Clause
71
Partnerships
Mr.
Timms:
I beg to move amendment No. 106,in
clause 71, page 47, line 9, leave
out ‘sub-paragraph (1)(b),’ and insert
‘sub-paragraphs (1)(b) and
(4),’.
The
Chairman:
With this it will be convenient to discuss
Government amendment No.
107.
Mr.
Timms:
As I indicated earlier, clause 71 amends the
Finance Act 2003 to counter known schemes that attempt to avoid stamp
duty land tax by moving property tax-free into a
partnership—that is, by the ceding of partnerships. The clause
will prevent tax avoidance schemes that we initially dealt with by
regulations in the pre-Budget report 2006. The two amendments that I am
tabling are directly in response to representations from the property
sector.
The first
amendment is merely to rectify an omission from the clause; it is a
minor omission, but if it was not rectified we would run the risk of
confusing those trying to interpret the law. The second amendment
follows some late representations suggesting that the clause could have
an adverse effect on investment structures that use partnerships but
are not engaged in avoidance. We have been lobbied to include a
transitional provision, so that the provisions that will create the
change do not apply where all the property in a partnership was
acquired before Royal Assent and stamp duty land tax was paid in full
on the gross market value of the property, and that is what the
amendment
does.
12.30
pm
We have taken
on all the suggestions we could that will facilitate those involved in
legitimate, innocent transactions without creating further opportunity
for those seeking to avoid tax. Of course, those developing avoidance
schemes will keep on looking for new ways to avoid stamp duty land tax
and we will respond by closing avoidance schemes quickly. We have a
duty to the majority of taxpayers to maintain a level playing field for
everybody, and of course we will keep this area under review.
I commend the amendments to the
Committee.
Mrs.
Villiers:
I would like to address some of the
issues surrounding the clause at the same time as addressing the
amendments, to obviate the need for a separate clause stand part
debate.
I appreciate
that there are avoidance risks in relation to partnerships, which have
not always proved easy to tackle in the past. However, there seems to
me a significant risk that clause 71, like the clause that we have just
discussed, could have some unintended consequences in relation to
innocent transactions.
Again, some
general concerns about the operation of the clause have been expressed
to me by the Institute of Indirect Taxation. It believes that
transactions that a taxpayer might contemplate without professional
advice, such as gifts, could be affected by clause 71. It
states:
“We are
surprised that a Labour Government should take the view that a family
that cannot afford professional advice should not expect to be able to
make straightforward gifts without triggering tax
consequences.”
I would like to raise two points
in relation to the scope of clause 71, and I do not think that they are
addressed by the Government amendments. One of them is partially
addressed, but some remain and it would be excellent if the Chief
Secretary could help to answer
them.
The first issue
concerns the deletion of the requirement of consideration. Under the
old law, the relevant partnership anti-avoidance provisions did not
bite on gifts, so they did not apply to a transaction where no
consideration was given. The Law Society has expressed concern about
the removal of the requirement of consideration by clause 71, pointing
out that the consequence is that a gift of a partnership interest from
individual to individual is now subject to a market value charge based
on the value owned by the partnership. It should also be noted that
that is a charge on the gross value of the land owned by the
partnership rather than the real value of the gift, which could be
considerably less where the partnership has borrowed to invest in the
land. So the SDLT charge here could be quite a high one. The Law
Society expressed concern that a gift of a partnership interest
attracts a charge when a gift of the underlying property would not. It
would be useful if the Minister could provide greater clarification on
that point and explain the reasons behind the proposed deletion of the
consideration
requirement.
The
second point is rather more worrying. It concerns one of the effects
that are partially caused by the deletion of the requirement of
consideration, but it also interacts with other changes made in clause
71, and it involves property investment partnerships. The point is best
explained by looking at the example given by the Law Society in its
briefing to the Committee. It concerns a relatively simple case, where
A, B and C are in partnership, sharing income and profits equally, with
partnership property of £450,000. Each partner is deemed to own
£150,000-worth of property. Further property is purchased by the
partnership, using its assets. If another person then joins as a new
partner, providing £150,000 in cash, the value of
everyone’s interest will have stayed the same, at
£150,000. I am told that before section 75A, it was accepted
that the addition of a new partner did not trigger an SDLT
charge.
The
amendments to paragraphs 14(1)(b) and 36 contained in clause 71 would
throw that into doubt. Will the Minister confirm whether the enactment
of clause 71 will result in SDLT being payable in that situation? It
seems that it would be. If so, it could have a significant impact on
property investment partnerships.
The practice
of second closing—bringing a second wave of investors into a
partnership some months after it is first set up—is common. The
changes proposed in clause 71 would result in SDLT being payable if the
partnership had acquired land between the first and second closing,
even though it was bought with money put up by the original investors.
If second closings are now to trigger an SDLT charge, it could severely
restrict the use of open-ended property investment partnerships.
Similar problems occur when partners redeem their partnership
interests. Coupled with a further concern, such problems could render
partnerships almost unusable in the property investment field. I hope
that I am wrong, and that the Chief Secretary will reassure
me.
My other
concern is about changes in the profit sharing ratio in a partnership.
The old law made it plain that, if a partner sold his interest for a
consideration to another person, it would give rise to an SDLT
liability. However, clause 71 would significantly expand the scope of
SDLT by applying it not only in that situation but whenever the profit
sharing ratio in a partnership changed.
That could
give rise to significant problems, as profit sharing ratios can change
automatically under the original partnership agreement. A common
example might be an agreement that entitled the operator of a
partnership to an increased profit share if the partnership reached a
particular level of return. When that relevant level of profits was
reached, the partnership shares would change. Under the old paragraph
36, there was no SDLT problem because no consideration had been given
to changes in profit shares, and a partnership interest, as it was
previously understood, had not been transferred. It now seems that SDLT
will have to be paid in every case when a profit sharing ratio changes,
even if it was provided for in the original partnership agreement,
because of the new definition of what amounts to an interest in a
partnership and the removal of the need for
consideration.
Similarly,
development funds using partnerships will typically include a provision
to call for more money from investors: it is a well-known fact that
developments frequently run over budget. Such calls are not compulsory;
some investors may take them up and others not. However, in such cases,
we again see that changes in the partnership ratios that to date would
not have triggered an SDLT would now do so. Again, the
Minister’s guidance on whether that is the case would be useful.
The same problem occurs where an investor defaults or goes
bankrupt—another occupational hazard in the property development
business. Until now, the resulting change in partnership ratios did not
trigger SDLT. It now seems that it
would.
I have received
representations that, if my analysis is correct and SDLT is payable,
partnerships will no longer be used for property funds. That is
significant, as such partnerships have played an important role in
property investment. A solicitor who contacted one of my colleagues
about the problem described the change as lunacy, although I would not
go that far. I am willing to hear the Chief Secretary’s
justification, but I want to know whether that effect was intended by
the Government when drafting clause 71. If so, what was their
justification for making such a significant change?
What avoidance
problem was caused by property investment partnerships that justified
penalising them in the way that clause 71 seems to do? What assessments
have the Government carried out on the impact that the change will have
on the property investment market? I would be interested to hear
whether the Chief Secretary is prepared to publish the
Department’s research on the impact of the change. To what
extent will the amendments assist in solving the problem? They are
helpful in some contexts. In particular, they help to tackle the
unfairness that the change in the law creates for people who are
committed to partnerships on the basis of the existing law. However,
they seem to cover only partnershipsthat bought land between
December 2003, when the SDLT regime was introduced, and commencement of
clause 71.
While it is useful to give
assistance in relation to those transactions, the Government amendments
provide a very limited lifeline. In particular, they do not seem to
solve any of the problems in relation to partnerships that want to
carry on business in future, nor do they permit new partnerships to set
up start-up arrangements in the property investment businesses. As the
Chief Secretary has confirmed, they are merely transitional
arrangements to ease the change that is being introduced.
A way should be found to
address concerns about avoidance in this area without such radical
restrictions on the use of property investment partnerships. In the
debate on REITs, the Government have repeatedly stated that they wish
to encourage collective investment in property. If that is the case,
why are they effectively shutting down an important vehicle for doing
so—the property investment partnership? The Committee should
consider the likely consequences of that shutting down. The onshore
alternative structures that might substitute for property investment
partnerships are limited. Not all enterprises are suited to REIT
status; as we debated at length in this Committee last year, REITs are
usable only in certain circumstances. In particular, many property
enterprises may not be large enough to justify the cost of the listing
that is required for REIT status. I am concerned lest the net result of
the changes is simply a shift of property investment into offshore unit
trusts. I cannot believe that that is really what the Government
want.
The Chief
Secretary referred to Patrick Cannon’s comments on section 75A.
I, too, would like to draw to the Committee’s attention to some
comments by Mr. Cannon, who is a barrister. They appeared in
Property Week a few days ago in an article helpfully entitled,
“Latest tax clampdown is shoddy and rushed”. Let me close
with a quote from the article, which
states:
“The
SDLT partnership provisions are an unfortunate example of just how bad
tax legislation can get when you have layer on layer of anti-avoidance
amendments built on to basic provisions. The provisions seem to have
been worked on at different times by different draftsmen, some of whom
do not seem to have a full grasp of how property partnerships
function.”
I have to say,
Mr. Chairman, that I am inclined to
agree.
The
Chairman:
Before we progress, the hon. Lady has, perfectly
reasonably, broadened this into a stand part debate. As the Committee
knows, I have no problem with that so long as we do not try to cover
the ground twice. However, I listened fairly attentively to what she
has been saying and it strikes me that she might have placed the Chief
Secretary in a slightly difficult position, because she has commented
on one or two things that would otherwise have been raised under the
next pair of amendments. If the Chief Secretary wishes to respond now,
he might find it necessary to curtail his remarks on the next pair of
amendments.
Rob
Marris:
I had anticipated that you might turn this into a
broader debate, Mr. Gale. The hon. Lady has got me totally
confused—perhaps my right hon. Friend can help me. I had thought
that stamp duty
land tax bit on land, but the hon. Lady has talked about changing profit
shares in a partnership. I did not think that stamp duty land tax had
anything to do with that, so I should appreciate some
clarification.
Mrs.
Villiers:
That would be the impact of clause 31. If a
partnership holds land and one of the situations that I have outlined,
such as a new partner joining, occurs it will be subject to an SDLT
charge on that land. That is the connection between the land and a
partnership.
Rob
Marris:
I understood that part of the argument. I am not
sure that I agreed with it, but I understood it. However, I did not
understand at all what the hon. Lady said about changing profit share.
I hope that my right hon. Friend can clarify that.
The second point that I should
like to make to my right hon. Friend is that it is often,
understandably, prayed in aid in this Committee that the Chartered
Institute of Taxation says at paragraph 29.1 of its submission that the
proposed changes to the Finance Act 2003, schedule 15, are welcome in
that they eliminate some of the anomalies in schedule 15. That is all
that it says.
Mr.
Philip Dunne (Ludlow) (Con):
I welcome
the remarks that the Chief Secretary made in introducing the
amendments, which attempt to establish some clarity for partnerships
that would be caught incidentally. In other words, they would remove
genuine partnership transactions that are not seeking to avoid stamp
duty land tax, which is clearly the thrust of the schedule and clauses.
However, I am not sure that he has done his job as well as the
Committee would normally expect him to do. I am concerned that there
are incidental consequences for members of existing partnerships that
go beyond the special purpose vehicle type of partnerships that he
seeks to
catch.
12.45
pm
I would
appreciate it if he could give the Committee some clarity here and
confirm that the Government amendments do not apply to those
partnerships where property interests are held incidentally to the
activity of the partnership rather than specifically, and interests in
those partnerships change over time. My hon. Friend the Member for
Chipping Barnet, in her thoughtful contribution, showed that by
changing the definition of consideration in the Bill, a partnership
gift interest from one individual to another, such as a gift from a
partner to his spouse, his children or a family interest, could
potentially trigger a stamp duty land tax charge if the partnership
happens to hold property. That is quite clearly not the intent of the
clause.
I am not sure
that the Government amendment is sufficiently clear. We do not have a
definition of a property investment partnership although it may exist
in the Finance Act 2003. I apologise to the Chief Secretary for not
having seen such a definition if it does exist. Perhaps he could put us
straight on that. The second point on which I seek some clarity is
whether it is intended to catch gifts in the manner that I have just
described if they arise in partnership interests. If a property is held
outside a partnership, such a gift would not attract stamp duty land
tax whereas if it is held within a partnership it would. Is that the
Government’s intention? If so, I think that it is quite
inappropriate.
Mr.
Timms:
As I have indicated already, the clause aims to
prevent tax avoidance schemes that were initially dealt with by
regulations at the pre-Budget report. As with the previous clause, the
regulations were time-limited and so now need to be replaced using the
Finance Act. But the opportunity we have had to revise the legislation
has been helpful. Not only has it allowed us to make changes to ensure
that a variation on the schemes that we did not know about when we
drafted the regulations can be dealt with, it has allowed us to
consider whether there are any changes we can make to ensure that
legitimate transactions are not affected by the
legislation.
As far as
the clause itself is concerned, I believe that we have been able to
reassure most in the property sector that it will be clear,
proportionate and effective. My hon. Friend the Member for
Wolverhampton, South-West is right to draw attention to the views of
the Chartered Institute of Taxation, which were communicated to all
members of the Committee. It welcomed the amendments and the clause.
The clause brings fairness to the property sector for taxation by
ensuring that transactions using these complex avoidance schemes will
be taxed in the same way as they would have been if they had been
straightforward land transactions between two
parties.
I
should again point out that significant sums are at stake here. Until
the PBR, when we made the regulations, only relatively few transactions
had used these schemes, but the loss in stamp duty land tax yield is
significant. These are major commercial transactions. The number would
have certainly continued to rise. Closing this scheme alone will bring
extra combined revenue for the years 2006-07 to 2009-10 respectively of
£10 million, £25 million, £25 million and
£25 million.
We
believe that we have taken on all the suggestions we could that will
facilitate those involved in innocent transactions without creating
further opportunity for those seeking to avoid payment of the tax. As a
result, we have certainly achieved a clearer and more effective clause,
which hits our target of preventing avoidance without unduly affecting
legitimate land
transactions.
As I
said during the debate on the previous clause, those developing
avoidance schemes will, of course, keep on trying to find new ways to
avoid paying stamp duty land tax and we must be ready to respond by
closing avoidance schemes quickly, and we will. We have a duty to the
majority of taxpayers, who are not using elaborate avoidance schemes,
to ensure that there is a level playing field for everybody, so we will
be keeping this area under
review.
I would like
to respond specifically to some of the points raised by Opposition
Members. A concern was raised about charging when partnership interests
are gifted between individuals, or by an individual to an unconnected
company. I think that it was implicit in what the hon. Members asked,
but I need to make it clear that charging applies only to cases where
there are
property transactions. However, in such cases, I do not think that there
is any reason why such a transaction should be dealt with more
favourably than other transactions where tax would be due. Regarding the concern about
gifts of partnership interests now being chargeable, again they will be
chargeable only where the partnership is engaged in property dealing or
property investment. Other forms of trading partnership, such as
farming partnerships, are not affected. Indeed, partnerships where land
ownership is incidental are also unaffected by the
clause.
Mr.
Dunne:
I am grateful to the Minister for that
clarification. Could he also clarify whether, in the case of an
investment management partnership that manages property portfolios as
part of its activity but not as its core activity, such a partnership
would be
caught?
Mr.
Timms:
I imagine that it would depend on the extent of the
property interest, but I think that the answer is, quite rightly, yes.
If the hon. Member wants to raise a more specific question with me, for
example in a letter, I would be happy to provide him with an answer.
Let me also make it clear that it is not the case that gifts of
property from parents to children will be made liable to stamp duty
land tax by the clause.
There are substantial sums at
stake. The hon. Member for Chipping Barnet asked about the addition of
a new partner who contributes cash. She is right that there will now be
a charge, because the previous provisions were being used for avoidance
purposes and it was necessary for us to ensure that that opportunity
was blocked. She also asked about what happens when the profit share
ratio between partners changes. Again, this applies only to property
investment partnerships, but we think that it is right that there
should be a charge where a partner acquires an increased right to
income from the property.
This is a complex area, but the
balance that we have struck in the clause, with the amendments that we
tabled, is right. Certainly, the changes that we have made have been
warmly welcomed. I hope that the Committee will support the clause,
with these Government
amendments.
Amendment
agreed to.
Amendments made: No.
243, in clause 71, page 48, line 26, at end
insert—
‘(13A) But the
amendments made by subsections (6) and (10) do not have effect in
respect of anything done in respect of a property-investment
partnership established before the day on which this Act is passed
if—
(a) the partnership
does not acquire a chargeable interest on or after that day,
and
(b) stamp duty land tax was
paid in respect of each chargeable interest acquired before that day,
by reference to chargeable consideration of not less than the market
value.’.
No.
244, in
clause 71, page 48, line 30, leave
out ‘and’ and insert
‘to’.—[Mr.
Timms.]
Clause
71, as amended, ordered to stand part ofthe
Bill.
Clause 72
ordered to stand part of the Bill.
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