Kitty Ussher: I beg to move amendment No. 117, in schedule 18, page 253, line 39, after above, insert
or not so exempt by virtue of subsection (3) above,.
Kitty Ussher: Government amendments Nos. 117 and 118 strengthen and revise the regulation-making powers governing the allocation of income gains, losses and expenses between taxable and tax-exempt businesses of friendly societies, so that those powers cover all circumstances in which an apportionment is required. Friendly societies are entitled to exemption from corporation tax on profits arising from life or endowment business and on profits from other business. Those exemptions are subject to statutory limits. Business written outside of those limits is taxable. To compute the taxable profits of a friendly society, it is necessary to apportion income gains, losses and expenses between taxable and tax-exempt business.
Mr. Hoban: I would be grateful if the Minister clarified for the Committee which products offered by friendly societies are taxable.
Kitty Ussher: I am coming to that. Under current law, a friendly society may have taxable or tax-exempt other business, but not both. However, schedule 18 allows the transfer of other business between friendly societies without its impacting on the taxable or tax-exempt status of a transferred business. That means that it will become possible for a friendly society to have both taxable or tax-exempt other business.
Currently, there are no rules to divide income gains, losses or expenses between taxable or tax-exempt other business. Schedule 18 includes a regulation-making power to allow those rules to be made. However, the HMRC solicitor drawing up the regulations to do this has advised that the regulation-making power is insufficient to cover all situations. Therefore, Government amendment No. 117 strengthens the regulation-making power included in schedule 18, and Government amendment No. 118 extends the existing regulation-making power in section 463 of the Income and Corporation Taxes Act 1988, so that all situations are now covered.
The hon. Gentleman asked for examples of taxable or tax-exempt business. Sickness policies are an example of taxable business.
Amendment agreed to.
Amendment made: No. 118, in schedule 18, page 254, line 4, at end insert
Extension of section 463
3A In subsection (1) of section 463 (application of Corporation Tax Acts to life or endowment business carried on by friendly societies), for the life or endowment substitute long-term; and, accordingly, in the title of that section, for Life or endowment substitute Long-term..[Kitty Ussher.]
Schedule 18 , as amended, agreed to.
Homes outside UK owned through company etc
Question proposed , that the clause stand part of the Bill.
Mr. David Gauke (South-West Hertfordshire) (Con): Clause 42 relates to property abroad held by a company and to the tax consequences resulting from that. A requirement for a UK resident to hold a property abroad through a company is not uncommon, or it is, at least, to their advantage. For example, in Bulgaria it is necessary for all properties to be owned either by Bulgarian nationals or by a Bulgarian company. In France there are certain advantages to holding property through a company because of inheritance rules and in the US it is advisable to hold it through a limited liability company because of legal liability. Therefore, it is a common circumstance.
For some time, the problem has been that in those circumstances any income from that property, if it is rented out, would be treated as a benefit in kind. The Treasury has been trying to address that issue for some time. The difficulty has been distinguishing between domestic arrangements and employee benefits, which is the problem that we have here. We therefore welcome and support the objective of clause 42, but I have some detailed questions for the Economic Secretary.
The wording in the clause, and particularly in new section 100A of the Income Tax (Earnings and Pensions) Act 2003, relates to a property owned by a companyI think that the previous draft referred to body corporate. I understand that it has been changed to company to ensure that French sociÃ(c)tÃ(c)s civiles immobiliÃ¨res and US limited liability companies are included in the exemption, and I would be grateful for confirmation of that. Under new section 100A(1)(a), all the shares of the company have to be held by individuals. That begs the question, why not trusts? Trusts are a common manner in which property is held. The traditional objection to trusts is that they can be used as an anti-avoidance mechanism. I acknowledge that, but new section 100B(4) would appear to prevent that difficulty from arising, because it excludes from the regime an arrangement of which one of the main purposes is the avoidance of tax or national insurance contributions. Therefore, is there a good reason why a trust should not be able to hold shares in the relevant company? It also excludes a local management company, perhaps acting as a nominee. There is doubt as to whether a local management company as nominee for an individual would be able to hold shares in the company. Again, we would be grateful if the Economic Secretary could clarify that.
Another potential difficulty is that new section 100A(1)(a) refers to the fact that the director and the shareholder, or the property owner, will be the same person. It might be that the director of the company will be one spouse and the owner of the shares the other. That would appear to be excluded from the wording in new section 100A(1)(a).
Turning to new section 100A(2), the conditions on the company owning the property include that the property must be the companys main or only asset. That is usually interpreted as more than 50 per cent. of
The structure proposed by new section 100A(3) would appear to allow for a holding company on top of the company that owns the property, but that holding company has to be owned by the individuals in question. It has to own all of the company that holds the property. Professional advisersthe Institute of Chartered Accountants, I thinkhave asked what happens if two sets of friends own a property through two holding companies. Why deny the relief in such circumstances? It would seem to be possible to structure in such a way that that problem disappears, but is there any particular reason why such restrictions on a holding company are in place?
Proposed new section 100A(4) relates to the relevant interest in the property and states that it must be
a right to exclusive possession of the property at all times and at certain times.
Just for clarification, I would be grateful if the Minister could confirm that that does not cause a problem if the property is rented out, particularly with a timeshare arrangement, when the owners would have exclusive possession only at particular times, which would fall within the definition of certain times? Would that fall within the regime as set out in clause 42?
Finally, given that the issue is of long standing and has taken some time to be resolved, I understand that the position of HMRC is that it will not pursue tax liabilities in certain circumstances. The criteria are as follows: the property is owned by a company owned by individuals; the companys only activities are ones incidental to its ownership of the property; the property is the companys only or main asset; and the company is not funded directly or indirectly by a connected company. Again, will the Minister confirm that that is the policy approach of HMRC in such circumstances, while we wait for the terms of clause 42 to come into effect?
Kitty Ussher: As the hon. Gentleman said, clause 42 will ensure that individuals who have used their own money to buyor who will buya home abroad through a company will not face a benefit in kind tax charge for any private use of the property. Some UK-resident individuals have set up or acquired companies to own a property abroad, generally for holiday use. They will often have done so on the advice of their professional advisers, because of the specific laws in the country where the property is located. The hon. Gentleman mentioned Bulgaria. If those resident individuals direct the companys affairs, they could be within the scope of the living accommodation benefit in kind tax charge, although they may not have been aware of that. They may have considered that no tax charge arose in such circumstances and have not therefore reported the matter to HM Revenue and Customs.
The measure before us will remove that benefit in kind tax charge if certain qualifying conditions are satisfied. It will apply where an overseas property is owned by a company that is owned by individuals and the sole activity of which is holding that property for occupation and/or letting. That will include ownership through foreign companies, such as French SCIs, as the hon. Member for South-West Hertfordshire mentioned. The measure will have retrospective effect. It is right that we should remove the tax charge that would otherwise arise in those circumstances. It is not fair that those who have decided to buy a property abroad, out of their own taxed income, should face a bill simply because they did so through a company.
The hon. Gentleman asked a number of specific questions. A general point is that eligibility will be considered against the rules that have been laid outwe expect those rules to be clear, but we may need to look at the specifics of a specific situation in order to be able to judge, so I do not want to give any misleading impression today. I can respond in some general ways.
The hon. Gentleman asked whether companies owned by a trust were covered by the exemption. The exemption will not apply where the property-holding companies are owned by a trust. The limited exemption is intended to remove the benefits tax charge in certain circumstanceswhere an individual had incurred the charge without realising it. The Government feel that the current qualifying criteria strike the right balance in that regard.
The hon. Gentleman asked about a situation in which management companies are nominees. The legislation covers the situation in which the company owning the property is held by another company, and that can include a management company if it is within that definition. He also mentioned a situation in which property is rented out. If the property is rented out and the owner makes a profit, it will be treated as any other rental income. Obviously, if an individual has difficulty with a specific situation, they should contact HMRC and look at how that situation relates to general policy. The hon. Gentleman mentioned timeshare. I have already explained what would happen if property was rented out and the same applies to timeshare, so there is no issue there.
If two friends buy a property, the exemption applies regardless of whether the property is owned by a single person or with someone else. The legislation applies where the accommodation is provided to a director or their spouse, and the fact that both spouses own shares in the company will not affect whether they are covered by the exemption. The legislation includes only a benefit that arises from the owners private userunning costs for the rental of the property would be allowable as usual. I think that I have answered all of the hon. Gentlemans questions.
Mr. Peter Bone (Wellingborough) (Con): I should declare an interest because we sell overseas property. The Minister did not speak about the incidental element of the question. Often, the company will have a bank account in a foreign country. There may be a substantial amount of money in it because the owner will bring across money, depending on the exchange rate. That might fall foul of the incidental provision.
Kitty Ussher: I will have to write to the hon. Gentleman. I am sure that he will use my letter to make whatever appropriate domestic arrangements he sees fit.
Mr. Gauke: I am grateful to the Minister for providing clarification on a number of points, but I would like to return to the trust issue. As I said earlier, if a companys shares are held via a trust, I do not think that it will benefit. The question remains why not? I was concerned about a situation in which all the shares are owned by one spouse, although the other spouse is the director of the relevant company. Would that situation be protected? Although I have those concerns, on the whole we welcome the clause.
Question put and agreed to.
Clause 42 ordered to stand part of the Bill.
In-work and return to work credits and payments
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: The clause relates to the tax treatment of in-work credit, return-to-work credit, in-work emergency discretion funds, and emergency fund payments. A pilot scheme was rolled out nationally, and although that pilot scheme benefited from being exempt from income tax, that would not be the case for the national scheme but for this clause. How wide were the pilot schemes, what percentage of the country was covered by them, and when will the national schemes be introduced?
Kitty Ussher: As the hon. Gentleman said, clause 43 exempts in-work credit, return-to-work credit, the in-work emergency fund and the in-work emergency discretion fund from income tax. Such schemes are designed to encourage lone parents and incapacity benefit claimants to take up, and stay in, employment. The income tax exemption will apply to payments made on or after 6 April. In-work credit and return-to-work credit are weekly in-work payments for up to a year, to help the transition into work for lone parents and people with a disability or health condition. Lone parents in work can also receive discretionary payments from the in-work emergency discretion fund in Great Britain, and the in-work emergency fund in Northern Ireland, to help overcome unexpected financial barriers to work. The income tax exemption will ensure that payments under the scheme provide a clear, simple and transparent boost to income, ensuring the greatest possible impact on work incentives.
The hon. Gentleman asked about the effects of the pilots. The scheme was piloted as part of the pathways to work programme, which was piloted in 21 Jobcentre Plus districts. We announced in January 2006 in the welfare reform Green Paper that pathways to work would be rolled out nationally by April this year and we believe it will lift around 9,500 children out of poverty each year.
Question put and agreed to.
Clause 43 ordered to stand part of the Bill.
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