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Session 2007 - 08 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, James Davies, Committee
Clerks
† attended the
Committee
Public Bill CommitteeThursday 8 May 2008(Afternoon)[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 2Capital
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.
What
consideration has the Treasury given to that particular group of
people? I doubt whether it is a large group. With the market being what
it is, there is not a lot of takeover activity. None the less, people
might
have options that are required to be crystallised when they otherwise
would not have, but might then choose for a variety of reasons to sell
them. They would be liable to capital gains tax under the new regime. I
accept that my point is technical and that it has not been raised
before, but I should be grateful to know whether the Minister intends
to look at that group of people sympathetically or simply say that,
once the options are crystallised and the shares are sold, capital
gains tax will be paid as it would had the share been held as a share,
not as an option.
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.
Taper relief
was right for its day, but the context was different. Following a
decade of macro-economic
stability with sustained low levels of inflation, as the hon. Member for
Taunton acknowledged in a welcome intervention—on that
occasion—it is possible to consider reform and simplification.
It might be of interest to the Committee to know that after the
pre-Budget report in October last year, someone participating in The
Daily Telegraph business blog—a gentleman who is an
entrepreneur called Duncan
Bannatyne—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. 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.”
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
“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.
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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