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Session 2007 - 08
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General Committee Debates

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 8 May 2008


[Frank Cook in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Schedule 2

Capital gains tax reform
Question proposed [this day], That this schedule, as amended, be the Second schedule to the Bill.
1.30 pm
Question again proposed.
The Chairman: Order. I thank members of the Committee for being so tolerant of my decision to change our start time to 1.30 pm. I am very much obliged.
Stewart Hosie (Dundee, East) (SNP): It is a pleasure to see you in the Chair, Mr. Cook. Before we adjourned, I was describing the talk of winners and losers that had taken place in respect of capital gains tax changes and those who sold shares and were due to pay capital gains tax on them. One of the issues that has not been addressed before relates to people who hold share options. As I have said, those options might have been granted as bonuses or rewards for loyalty over time from a company. People might have intended to keep them and exercise them as options; to buy and sell when it was beneficial to them perhaps in large part to fund a special holiday or their retirement. I am not talking about rich people or those in senior management. I remember from my past when ordinary employees of a large plc were routinely granted share options as part of its loyalty and bonus payment system. However, in the case of a takeover, particularly of one plc by another plc, the options have to be crystallised to facilitate the sale or buy-out of the company. The holder of the options may not necessarily want to crystallise the options into shares, but has to as a result of a buy-out or takeover by another company. The employee is then left with an option. They may no longer be employed by the new company, but be surplus to requirements, or may not feel the same loyalty to the new company that they had to the old company, and consider that it was time to sell up. Again, I can think of ordinary workers from my background with that experience.
The Financial Secretary to the Treasury (Jane Kennedy): Welcome to the Chair, Mr. Cook. We said this morning how grateful we were for the licence given to us this afternoon. It was of enormous benefit to those of us who were able to join you at Gwyneth Dunwoody’s funeral.
Schedule 2 delivers the central elements of the capital gains tax reform programme that was announced in the 2007 pre-Budget report, with the changes taking effect from 6 April 2008. Taper relief operated by reducing the amount of a gain before it was charged to tax. That reduced the effective rate of tax paid on the gain in question. The amount of reduction depended on whether the asset being disposed of qualified as a business asset or a non-business asset, and the length of time for which the asset had been owned before its disposal.
The introduction of taper relief in 1998, as we have discussed, was an important part of the Government’s drive to promote investment and reward enterprise. A decade on, we have now delivered an unprecedented period of macro-stability and have established the United Kingdom as one of the best environments for business in the world. We believe therefore that it is now right to reform capital gains tax. The regime remains highly competitive, with a headline rate less than half that in force in 1997. Equally important, the change represents a major simplification of what had become one of the most complex parts of the code.
The reformed capital gains tax regime removes distortions and will be more sustainable and straightforward for taxpayers, helping everyone to plan for the future. Extending taper relief in the way that a number of hon. Members have suggested would not enable the major simplification that we have delivered. We believe that the 18 per cent. headline rate and the 10 per cent. special rate available through entrepreneurs relief represents one of the most simple and competitive regimes of any major economy. That compares very favourably with our competitors in the G7, based on the figures for those countries in 2007. Only Italy has a marginally lower rate of 17.2 per cent. The spread goes as far as the USA, where the rate is 35 per cent., and Japan, where it is 40 per cent. and in both countries capital gains are taxed as personal income. Our preferential CGT rates also bear comparison with international competitors.
I was asked a number of questions about indexation allowance, and we discussed it partly when considering the amendments. Because indexation allowance was frozen in 1998, only a minority of disposals still qualify. I was asked if I had an estimate of the number. The data published by Her Majesty’s Revenue and Customs show that about 17 per cent. of disposals are of assets that have been owned for longer than 10 years.
In a wide-ranging speech, but one which raised a number of sensible questions, the hon. Member for Fareham probed whether there was any way of predicting how the decline of costs would occur. He acknowledges that there is no question but that there will be a decline. I invite him to look at table A3.1 in the Red Book. We do not have a profile that predicts ahead because we do not carry out that type of prediction for future years for this type of measure.
Mr. Mark Hoban (Fareham) (Con): I am intrigued. The Government have been able to project the additional tax that will be raised by the CGT reforms. Presumably, to do that they needed to project the revenue that they would gain from the abolition of the indexation allowance.
Jane Kennedy: I will look into the point that the hon. Gentleman raises. The information that I have has already been published, but I will see if there is more that I can share with the Committee in the spirit of being helpful.
The hon. Member for Dundee, East raised concerns about people holding share options. He feared that they might face different capital gains tax rules. We are focusing new relief on entrepreneurs, as we will discuss shortly. The tax paid by people with options will depend on their personal circumstances. It could have been as high as 40 per cent. under the previous regime. The highest that it could now be is 18 per cent. We think that it is right for someone with large share options to pay some capital gains tax.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I am interested in what the Financial Secretary has just said because by implication, there could be circumstances in which people with share options will pay less than 18 per cent. and will be eligible for entrepreneurs relief. Will she confirm that, because I have not been able to identify such a possibility?
Jane Kennedy: Based on the advice that I have, the logic of what he is saying is right. It will depend on the circumstances of the individual.
Stewart Hosie: This is very interesting. I confirm that the same rules for options will then apply, so that if one held options to purchase more than 5 per cent. of stock, they would be eligible for the entrepreneurs allowance on crystallisation of the sale in the same way as if they have more than 5 per cent. of the stock in actual shares? Is that correct?
Jane Kennedy: I hope so—[ Laughter. ] I will look at this matter. I believe that my answer is accurate, but I want to double check it in the light of the debate. Let me say one or two more things about share schemes. For the two large all-employee share schemes, the share incentive plan rules include a special provision for shares to be rebased to their current market value when someone leaves the scheme, so that there are no outstanding gains for capital gains tax purposes at that point. Tax returns from companies offering save-as-you-earn schemes show that in 2005-06, the average gain per employee was £2,300—well within the tax-free annual exempt amount. That is why we believe that the vast majority of people who sell shares acquired through tax-advantaged share schemes will not be liable to capital gains tax on those gains. Most gains made will fall within the generous tax-free annual exempt amount of £9,600.
I have seen the evidence that the hon. Gentleman presented from ifs ProShare. We do not believe that that evidence is a proper issue—most people do not come anywhere near HMRC because they fall below the threshold, so there are no figures to demonstrate that what we are saying is accurate. However, because we know what the general value is—as I have said, most gains fall within the generous tax-free annual exempt amount—we are confident that the vast majority of people selling shares in that way are not liable to capital gains tax. It is not something that we have not looked at. We have given it some consideration.
We continue to support employee share schemes, which continue to offer significant tax advantages for those employees who participate in an improved scheme, as well as for those employers who offer such a scheme.
Let us turn to the questions about sections 77-79 of the Taxation of Chargeable Gains Act 1992. At the time, those sections were introduced as anti-avoidance measures. They were designed to counter tax-avoidance schemes that sheltered individuals’ assets in a trust, so that a lower rate of capital gains tax could be paid. Those sections stop that avoidance, by taxing the trust’s gains on the settlor, at the settlor’s rate of capital gains tax.
With a single rate of capital gains tax of 18 per cent., for both trustees and individuals, trustees cannot get a lower rate of CGT and so there is no reason to retain those anti-avoidance rules. The hon. Member for Fareham also asked about particular trusts that were set up to assist vulnerable people, and that is a useful point for me to respond to.
As a consequence of abolishing those rules, a trust or vulnerable beneficiary will no longer be able to set off any personal losses of the vulnerable beneficiary against gains made by the trustees. However, I inform the Committee that I took advantage of the break to ask HMRC to look into that issue, because I had some concerns based on the representations made. It advised me that capital gains tax does not seem to have been an issue for any of the approximately 500 trusts that have elected into the vulnerable trust regime. That is to be expected. Bearing in mind what such trusts are set up for, we expect that trustees will take a cautious investment approach, which is unlikely to yield significant, if any, capital gains. While I am sympathetic to the point, in practice it does not seem to be an issue. However, if the hon. Gentleman, or any other member of the Committee, has any evidence that this is a problem, I would be happy to consider it further.
Mr. Hoban: I thank the Minister for her response to the issue about a trust set up for vulnerable persons. However, the same issue about the application of personal losses against the gains of a trust also applies to a situation in which a settlor has an interest in the trust. That was the other part. I understand why sections 77-79 were introduced in the first place, but the point made by the Law Society is that if they are repealed, a settlor cannot offset his personal losses against those gains.
Jane Kennedy: As I have said, I want to look carefully at this matter to reassure myself that what I have been advised is accurate. I am grateful for the opportunity to discuss that.
Abolishing those sections was in fact originally suggested by representative bodies during the consultations that HMRC held after the pre-Budget report. Abolition was supported by various representative bodies and accountancy firms, including the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Chartered Institute of Taxation, the Law Society of Scotland and the Society of Trust and Estate Practitioners. Their view was that the losses issue was a small price to pay for the greater simplification that abolition would bring. As a Government, we were guided by those representations, so I am somewhat surprised to hear the hon. Gentleman say that the Law Society feels differently. We have sought to listen to the representations that we received.
A number of hon. Members, particularly the hon. Member for Fareham, asked about halving relief. It is available where a gain has been deferred, rolled over or held over on the disposal of an asset between 1 April 1982 and 5 April 1988 inclusive, and where the person who made that disposal acquired the asset before 31 March. In such a case, where the computation of a gain on a later occasion has the effect of bringing the deferred gain into charge, only one half of the deferred gain is taken into account in that computation.
Claims for halving relief are rare because the circumstances in which the relief is due are limited. Given that fact and the complexity inherent in applying relief, removing it from the capital gains tax rules seemed a sensible element of the reform and simplification package.
I shall say a bit more about people with share options and entrepreneurs relief, although we will perhaps have an opportunity to explore that further. Shares sold after exercising an option can qualify for entrepreneurs relief if all the qualifying conditions are met, including the 5 per cent. holding test.
Mr. Hammond: In an earlier exchange, I asked whether options were eligible for entrepreneurs relief. That is quite a different question from whether shares acquired as a result of exercising options are eligible for relief. One of the qualifying tests is that the shares must have been held for one year and therefore the person exercising the option would have to fund the acquisition of the shares and be able to continue that funding for a year before he could dispose of them and take the benefit of entrepreneurs relief.
Jane Kennedy: Perhaps it is better if we consider that in greater detail shortly when we have made progress on the schedule.
“I cannot put my hand on my heart and say that a tax of 10 per cent is justifiable when I have employees who pay tax at 40 per cent. I do not believe a tax of 18 per cent will stop anyone from starting a business...For real’s about the pleasure and pride you get from building a company and making it profitable. These are the important factors, not tax gain.”
From conversations I had with those who are described as business angels, particularly in the world of medicine and pharmaceutical investment, I had a similar response.
I shall give one further quote before finishing my comments. In the Evening Standard , on 16 October 2007, Merryn Somerset-Webb commented:
“It’s a good idea on CGT, Alistair—simply do it ... for ordinary people the changes to CGT are brilliant. The old rules were hopelessly confusing. The new ones will be delightfully simple.”
We on the Labour Benches know that one does not normally turn to the Evening Standard to find comments supportive of the Government’s position.
Mr. Hammond: I am sure that the person whom the Financial Secretary has just quoted speaks for all second home owners and buy-to-let investors up and down the country, but since she wants to exchange quotes, I will offer her one. I do not have the quote in front of me, but I am pretty sure that at the 1996 Labour party conference the current Prime Minister said that its long-term aim was to have a 10 per cent. rate of tax on long-term capital gains. When introduced, was that an interim measure as well?
Jane Kennedy: As I have said, the capital gains tax regime that was introduced at the end of the 1990s was designed to create a business-friendly environment within the UK that encouraged investment. As I have also explained, over time the support that the taper relief provided to real entrepreneurs and for real business investment gradually began to be eroded. For those reasons, we felt that it was an appropriate time to reform it.
Stewart Hosie: The Financial Secretary quoted Duncan Bannatyne, so I am sure that that is what he said. She also said that the biotech sector had expressed similar views. The BioIndustry Association has certainly said to me:
“Much more needs to be done to help address the potentially fatal blow to the sector dealt by the abolition of taper relief on Capital Gains Tax in order to prevent an exit of investment from the sector, which already faces other significant funding challenges.”
That does not ring true with what the Financial Secretary has just said. I will give her the whole letter later if she has not got it.
Jane Kennedy: I said that in my conversations with those who are described as business angels, they were grateful for the introduction of the entrepreneurs relief. He is right to say that the biotech sector made strong representations, and we responded to them. Again, the same friends that I got to know in my time at the Department of Health said that it was a welcome change and that they were pleased that the Government had listened to the representations that were made.
Mr. Jeremy Browne (Taunton) (LD): As I understood Mr. Bannatyne’s quote, he seemed to share the Liberal Democrat position that extremely wealthy hedge fund managers should not be paying a lower marginal rate of tax than the people who cleaned their offices. Is that now the Minister’s position as well?
1.45 pm
Jane Kennedy: Mr. Bannatyne did argue that, but he also said:
“I cannot put my hand on my heart and say that a tax of 10 per cent. is justifiable when I have employees who pay tax at 40 per cent.”
That can hardly mean the cleaners in his business. He continued:
“I do not believe a tax of 18 per cent. will stop anyone from starting a business. For real entrepreneurs...It’s about the pleasure and pride you get from building a company and making it profitable. These are the important factors, not tax gain.”
As I have said, we believe that the taper relief was right for its day, but today’s context has changed. We believe that the new regime will be more sustainable and straightforward for taxpayers, with a targeted tax relief to support business investment and enterprise. I therefore hope that the Committee will give the schedule a fair wind.
Mr. Hoban: May I say what a pleasure it is to serve under your chairmanship, Mr. Cook. There seem to be new constitutional standards being set, as it appears that blogs can now be prayed in aid to justify a Government tax measure. The comments from Mr. Bannatyne, and the Financial Secretary’s endorsement of them, lead one to question why the Government introduced the taper relief in the first place if all that businesses need is the satisfaction and enjoyment of building themselves up. Clearly, the Government thought that there was a need back in 1998 to set up taper relief. The Minister says that the reason for the abolition is the macro-economic stability over the last 10 years. I am not sure that that is an explanation for the Government’s significant U-turn when they scrapped a relief that was designed in 1988 to encourage long-term investment in economically productive assets. The Government seem to have set themselves against that in these reforms, and the Minister has yet to produce a convincing explanation for that.
Mr. Siôn Simon (Birmingham, Erdington) (Lab): Will the hon. Gentleman give way?
Mr. Hoban: I will not give way, not because I do not welcome the hon. Gentleman’s interventions—his Whip clearly does not welcome them because he waves him down—but because I want to make progress, and we want to move on to entrepreneurs relief.
I do not believe that the Minister has properly addressed the issue. On the abolition of sections 77 to 79, I take note of her comments about the number of representative bodies that supported that abolition, and said that the fact that those losses would not be available to reduce chargeable gains was a small price to pay for abolition. Did the Treasury not investigate whether it was possible to institute those reforms without scrapping that aspect of those sections? When the Minister revisits the issue and addresses the concerns about vulnerable people, she might consider before Report whether there is a way of protecting the use of those losses, consistent with the scrapping of those three sections.
We shall deal with share option schemes later, but I return to the point that, based on the work by ifs ProShare, 250,000 employee shareholders will lose out as a consequence. The measure will affect a minority and not a majority—I have never said that it would affect a majority—but a significant number of people will lose out as a consequence, and they have been ill served, as have others, through the abolition of taper relief.
Question put and agreed to.
Schedule 2, as amended, agreed to.
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