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Session 2003 - 04
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 349

Standing Committee A

Tuesday 25 May 2004


[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

Clause 112

Private residence relief

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

9.30 am

Mr. Howard Flight (Arundel and South Downs) (Con): I welcome you to the Chair, Mr. McWilliam.

There have been significant professional criticisms of the clause and the measures in the schedule. The Chartered Institute of Taxation has argued that the changes—

The Chairman: Order. I would not want the hon. Gentleman inadvertently to mislead the Committee. The clause states:

    ''Schedule 22 (which makes provision about private residence relief) has effect.''

I cannot see any possible professional criticism of that; it is a fact.

Mr. Flight: You are, as ever, correct, Mr. McWilliam. Perhaps it would be better to cover the issues under the schedule, but as there are amendments to be discussed under the schedule, I thought there was an argument for dealing with criticisms in principle of the arrangements under the clause.

The Chairman: It might help the Committee if I draw its attention to the selection list. The Committee will observe that I have selected schedule stand part together with new clause 11. That combination renders debate under clause 112 about the principle otiose.

Mr. Flight: I stand corrected, and sit.

Question put and agreed to.

Clause 112 ordered to stand part of the Bill.

Schedule 22

Chargeable gains: private residence relief

Mr. Flight: I beg to move amendment No. 30, in

    schedule 22, page 388, line 28, leave out from beginning to end of line 20 on page 389 and insert—

    '( ) Where a claim for relief under section 260 has been made in relation to a disposal of a property, the trustees' relief under section 223 above on a disposal of that property shall be limited to that proportion of the chargeable gain which reflects the period during which the property has been occupied as an only or main residence under the terms of the trust as a fraction of the combined period of ownership of the trustees and the person who claimed the relief under section 260.

    ( ) In calculating the proportion mentioned in subsection (1) above, the Trustees shall only be entitled to relief for periods in which the property was in actual occupation by one or more beneficiaries and not for any period of deemed occupation.'.

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The Chairman: With this it will be convenient to discuss amendment No. 1, in

    schedule 22, page 390, line 35, leave out sub-paragraph (8) and insert—

    '( ) In subsection (5) of section 223 of the Taxation of Chargeable Gains Act 1992 after ''and (2)(a) above'' insert ''and section 226A below''.'.

Mr. Flight: The mischief that the schedule is designed to deal with is the technique of transferring a second home into a discretionary trust as a conduit to passing it on to, for example, one's children, and later realising the property free of capital gains tax. Where the value of the home was more than a quarter of a million there would of course be inheritance tax to pay. The schedule removes the availability of principal private residence relief from capital gains tax where there has been an earlier deferral of gain under section 260 of the Taxation of Chargeable Gains Act 1992. The rest of the schedule is concerned with consequential amendments and some rewrite language. The formal inclusion of a former concession giving private residence relief to the personal representative of the deceased in certain circumstances is a positive move.

I will return to the principles during the stand part debate. The problem is that if a person has, say, half a million in cash—lucky person—and settles it into a discretionary trust, the trustees could purchase a property and then claim PPR relief on a subsequent sale of the house, assuming it had been occupied by a beneficiary, but if the settlor provides not cash but an asset that becomes a beneficiary's PPR, there is no relief available. That may be the Government's intended policy position, but it seems unfair and disproportionate. Our point is that to avoid a double charge, there should be a credit against the capital gains tax of any inheritance tax paid in respect of the same gift. I recollect that in our debate on schedule 21, the Paymaster General said that the Government were not looking to bring in double taxation. I therefore ask her how she is addressing the issue in relation to clause 112 and schedule 22.

A possible alternative might be to address the perceived mischief directly. The objection is to short-term washing-out strategies, so might it not be possible to limit the PPR relief available to the trustees to that proportion of the gain that reflects the period for which the property was occupied as a PPR under the trust during the total ownership period of the trustees and the donor? That would address those situations where trusts are used as a short-term device to wash out, without unfairly treating innocent situations or catching changing circumstances.

It is not uncommon for young adult children to be provided with a home from a discretionary trust set up five or 10 years before. They are then given the use of the property, as one would not want to give large sums of money directly to young people for reasons of prudence. One might want to have the property used by a succession of beneficiaries. In both situations, there can be bona fides cases in practice, and tax is not a primary motivation for such arrangements.

Assuming the measures stand, there are some points of detail to address, with which amendments Nos. 30

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and 1 are concerned. I am sure that the Paymaster General will argue that she simply wants to block a piece of tax avoidance, fairly or not. Our argument of principle is that the anti-avoidance measures are disproportionate and put trustees who receive cash and buy a house in a different position from trustees who receive a property. There are significant long-term record-keeping requirements and tracking of claims, and no response is allowed to changing circumstances.

Amendment No. 30 is a rewrite of paragraph 6, designed to persuade the Government that the mischief can be addressed in a fairer way. It proposes that trustees are no longer entitled to the last 36 months in any event, but only if the property is in actual occupation. Amendment No. 1 is a little less easy to get one's mind round, but where the existing legislation refers to 36 months the amendment would allow the Treasury to change that period to 24 months for all purposes. Would it not be easier to do that through a much simpler wording, as in the amendment? I would like the Paymaster General to justify the length of paragraph 8(8). I shall make slightly more fundamental criticisms in the stand part debate.

The Paymaster General (Dawn Primarolo): I remind the Committee that clause 112 and schedule 22 are targeted at measures that are designed principally to avoid capital gains tax. That exploitation depends on there being no immediate capital gains tax charge. Subsequently, the effect of the interaction of gifts relief with private residence relief has been that capital gains tax is avoided entirely. The purpose of the measures is to ensure that the changes are appropriate in tackling that avoidance.

There are a number of reasons why I shall be asking the Committee to reject amendment No. 30, which would limit the restriction of private residence relief proposed in the schedule. The purpose of the schedule is to stop capital gains tax avoidance schemes that exploit the interaction between gifts relief and private residence relief. Such schemes aim to convert chargeable gains on disposal of residential property that would not normally qualify for private residence relief into tax-free gains by the use of the trusts. Clause 112 and schedule 22 deny private residence relief to people who dispose of a property, where the computation of the chargeable gain resulting from that disposal is affected by a claim to gifts relief relating to an earlier disposal.

In a simple case where a second home is sold and the owner wishes to avoid capital gains tax, he or she gifts the property to the trustees of a trust and claims gifts relief, so that no capital gains tax is payable at that point—it is deferred. Arrangements are then made for a beneficiary to live in the property for enough time—it can be a short period, possibly days or months—to establish an entitlement to private residence relief.

The trustees then sell the property and obtain the relief. The result is that the gain is wholly relieved by private residence relief and no tax is payable, not even in respect of the earlier hold-over gain that accrued

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while the property was not the only or main residence of the person who owned it at the time. By denying private residence relief in circumstances where gifts relief is obtained, clause 112 and schedule 22 provide for the whole of the gain arising on the disposal of a second home to be taxed, irrespective of the interposition of a trust—a trust put there simply to avoid the tax on that gain.

As I understand it, amendment No. 30 would allow trustees private residence relief when they dispose of a property that has been the subject of a gifts relief claim, but would limit the amount of relief available by reference to the amount of time that the property was occupied as an only or main residence under the terms of the trust. That would render the legislation ineffectual in combating such avoidance, because it could easily be sidestepped. Committee members must ask themselves why those schemes are being used. They are being used to avoid paying the tax on the capital gain. The amendment would address only the most straightforward cases, where there is a single gifts relief claim and the trustees dispose of exactly what was gifted to them. That does not happen. There are many complex forms in that area.

The amendment would not, for example, deal with cases where successive gifts are made through a number of trusts, as frequently happens. Nor would it deal with cases where interests in a property are divided or combined and where there are a number of relevant gifts reliefs claims that have been made by different persons. Nor would it deal with cases where the final sale is made by an individual and not by those trustees of a trust who had gifted the property to that individual. It would leave open opportunities for people who dispose of second homes to be able to continue to avoid capital gains tax by exploiting the interaction of gifts relief and private residence relief.

On the other hand, clause 112 and schedule 22 deal with all such cases. I think that it would be naive to assume that those elements of the tax-planning industry that enthusiastically marketed those schemes would not be up to devising and selling variations, which could drive straight through the legislation if it were to be amended by amendment No. 30. It is not acceptable because it leaves open those possibilities.

9.45 pm

Another reason why I will ask the Committee to reject the amendment is that even if it were effective it would impose a greater compliance burden on the taxpayers. The ultimate vendor of the property would need to know not only his acquisition costs following his gifts claim but the period or periods of ownership of the previous owner or owners. In anything but the simplest of cases, the burden might be considerable.

For those two reasons, I say to the hon. Gentleman that schedule 22 as drafted provides a more effective and equitable way of stopping this drain on the public purse than would the measures as amended by amendment No. 30.

I ask the Committee to reject amendment No. 1 as well. As drafted, it was very difficult to understand its objective, but in moving it the hon. Gentleman has clarified that. I have explained that the anti-avoidance

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measure in the schedule is being introduced to prevent people from exploiting the interaction of gifts relief and private residence relief to make a tax-free disposal of a property that would not otherwise have attracted private residence relief.

We recognise that because the measure has effect from 10 December 2003 some people will have entered into arrangements before that date expecting a certain amount of relief. That is why we have included a transitional period preserving any entitlement to private residence relief, which is referable to the period before 10 December 2003. The transitional provisions also preserve entitlement to private residence relief if any proportion of the last 36 months of the ownership falls before 10 December 2003 and the relevant conditions are met. Frankly, that is as fair as we can be.

I am grateful to the hon. Member for Arundel and South Downs (Mr. Flight) for explaining that, by providing a neater way of catering for the effect of the consequential changes that would need to be made if the last-36-month rule were to be changed by Treasury order, amendment No. 1 is intended to be helpful. Although I thank him and I appreciate his sentiments, the amendment does not appear to achieve its objective, because it would have effect over the whole measure rather than just the relevant transitional rule. I am sure that that is not what he intended.

In any event, even if the amendment were to work, which it would not, its effect would be the same as that of the legislation as drafted. I appreciate the hon. Gentleman's motives, but the amendment does not deliver.

The hon. Gentleman made three specific points. The first was about cash being provided to a trust. If a person provides cash to a trust, they are not seeking to avoid capital gains tax by using gifts relief and private residence relief. The circumstances are different and therefore there is no unfairness.


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