informal discussions have already taken place in advance of the formal consultation.

On the question whether HMRC’s IT system will be able to cope with the additional returns expected once the thresholds have been reduced, and on the issue of  resource for valuations, HMRC is exploring the possibility of securing a more robust online solution for ATED. It offers pre-return banding checks for ATED for valuation purposes, and those will be offered to new taxpayers who fall within 10% of each band.

On transitional measures, a chargeable period runs from 1 April to 31 March, and the normal date for filing an ATED return and making payment is 30 April in the chargeable period. Extra time has been given in the first year to help to smooth the administration of the tax following these changes, bearing in mind the potential for further changes as a result of the consultations that will take place over the summer.

All I will say on SDLT threshold rates is that the Government do not normally pre-announce them, for the very good reason that that would increase the risk of forestalling. There is nothing further I want to say about that.

Let me conclude by saying that the extension will further counter schemes that use corporate structures to avoid tax, and it will ensure that those who own UK residential property in this way pay their fair share of tax. I hope that the clauses can stand part of the Bill.

Question put and agreed to.

Clause 103 accordingly ordered to stand part of the Bill.

Clauses 104 and 105 ordered to stand part of the Bill.