118A (1) The Commissioners must, within three months of the end of the tax year 2019-20, provide information to the Treasury on the basis of the exercise of their functions in relation to the changes made in this Schedule about the effects of the changes on the matters specified in sub-paragraph (2).
(2) Those matters are—
(a) residential property prices in the United Kingdom, and
(b) the proportion of residential property in the United Kingdom owned by persons not ordinarily resident in the United Kingdom.
(3) The Chancellor of the Exchequer must, within six months of the end of the tax year 2019-20, undertake a review of the information supplied in accordance with sub-paragraph (1) and lay a report of that review before the House of Commons.”
This amendment would require the Chancellor of the Exchequer to review the effects of the changes in Schedule 1 on residential property prices and foreign ownership of residential property.
That schedule 1 be the First schedule to the Bill.
Clause 13 and schedule 1 introduce provisions, with effect from April 2019, to tax non-residents on the gains they make on UK commercial property and to extend the charge on residential property. That levels the playing field between UK resident and non-resident investors in UK land and buildings. The modern OECD model tax treaty gives the jurisdiction in which land and buildings are located the primary right to tax income and gains from those land and buildings. Historically, non-residents have not been subject to UK tax on the gains they make on UK land and buildings. That has been the policy of successive Governments over several decades. The Government have steadily revised the UK’s approach in recent years. In 2013, we introduced a targeted tax on gains relating to property within the charge of the annual tax on enveloped dwellings. In 2015, the Government went further and brought in certain non-residents’ gains on the sale of residential property owned directly.
Those 2013 and 2015 changes were a substantive reform to the taxation of non-residents investing in UK property. Now that the charges have been in place for several years, it is the right time to take a more comprehensive approach. Clause 13 achieves that by extending a charge to the gains made by non-residents on commercial property and expanding the scope of the existing residential charge by removing the carve-out for widely held companies. To ensure that transactions that are essentially sales of UK land are taxed, and to reflect the commercial reality of many large property transactions, the clause introduces a charge on indirect disposals of UK property. That charge will apply to gains made on the disposal of an interest in an entity that derives 75% of its value from UK land.
The Government recognise that these reforms are extensive, and recognise the value that investment in UK land and buildings brings to the United Kingdom. The clause implements the rules in a way that minimises disruption and avoids unintended consequences. Non-resident companies will pay corporation tax on all the chargeable gains they make on UK land and buildings, creating a single cohesive set of rules. Those taxpayers who are exempt from UK tax on the gains that they make for reasons other than their residence, for example pension funds and qualifying charities, will continue to be exempt. Steps have been taken, using principles currently applied to UK funds, to ensure that these and other investors are not disadvantaged where they invest in UK property via funds.
In legislating for this policy, the clause restates, in a simplified form, the main charging provisions for the taxation of capital gains. Other than implementing the policy, this makes no changes to the existing law. It significantly and permanently simplifies the legislation and aids taxpayers’ interpretation of the law.
Government amendment 1 will remove a redundant subsection of the Corporation Tax Act 2009. That subsection currently ensures that corporation tax is not charged on gains that are subject to capital gains tax. As I have set out, clause 13 will introduce a single cohesive set of rules charging companies corporation tax on all the chargeable gains they make on UK land and buildings, which means that this subsection is no longer required.
Amendment 23 would require a public register of those subject to capital gains tax as a result of schedule 1. The categories of person who will be brought into scope by clause 13 and schedule 1 are absolutely clear. I have set that out to the Committee today and it is set out in detail in the schedule. The Government do not, as the amendment would require, identify specific individuals or companies that are brought within the scope of particular tax charges; it would be inappropriate to do so.
Amendments 24 and 34 would require a review of the revenue effects of the changes to capital gains tax as a result of the schedule and the impact on reducing the tax gap. The OBR-certified Exchequer impact for the measure was updated and published in table 2.2 of Budget 2018. Like all tax changes, the fiscal impact of this clause and schedule will be monitored and subject to revaluation where appropriate. In addition, HMRC already publishes annual updates on its tax gap analysis, which will reflect the effect of capital gains tax changes.
Amendment 29 would require a review of the changes made by schedule 1 in relation to residential property prices and foreign ownership of residential property. The intent of the measure is to level the playing field between UK and non-UK-resident investors in UK property. The impact on the market was carefully considered in the design of the policy and will be monitored following implementation of the measure. The OBR made no adjustment to its property price forecasts as a result of the policy.
The Government therefore reject the amendments, and I commend the clause to the Committee.
I am grateful to the Minister for that explanation. As he stated, this clause and schedule are intended to perform a variety of functions to level the playing field—the number of times that he used that phrase was interesting—between UK and non-UK residents when it comes to the payment of corporation and capital gains tax on gains from disposals of interest in UK land. They include, as he mentioned, the removal of the charge to tax on ATED-related gains, with ATED standing for the annual tax on enveloped dwellings. As was mentioned, these changes follow on from the imbalance in the tax treatment of the disposal of interests in property by individuals as against companies, artificial or otherwise, which has been gradually rectified over recent years.
Part 3 of the Finance Act 2013 introduced ATED as a principle and the concept of enveloped dwellings so that there would be a capital gains tax charge on non-natural persons who had owned properties worth more than £500,000, subject to a range of exemptions. That was followed three years ago by the extension of capital gains tax on gains arising on the disposal of UK residential property interests by certain non-resident persons, including individuals, trustees and closely held companies. However, that was not accompanied by a levelling of the playing field in relation to non-residential property wealth—land and commercial property—until now, although for reasons that I will explain, these measures are wanting in their current form, in particular because they involve a so-called trading exemption, to which I note the Minister, unless I misheard him, and he is normally very clear, did not refer in his comments. I shall speak first about that main and very significant problem with the clause and schedule, before moving on to describe the amendments in relation to them.
In an ideal world, we as the Opposition would have sought to remove the trading exemption for enveloped structures to avoid capital gains tax. Indeed, that is what some of the amendments that we had tabled set out to do. I completely understand why they were ruled out of order. There is absolutely no criticism of the decision to do that. I am sure that it was because of the restrictions imposed on us because of the Government’s failure to table an amendment to the law resolution, which my hon. Friend the Member for Bootle has already referred to. However, that trading exemption threatens to emasculate this measure.
I am sure that members of the Committee will be aware that almost all the measure’s projected yield is expected to derive from non-resident companies when they dispose of UK commercial property such as offices, factories, warehouses, shops, hotels, leisure facilities and agricultural—
I am grateful for the clarification. I am sorry if I got the situation wrong, and it is helpful to have heard that. However, I understand that it is appropriate for me to discuss the substantive matters in the clause, even if we do not have amendments tabled on them. Other hon. Members have done that, so I will continue to do so before I move on to my amendments, if that is acceptable. I am sorry if I mischaracterised the position and the decisions that were taken.
To continue with reasons why the trading exemption is illegitimate to our mind, as I mentioned before, the yield that has been described as arising from the measure is expected to derive from non-resident companies disposing of the whole range of different types of UK commercial property that I listed. Unlike residential property, most of which is owned by individuals, almost all major UK commercial property is held by large corporates or collective investment schemes or trusts.
Those large corporate investors in property are sometimes known as property envelopes, which reflects the fact that the companies’ principal purpose is to operate as a synthetic wrapper for owning land. Since the property envelope has full title to the land, any individual or other corporate owning the property envelope—for example, by owning its shares—is the ultimate or indirect owner of the underlying land.
Typically, when selling the property, the ultimate owners do so indirectly, by selling their interests in the property envelope, rather than by a direct sale of the property itself. That form of disposal is often known as an envelope disposal, since the property envelope has full title to the land, and the transfer of its shares to a new owner is tantamount to a conveyance of the property to new ownership. There are often tax reasons for that form of conveyance, since the transfer of shares, rather than land, does not attract any stamp duty land tax charge, which results in a substantial saving for the purchaser.
Recognising that situation, the consultation on the proposed measures proposed charging non-UK residents capital gains on disposals of their interest in property envelopes in the same way as if they had sold the actual land. The consultation document proposed that a property envelope would be defined as a property rich entity if it had UK property assets that represented 75% or more of the value of the entity’s total assets, as the Minister mentioned. Given that the vast majority of high-value UK commercial property is owned through a property envelope, that element of the rules, which I will refer to in future as the anti-enveloping rule for ease of discussion, is critical to the measure securing significant yield.
In response to the consultation responses that the Government received, the draft legislation includes an exception to the charge on disposals of property envelopes if the property owned in that envelope is being used in an ongoing trade that continues after the disposal takes place. In effect, that means that non-residents who make a disposal of shares in a property envelope will not be subject to any charge, provided that the property is being used for a trade.
That condition will be met if the property is being used as an office, a factory, a warehouse, a shop, a hotel, a leisure facility, in a farming trade or for any other similar commercial purpose—I am sure the Committee gets my drift. As such, the exception is surely entirely contrary to the stated rationale for the measure, which is to ensure that non-residents are taxed on gains from the disposal of commercial property in the same way as UK residents. Again, I remind the Committee that the Minister used the phrase “having a level playing field” several times in his remarks. Commercial property will, almost by definition, be used in a trade.
I am sure that the entire Committee will be scratching their heads and asking why the change occurred. Well, there were 120 respondents in all to the consultation, a number of which focused on one question only, many of which came from the most significant actors in this arena, namely the big four and large property concerns, including representatives from the real estate and collective investment scheme sector.
The Government response to the consultation states:
“Many respondents were concerned by”— what they described as—
“the ‘cliff-edge’ nature of the 75% property richness test. They noted that fluctuations in the value of property and other assets could lead to cases where an entity strayed in and out of property richness. Some were concerned that real-estate rich trades such as retail and hotel chains and utility companies could fall to be property-rich, or that investors in these trades might be concerned that they were, and be forced to go to lengths to explore the rules and test their situation, often finding that there was no impact. To ameliorate this, a number of respondents asked for a trading exemption to make it simple for smaller investors to understand when the rules did not apply to them. They noted that the main policy aim was to tax UK land, not interests in retailers or utility companies.”
The Government response went on to say that,
“the government will agree to add a trading exemption. When a disposal is made of an interest in an entity that is trading both before and after the disposal, as for connected parties under the Substantial Shareholdings Exemption rules, then it will not be considered to be an indirect disposal of an interest in UK land”—
That is, it will not be treated as an enveloped disposal.
“Although the government does not intend to provide a specific exemption for infrastructure, a trading exemption should also deal with instances where the infrastructure disposed of is in use as part of an ongoing trade being disposed of alongside it in the arrangement.”
Surely, that exemption will undermine the overall intent of the measure. First, the main target of the legislation is enveloped disposals of commercial property made by non-residents. Almost all commercial property will, as I mentioned before, by definition, be used in a trade. The examples of commercial property given in the consultation document—offices, shops, industrial units and hotels—are all examples where the property is used in a trade, yet these disposals will be outside the scope of the new rules, provided that the sale is an enveloped one, and that the trade continues under its new ownership.
That is in clear contrast to the situation for UK residents. An equivalent disposal made by a UK resident is chargeable to tax, unless it meets specific conditions laid out in those substantial shareholding exemption rules—the SSE rules, which the consultation response referred to. The original consultation document was clear that non-residents would be able to benefit from the substantial shareholding exemptions in the same way as UK companies. However, the response document, as I just described, goes further than that: it grants a blanket exemption available only to non-residents and in circumstances much wider than the SSE.
Frankly, I very much doubt that many property envelopes or large investors involved in them would go to the lengths of requiring ongoing trades in their ownership—say, a popular hotel—to close while they are selling that commercial property, just so that they can have the joy of paying stamp duty land tax. If the Government think otherwise, perhaps they can enlighten us, but I think the chances of that are fairly slim. That appears to be what would be necessary in order for them to be caught by this measure. Perhaps the Minister can enlighten us, if I have got that wrong.
This trading exemption undermines any claim that the measure creates a level playing field with comparable UK businesses, and also provides an avoidance opportunity that, worryingly, even UK businesses could exploit, if they arrange for their UK property to be held through chains of offshore envelopes. That is surely something that our Government cannot stand by and facilitate, yet they seem to be doing so—albeit unwittingly, I am sure.
The Government’s stated reason for making this change is to help smaller investors, but if that is the aim, surely it would be more appropriate to include an explicit small-investor exemption that would not apply to larger capital gains.
We therefore believe that this trading exemption is very concerning. Our hands are tied, but it is important for the Minister to explain whether he shares our characterisation of this exemption and its potential damage to the overall intent, as he has described it, of levelling the playing field.
That is the most significant lacuna in this measure, but our amendments would deal with other weaknesses, specifically our amendment 23 on a public register, amendment 24 on revenue effects and amendment 29 on property prices and ownership. I will also mention the SNP’s amendment 34, which we support.
Amendment 23 would require the Treasury to require that a list of persons not resident in the UK whose gains are brought into the charge by the changes made in this schedule should be published on a public register. I thought that in discussion of this amendment the Minister would state that the Government were due to introduce a register of foreign-owned property. He did not, but I appreciate that he took another tack in his rejection of the amendment. We still believe that it is necessary for the Government to provide that register, and believe it is disappointing that the timetable for that register has been pushed back. We have made it very clear that it would meet no opposition from us, so it could be introduced far more expeditiously than, it would appear, the Government currently wish.
However, while we wait for that property register to be produced, we surely need to use every mechanism to ensure more transparency in this field. In that connection, it would help if the Minister explained more of his Government’s thinking on one of the assumptions in the measure—that it is not intended to encourage onshoring to the UK, but to create a level playing field for offshore and UK investors. That was in the context of not accepting calls from respondents to the consultation for SDLT seeding relief as an incentive to encourage investors to move their property out of offshore jurisdictions and onshore. I agree that it would not be sensible to extend seeding relief in that manner. However, it would be helpful to understand what, if anything, the Government intend to do otherwise to encourage onshoring. This is surely something that the Government should be considering more seriously, in a context where there are clear indications that the high-end property market—and indeed commercial market—in many areas is increasingly dominated by companies that are located offshore, sometimes as a route towards money laundering.
Private Eye and Transparency International UK have led research in this area. Some of the data they have uncovered is alarming. Research by Transparency International UK has shown that in London alone, over 39,000 properties have offshore owners, who in many cases are totally non-transparent. Even just looking at publicly available material, they find that over £4.2 billion-worth of London property has been bought by individuals and companies who could legitimately be classified as posing risks of money laundering. We believe that amendment 23 would help us some of the way towards the transparency that we require.
Our amendment 24, on the other hand, requires a review of the revenue effects of the changes made to the Taxation of Chargeable Gains Act 1992 in schedule 1, and requires the Chancellor to lay a report of that review before this place within six months of the passing of the Act.
Will the Minister please indicate which tax information and impact note relates to these measures? He mentioned OBR modelling in the Budget in his remarks, which was very helpful. However, I do not know whether other colleagues have had this problem when they have been looking carefully at the different clauses in the Bill. The tax information and impact notes on the list under the heading of Finance Bill 2018-19 under different dates on the Government website are not specifically then mapped on to different clauses. It is quite difficult for the Committee to work out which TIN relates to which measure. Initially, I thought the relevant TIN could be that on capital gains tax and corporation tax on UK property gains, but it turns out that is the TIN for the following clause, which we are just about the debate, and its schedule—clause 14 and schedule 2. I then thought the relevant TIN might be that concerning corporation tax on UK property income of non-UK resident companies, but that actually refers to measures regarding non-UK companies that own UK-resident property companies, so something very different. Perhaps the Minister can let us know which TIN we should be reading for this measure, but above all—beyond whichever TIN this Committee should be looking at—we surely need a much more thorough analysis of the revenue effects of these measures, in order to analyse them properly; hence our request to the Committee in amendment 24.
Amendment 29 would require an examination by the commissioners of the impact of the measures that we are considering here on both residential property prices in the UK and the proportion of residential property in the UK owned by non-residents. Clearly, there is a need and a place for non-UK investment in UK property, both residential and commercial; we absolutely accept that. However, we need to understand far better how particular types of investment might have impacted on both housing prices and ownership.
The Minister referred to the OBR’s analysis, but it is important that we have a wide sweep of evidence before us on this matter, so I very much encourage colleagues to look at the research by Dr Filipa Sa at the London School of Economics. She has specifically considered the impact of foreign investment in property on both price and availability, and the evidence is startling. Members will be well aware that the average English or Welsh house has almost tripled in value in the last 15 years, albeit with very significant variation between areas. Of course, alongside changes to social security and the lack of measures to boost the supply of genuinely affordable housing, that has led to the housing crisis that we see today.
The impact of foreign investment on prices is clearly very significant in some specific areas, such as Kensington and Chelsea, where the average—the average—house price was £1.3 million back in 2014; I bet it is far, far higher now. However, Dr Sa’s research shows that there has been a trickle-down effect from rising prices in London, such that there has often been an upwards trajectory elsewhere too, including in major cities such as Manchester and Liverpool. Overall, Dr Sa’s research suggests that if there had not been any foreign investment in residential property in England and Wales between 2000 and 2014, housing prices would be nearly a fifth cheaper—19% lower—than they are now.
Dr Sa states:
“Housing costs form a big part of households’ budgets and so they are a concern for a large portion of the UK population.
One of the issues on people’s minds”—
her words, not mine—
“is that foreign investors are buying properties with the purpose of making money as opposed to creating a home to live in and that this is pushing house prices up.
This research shows that foreign investment in the UK housing market does, indeed, play a part in the increase in house prices that we have seen in the last two decades.”
None the less, she makes it clear that domestic demand is also outstripping supply and having an impact on price, as I am sure we are all aware as constituency MPs.
Dr Sa has made reference to action being undertaken on this issue in a number of other countries, including Australia, Switzerland and Canada, and it would be helpful to know whether the Government considered their examples in drawing up these measures, and if so, whether they considered some of the potential issues that there may be with the matters that we are examining just now. Above all, it would be very helpful for the House to be provided with evidence about the suggested impact of these measures specifically on the level of non-UK ownership of residential property and the price of that residential property, which is so prohibitive for many people.
I move on to the SNP’s amendment 34. I am sure SNP Members will speak to it in a moment. However, I will speak briefly in its support. It states:
“The Chancellor…must review the expected revenue effects of the changes”
caused by these measures.
As the Committee knows—indeed, as we discussed last week in the Committee of the whole House—there is a lively discussion about whether the Government’s current methodology for assessing the tax gap is the correct or appropriate one, given that it does not include tax lost due to legal loopholes but only considers tax lost due to a failure to stick to the letter of the law, and in addition it does not cover profit-shifting by multinationals. None the less, it is important to investigate strict legal compliance, and on that basis I am concerned about the provision detailed in paragraph 11 of schedule 1—the so-called anti-forestalling clause.
Respondents to the consultation expressed concern that those seeking to avoid the changes could simply shift their interest to jurisdictions that do not facilitate UK taxation of UK property-rich entities, as is the case with the UK-Luxembourg tax treaty.
This would then result in double non-taxation of capital gains. Rather than follow suggestions made by respondents to the consultation, the measures simply aim to prevent actions contrary to the intent of existing treaties.
It is unclear to me whether this is sufficiently watertight to prevent such avoidance activity. I think the amendment from the Scottish National party might help us to test that out. Is the concept of following the spirit and intent of tax treaties really enough to prevent those seeking to avoid tax using legal niceties and the exact wording of treaties?
We need more clarity on the issue before we can accept that the measure is sufficiently tightly drawn to prevent current anomalies in the tax treatment of non-UK, as against UK, residents. How, in particular, will the intent of the treaty be interpreted and by whom? I believe we need more information about his matter.
It seems to me, belatedly, that there could be some very creative avoidance undertaken when it comes to the anti-enveloping rules, which to my mind would not be caught by the Government’s definition of the tax gap. Perhaps the Minister can enlighten us, if I am wrong.
The draft legislation that was published in July 2018, alongside the response document, includes a minimum ownership requirement before the anti-enveloping rule can operate: the rule can apply only if the non-resident owns 25% or more of the property envelope. Although that was proposed in the original consultation document—I accept that Government have not gone back on something they said before—concerns have been expressed to me that this could undermine the level playing field, which the Government have stated underlies their commitment to the measures.
The objective of the 25% test is reasonable, to exclude those non-residents who might not have sufficient information about their assets in the property envelope to know whether the 75% property richness threshold is met. As the response document states:
“If a person has 25% or more of the interests in an entity…it would be expected that the investor has made that investment in the knowledge of what the underlying assets and income sources of the entity are.”
However, if someone makes a major monetary investment in an entity, they will also surely do so only in the knowledge of those assets, even if that investment results in their having less than 25% ownership of the entity. We can think of this in relation to an example. Let us assume there are five investors each disposing of their 20% stake in a UK property envelope. If the property increases in value by £100 million, each investor would pretty obviously realise a gain of £20 million.
Existing law means that UK-resident investors will each be chargeable on that gain of £20 million. However, the 25% ownership requirement for non-residents means that non-resident investors will not be charged on any gain, even though the scale of the investment means that it will have been made, surely, in full knowledge of the entity’s assets. That will mean that non-residents will continue to have a significant advantage over UK investors.
I would be grateful if the Minister could inform us whether his Department has had any discussions on the subject of whether there could be a limit on the gain that could benefit from this exemption. Surely, anyone who ends up with a gain of £1 million or more would only have made their investment in full knowledge of its nature. If not, quite frankly, to use a phrase from my part of the world, they have got far more money than sense.
Was that kind of limit considered previously? If not, would the Minister consider coming back with a future Bill to introduce it if there is widespread evidence of UK investors being taxed more than non-UK ones because of the 25% limit? As mentioned, will he also confirm whether such creative structuring—if we can call that—falls within or outside the definition of the tax gap?
Finally, I have one last question for the Minister. Given that concern was expressed by many respondents to the consultation that pension funds could be inadvertently caught by the new system, could he provide more detail? I am aware of the different parts of the schedule, in particular those that refer to pension schemes and the need to exempt them. Will he provide us with more information about whether they are completely watertight?
I am sure many members of the Committee would not want to promote UK pension funds’ desire to invest in the UK real estate market through offshore funds. However, given that consultees raised that frequently, it would be helpful to hear a little more than the Ministers understandable assertion that they will not be covered.
I will speak relatively briefly. It is always difficult to follow the hon. Member for Oxford East, who is leading for the Opposition on these measures. I concur with her comments about the Labour amendments—the Scottish National party will be happy to support them. Foreign ownership of properties and the impact on price is pertinent and relevant to the SNP proposal.
On amendment 34, the explanatory notes are incredibly difficult to follow. By the time we get to “ggg” in the explanatory notes, things become very difficult to refer to. If there is another explanatory note of that length in future years, it would be useful if the staff could come up with a better numbering system. As I say, it is difficult to refer to those sections when we are going around the alphabet for the third time.
The public register proposed by Labour is an interesting idea and, in principle, the Scottish National party is in favour. As I said, transparency is important when encouraging everybody to pay the correct amount of tax, because if tax owed is publicly known—the calculation of the tax gap is pertinent to this topic—people are more likely to pay. The Government should say clearly, “This is the amount of tax owed, this is how hard we are chasing it down and, as a result, this is the tax gap.” It bothers me that the Government say regularly that the UK tax gap compares favourably with that of other countries. It does not matter whether it compares favourably with other countries: any tax gap is a bad thing and, if one exists, the Government clearly need to work to ensure that they are reducing it as far as possible. Given the issues that have been brought up by Opposition Members and by many external organisations, it is clear that the Government could do more to reduce the tax gap. It is not good enough to say, “We are doing quite a good job, and therefore we should stop here.” The Government need to be able to say, “We are doing the best job on reducing the tax gap that we possibly can.”
On foreign ownership and the residential property price, I was disappointed that the Labour amendment on landholdings was not accepted—I understand the reasons why it was not allowed, but I would have been keen to debate it. There are specific Scotland-related issues not so much about residential property—that is an issue in Scotland but not to the same extent as it is in London—as about other landholdings. That is a significant problem in the Scottish context. Foreign ownership of those landholdings concerns a huge number of people in Scotland.
Regarding the benefits of transparency, the SNP has called for measures to reduce tax avoidance, and the Government have talked a good game about things like Scottish limited partnerships after a huge amount of pressure from the Scottish National party. However, we are still waiting for action. If the Government say they are doing positive things to reduce tax avoidance, they need to follow through. Rather than just producing a consultation, they need to take the required action to reduce the numbers of people who are abusing Scottish limited partnerships. We need the Government to be seen to be serious in this regard, and to take the action they have promised to take. The House operates on trust, and throughout my time in this place, I have seen a number of Opposition amendments withdrawn because ministerial teams from all Departments have given assurances. If the Government do not take action soon on Scottish limited partnerships, they risk seriously eroding that trust and may end up in a situation in which ministerial assurances, and particularly assurances from Treasury Ministers, are not accepted because the Government have not followed through previously.
The income tax, national insurance contribution and capital gains tax gap sits at about £13.5 billion, which is a significant amount of money. If any changes are being made to those taxes, and particularly to CGT, it is reasonable to ask about the impact on the tax gap, and reasonable for the Government to have those figures at their fingertips. They should be able to say not just what the impact is on the total tax take from any changes, but also what the impact is on the tax gap.
If the Government are talking about cracking down on tax avoidance, it is important that they prove to us that the tax gap is being reduced. It is not good enough to just say, “We think this measure will reduce tax avoidance.” The Government need to tell us by how much they will reduce tax avoidance. They need to be clear on the impact of those changes before they introduce them.
I intend to push amendment 34 to the vote if we have the opportunity to do so. I would be happy to support the Labour party on their amendment. I would also like to seek further assurance and a clarification from the Minister in relation to the pursuit of tax avoidance reduction measures, and a commitment from him that the Government will follow through on the tax avoidance reduction commitments they make today.
I thank the hon. Members for Oxford East and for Aberdeen North for their contributions. I compliment the hon. Member for Oxford East on arraying a mass of highly technical questions on a very technical area. I will do my best to answer her them, but I will write to her accordingly if I am unable to do so. She accurately mapped out the process that we have been going through for a number of years, moving into the space of the appropriate taxation of non-resident entities when it comes to property transactions. She recognises, as I do, that it is the right direction of travel, and that it is right to introduce the measures set out in clause 13, although she has several concerns about the detail.
The hon. Member for Oxford East dedicated a specific section of her remarks to the issue of property-rich businesses and the trading exemption. She gave some examples where she felt that this would be an inappropriate exemption, around both the general principle of the exemption for trading purposes and the specific threshold figure of 75%. She used the expression “cliff edge” to refer to what there might be around that number.
On the basic principle, this measure seeks to avoid the circumstances whereby a business—a significant supermarket chain, for example—might be sitting on a substantial amount of land and might even have banked some land for future development. However, the business’s principal purpose is the purchase and sale of a variety of goods, with that being the core of the particular business being looked at. Were a sale of that business under those circumstances to occur, it would seem appropriate that the investors in that business—where it was consequently below the 75% threshold—would not fall within the measures due to the taxation measures that we have been considering.
As to the specific figure of 75%, it is the same issue as the 25% threshold figure that the hon. Member for Oxford East raised in relation to whether individual investors would fall within these measures, or whether they would be expected to know or not know about the property richness of the business in which they were investing—we inevitably run into a generalised problem with figures, which is that we have to choose one. There will always be a debate about whether 75% is the right figure, or indeed 25%. However, a figure has to be applied, to make it scientific and rigorous.
Then there is the question of what we have done to ensure that 75% and 25% are the right figures, as opposed to figures that we have just plucked out of the air. That leads us to the extensive consultation that has been undertaken in respect of the Bill, with some 80 responses around the measures raised by the hon. Member for Oxford East. As I would say of all tax measures, this one included, they are kept under continuous review by the Treasury, so it is quite possible that we will return to these matters in future legislation, specifically on the issue of thresholds.
The hon. Member for Oxford East spent some time referring to the amendments and the question of whether there should be a register of those who fall within the scope of these capped measures. There is a basic principle here that just feels right to me, which is that the Government should not be in the business of holding up individuals to the public as falling due for particular types of tax. Once you start moving into that kind of space, it feels rather disproportionate and a little authoritarian, if I may say so. It is right to resist that urge.
I was going to raise one other matter in that context, which is important, and that is that the hon. Member for Oxford East referred—she very kindly did this for me although I did not do so in my opening speech—to the implementation of a register of beneficial owners of overseas entities owning or buying property in the UK. We will bring that in by 2021, and the register will be the first of its kind in the world. That underscores the importance of transparency to this Government.
If I interpret my gallant and hon. Friend’s question as relating to the specific issue of overseas holdings of UK land and properties and paying CGT on the transactions they are in, I would be fairly confident in saying that we will be raising more. Indeed, through time and through dealing with the measures I identified earlier, I strongly suspect that the answer is yes. I am seeing nods of an inspirational kind from over my left shoulder, so I can reassure him that is indeed the case.
The hon. Member for Oxford East also raised the effect of these measures on the market and the suggestion of a review to look at price effects. The Office for Budget Responsibility has already done such an analysis and concluded that these measures would have a negligible effect on price. She also raised the issue of taxation treaties, particularly Luxembourg, which is a fair point because there are instances when the international taxation treaties—the bilateral treaties between ourselves and other tax jurisdictions—do not quite fully accommodate the measures we are looking at here. I know we are actively engaged in the specific case of Luxembourg to seek changes to those arrangements to make sure they facilitate the measures we are looking at here.
With regard to TIINs, I must say that I do not have the same confusion as the hon. Member for Oxford East. I am not making a specific point, other than that I have not noticed it, but I will look at it again. The relevant TIIN is the one entitled “Capital gains tax and corporation tax: taxing gains made by non-residents on UK immovable property”, which was last updated on
The hon. Member for Aberdeen North had several points to make, particularly about the tax gap. She suggested that there might be some complacency on the part of the Government, and that it might be assumed that, because we already have a world-beating tax gap level, we are not pushing forward with further measures. I can reassure her that that is not the case. Indeed, the Bill contains several measures that further bear down on the tax gap, of which this is one. It will build our tax base and further enhance our ability to raise tax, which of course is very important. The point I would make is that we have both the legislation, some of which I have referred to, and several other practical measures that the Government are bringing in that are driven by HMRC —for example, making tax digital, which is an approach to bearing down on the tax gap when it comes to the operations of smaller companies in the United Kingdom.
I hope that has covered the majority of the issues raised, but I would be happy for the hon. Members for Oxford East or for Aberdeen North to write to me if they would like me to respond to any other issues.
I am grateful to the Minister for those comments, but I would like to clarify a few points, so that we are not talking at sixes and sevens. In relation to the trading exemption, the point is not that it would exempt certain categories of business as opposed to others, but that it would exempt those businesses that are trading before and after the disposal, so it introduces a new concept that is not applied to UK-resident investors to the same extent. That is what is relevant, rather than whether we are talking about a supermarket or not. That would be relevant to the property richness test, but the trading exemption is a separate element of the Bill that I was trying to push on.
In relation to the 25%, the Minister always valiantly attempts to support his Government’s policies. He is right that a figure must surely be attached to any numerical proposition in a Bill. He tried to do that here and said that 25% had been arrived at. The suggestion was that any figure could be contested. Again, it is not the specific value of that figure that is problematic, but what the figure refers to. My contention was that the Government should focus not necessarily on the proportion of the gain, but on the value of the gain. His Government have decided to focus not on the value but on the proportion. As I said, 25%—or rather, 20%—of a gain could be £1 million, which is a tremendously large value, but it could be a smaller proportion if it is just 20%.
Does the hon. Lady agree that having both of those in the Bill would be useful, so we could have the 25% figure or gains over £200,000, or any such figure as the Government deemed appropriate?
The hon. Lady is absolutely right. The Government are quite keen on double thresholds in other contexts, so this is a case where a double threshold could be introduced if they were concerned about protecting those small investors. One could have both a measure related to the proportion of the gain and one related to the value of the gain. That could be very sensible.
I am grateful to the Minister for his comments on tax treaties, but I was trying to get at whether he feels that the reference in the legislation—I cannot remember the exact term used in the explanatory notes, but it is something like referring to the “intent” or “spirit” of the tax treaty, rather than the letter—is sufficiently legally watertight. I am concerned that it would not be, because many people who have moved their tax affairs to Luxembourg to avoid tax are quite adept at reading just the letter and not conforming with the spirit, when they want to.
Finally, in response to the question from the hon. and gallant Member for Poole—
I am a new Member and I am always getting my fingers rapped about how to refer to other Members. I never want to upset anyone, so I hope I have not upset the hon. Gentleman.
If we look at the proportion of the commercial property market owned by non-UK investors, we see that there has been a change over time. We should surely consider that when we look at the impact or otherwise of Government policy, as well as the absolute amount of tax revenue that will go up since absolute figures go up because of inflation and so on. I do not wish to try the patience of the Committee, so we will not press our amendments to a vote.
Amendment proposed: 34, in schedule 1, page 147, line 34, at end insert—
“21A The Chancellor of the Exchequer must review the expected revenue effects of the changes made to TCGA 1992 in this Schedule, along with an estimate of the difference between the amount of tax required to be paid to the Commissioners under those provisions and the amount paid, and lay a report of that review before the House of Commons within six months of the passing of this Act.”—
This amendment would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of the changes made to capital gains tax in Schedule 1.
The Committee divided:
Ayes 9, Noes 10.
FB01 Association of Taxation Technicians (Clause 31 and Schedule 12: Temporary increase in Annual Investment Allowance)
FB01a Association of Taxation Technicians (Clause 14 and Schedule 2: Disposals of UK land etc: payments on account of capital gains tax)
FB02 Chartered Institute of Taxation (clauses 7, 11 and 81 (all in the area of employment taxes))
FB02a Chartered Institute of Taxation (clause 13 and schedule 1: Disposals by non-UK residents etc)
FB02b Chartered Institute of Taxation (clause 25 - Intangible fixed assets: exceptions to degrouping charges etc)
FB02c Chartered Institute of Taxation (clauses 29 to 34 - capital allowances)