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Chris Huhne: The key point is that tax-paying investors may believe that they are investing in a fund that will not lead them to have any tax liability whatsoever but will suddenly find, through the operation of another investor, that they own more than 10 per cent. of the fund, even though they never intended to do so. As a result, through no fault of their own, the liability to which the Minister referred would be triggered. That is not sensible, as tax-paying investors will steer clear of the funds and avoid them. The object of the fundsthe sensible pooling of investment for a range of investorswill not be achieved. The Minister has not addressed that point.
It is reasonable to ask us to make the consequences quite clear. I do not believe that the hon. Gentleman's concern is justified, but to prevent misunderstanding or the risk of misleading people, we must ensure that the regulations make it clear which circumstances apply. We will take note of his concerns when we make them.
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The hon. Gentleman said that more fund providers would sell funds in Dublin and Luxembourg, rather than in the UK, because of the rule and the instability of the regulation. The tax regime applicable to funds authorised by the Financial Services Authority will not be changed materially. Capital gains made within the fund remain exempt from corporation tax, and fund-level profits remain subject to corporation tax at the lower rate of income taxcurrently 20 per cent. The income tax treatment of investors receiving distributions from both retail funds and qualified investor schemes will not change. Nor will the capital gains treatment of those individuals, unless they, together with their associates, hold a substantial proportion of a QIS. In those cases, any annual increase in the value of their holding will be charged to tax as income each year.
Chris Huhne: I return to the key point: a very substantial group of investors will steer clear of such things. The Minister says that existing tax provisions are not materially affected, but the whole point of setting up the QIS funds is precisely to ensure, on the initiative of the FSA, that there is a vehicle by which one can have sensible pooled investment funds. That is being done precisely to ensure that there is a material change in tax treatment. Saying that a substantial number of investors will be scared off because of the liabilities that they may incur through no action of their own precisely confirms my point: the investments are going to be registered in Dublin and Luxembourg, and not in London.
Mr. Lewis: I entirely reject the hon. Gentleman's contention. We believe that the United Kingdom remains a location of choice for such activities, for a variety of reasons. We do not believe that his concern about his perception of unintended consequences is legitimate, but I am sure that we will have the opportunity to discuss those matters when we look at the regulations.
I shall address REITs-related issues. Amendments Nos. 2 and 3 cover two different aspects: the taxation of authorised investment funds that invest mainly in property; and the treatment for authorised funds that have different classes of units or shares. On the second issue, amendment No. 2 seeks to insert a provision to allow authorised investment funds to have different classes of shares or units and to make different distributions in respect of them. We do not believe that the amendment is necessary. OEICs can already issue different classes of shares, and as we indicated in the Budget, regulations will be made to enable authorised unit trusts to do exactly the same. The powers taken in clause 17 enable that to happen, and clause 18 also includes a subsection to cover the point.
On the taxation of funds that invest mainly in property, amendment No. 2 seeks to enable regulations to be made that charge an authorised investment fund's property income to tax at either a nil rate of corporation tax or a rate equivalent to the lower rate of income tax. Amendment No. 3 seeks to allow special arrangements for withholding tax to be applied to distributions to investors by authorised investment funds that invest mainly in property. We believe that neither amendment is needed to enable regulations to achieve the outcome
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that the hon. Member for West Suffolk intends. The powers taken in clause 17(3) allow for the rewrite in regulations of the tax regime governing authorised funds.
Clause 18 was inserted in the Bill to explain how we intend to use those powers. It is simply an illustrative clause, and the industry asked us to include such a clause to reassure the House, in the absence of draft regulations, about how we intend to go about rewriting the current regime. In that respect, the purpose of the clause is to help to explain the proposed changes, not to define them.
I turn to the specifics of the proposed amendments to the treatment of property income. More broadly, partly in response to changes to the regulatory regime for authorised investment funds made by the FSA and the possible introduction of a UK real estate investment trust, the Government are considering whether changes to the taxation of property within authorised investment funds might be appropriate. As hon. Members are aware, that consideration is ongoing, although I appreciate their feeling that the matter is urgent and requires speedy action. It would therefore be premature to provide specific examples of how the taxation of property might be taken forward in this Bill or indeed anywhere until the position for UK REITs has been finalised. At this stage, it is important to talk hon. Members through the thought process and the different stages of the REIT debate.
One feature of the significant consultation exercise is the consensus that a key challenge has emerged in relation to international treaty obligations. I do not think that there is any doubt among hon. Members in all parts of the House that that is a genuine difficulty. It poses a significant challenge with regard to meeting the Government's specific objective of having no overall Exchequer cost. In the most recent Budget, the Government therefore published a further discussion paper that set out our latest thinking on UK REITs and highlighted three challenging and technical tax issues that we felt needed further discussion with the relevant parts of the industry. We made it clear at that stage that the outcome of the consultation would inform our decision on how property should be taxed in authorised unit trusts and open-ended investment companies. Those two issues will be taken forward in parallel.
We have had a number of meetings with industry working groups, particularly of tax specialists, to consider the outstanding issues that have arisen in those discussions about REITs. We have also received a number of written responses, only within the past few days. I reaffirm that, as the Budget discussion paper said, we intend to legislate in 2006, subject to our capacity to find a workable solution to the issues that have been raised. I reaffirm that that is the Government's intention.
That issue is at the heart of the amendments, and I simply do not understand the following point. The Minister is engaged in the consultation process, and three specific elements are still to be considered. The Government have promised legislation in 2006, but there are legitimate fears in the industry that action is not being taken rapidly enough
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and that the Exchequer is losing out in consequence. This process has been going on for many years, and he must draw it to a conclusion. Why have other countries with tax systems comparable to ours managed to deal with the problem, while we have not? That is the question to which I require an answer.
Mr. Newmark: While the Minister waits, the message is clear: people are moving to other tax regimes. Today, next month and the month after, more and more real estate investment trusts will be set up elsewhere. He has to ask himself why those other businesses are being set up in other tax regimes. If he waits another year, the Exchequer will lose out.
Mr. Lewis: It is clearly a point of consensus that we want to resolve the issue as quickly as possible and that that is in the national interest. I think that we also agree, however, that there are complex and difficult issues that have been resolved neither by Members of this House nor by experts. We have been taking expert submissions and advice, and as of today's debate there has been no satisfactory final resolution to ensure that the legislation that we introduce will achieve the objectives that we want from a reform of REITs.
That is the position. I have been open and up front about the process of tackling the REITs issue. We need to make progress as quickly as possible, but the Government are often admonished for rushing through legislation that leads to unintended consequences.
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