Jane Kennedy: Amendment No. 493 is our response to calls for the provisions in the Bill to be extended so that relief is available for remortgages. As paragraph 86 stands, loans only qualify for exemption if they are made to acquire an interest in residential property in the UK. There would be no relief if the individual had switched the original mortgageperhaps because they had found a better dealbecause the replacement loan would not serve to acquire the interest in the property. Perhaps that is less of an occurrence in the current climate than had been the case.
I accept that some relaxation was needed and therefore amendment No. 493 extends the grandfathering so that remortgages can qualify so long as the remortgage took place prior to 12 March 2008. Amendment No. 492 is a relatively minor technical change.
The hon. Gentleman proposes very extensive changescertainly in his first group of amendments Nos. 383 to 385to grandfathering for mortgages. They would remove many of the restrictions on relief that currently apply. For example, they mean that relief would cover all manner of loans not just those for acquiring residential property. They would apply not just to relevant foreign income but to foreign employment income and gains where a payment of this sort has always been taxable as a remittance under existing law.
His proposed changes go too far. I suspect that the reason he has tabled two different groups is to elicit why we have chosen the structure we have, and why we have gone some way but not to such a generous extent as he proposes. The relief under paragraph 86 is none the less generous and the extension we are making to cover remortgaging under amendment No. 493 does strike a fair balance. Extending the grandfathering to all loans would effectively reinstate the loophole under which remittance basis users could enjoy tax-free loans which are not available to other UK taxpayers. While it is reasonable to grandfather mortgages rather than cast uncertainty over peoples housing arrangements, it is not reasonable to extend such relief to all loans.
The hon. Gentleman asked why relief is not allowed for interest paid overseas from foreign earnings and capital gains which could both be used to pay interest previously without resulting in a remittance. Payments out of employment income and capital gains have always been treated as remittance, so giving relief would be untaxing things which we have always taxed in practice.
His second group of amendments appears to be an alternative and rather more modest in scope. Unlike the others, these amendments would not seek to cover all manner of loans but would provide relief for remortgaging and home improvement loans. The first of those is now covered by our amendment No. 493 and, in view of my comments about paragraph 86 being generous, I do not consider that it would be right to cover loans for home improvement.
Having said that, my officials are currently in discussion with a number of banks about the status of certain offshore loans and mortgages and whether those, too, should be covered by the grandfathering rules. I hope to be able to provide an update to the House on Report. This is an area where we are continuing dialogue and I will be interested to hear the outcome of those detailed discussions.
I hope that I have given the hon. Gentleman some of the answers that he seeks. I ask the Committee to support my amendments and hope that the hon. Gentleman will withdraw his.
Mr. Hoban: This is a difficult area. The fact that the Financial Secretarys officials are having a conversation with banks at the moment indicates that we need to get this right. The transitional provisions extend as far as March 2028 and indicate the complexity and long-standing nature of some of these arrangements. It is important to get them right. On occasion, we do not get the balance rightwe try to close down appropriate tax loopholes, but at the same time the phrasing is so wide that it can inadvertently affect people. That goes back to my comment on the amendments about who would be caught out by this measure, and whether there is any risk of unrepresented tax payers falling foul of the arrangements.
I am grateful that the Financial Secretary is considering the matter again with the banks to try to get it rightshe has addressed a number of issues in that spirit and tried to get a workable arrangement. One of the great assets of the scrutiny process in this House is that it provides the opportunity to get it right, either through the clarification that Ministers offer in such debatesand we have had a number of those clarifications already todayor through the opportunity to revisit issues up to and including Report. The Financial Secretary might throw those words back at me on Report if confronted by another 100 amendments on schedule 7, so I should be careful how fulsome I am when commenting on the effectiveness of the procedure. Given the Financial Secretarys reassurance that the Government are talking to the banks and that there will be further opportunity to get the fine detail of the rules right, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 492, in schedule 7, page 187, line 17, at end insert or
(d) the interest ceases to be owned by the individual,.
No. 493, in schedule 7, page 187, line 19, at end insert
(a) before 12 March 2008, money was lent to the individual outside the United Kingdom (the subsequent loan),
(b) the subsequent loan was made for the purpose of enabling the individual to repay
(i) the loan mentioned in sub-paragraph (1), or
(ii) another loan in relation to which sub-paragraphs (2) and (3) apply (by virtue of this sub-paragraph),
and for no other purpose, and
(c) before 6 April 2008
(i) the money was received in the United Kingdom,
(ii) the individual used the money to repay the loan referred to in paragraph (b)(i) or (ii), and
(iii) repayment of the subsequent loan was secured on the interest referred to in sub-paragraph (1)(c),
sub-paragraphs (2) and (3) apply in relation to the subsequent loan (and for this purpose references there to the debt or the loan are to be read as references to the subsequent loan)..
No. 338, in schedule 7, page 187, line 21, at end insert
86A (1) This paragraph applies in relation to employment-related securities if
(a) the date of the acquisition is on or after 6 April 2008 and on or before 31 July 2008, and
(b) Chapter 2 of Part 7 of ITEPA 2003 (restricted securities) applies in relation to the securities by virtue only of amendments made by this Schedule.
(2) Section 431 of ITEPA 2003 (election for full or partial disapplication of Chapter) has effect in relation to the employment-related securities as if in subsection (5)(b) for more than 14 days after the acquisition there were substituted after 14 August 2008..[Jane Kennedy.]
(1A) In subsection (1), after paragraph (a) insert
(aa) any reference to anything accruing is to be read as a reference to it arising (and similar references are to be read accordingly);..
The Chairman: With this it will be convenient to discuss the following: Government amendments Nos. 403 to 411.
Amendment No. 390, in schedule 7, page 189, line 17, leave out from 12 to end of line 18.
Amendment No. 494, in schedule 7, page 189, line 36, at end insert
(5) In computing gains to which this section applies, those gains shall, if the company so elects, be calculated by reference to the value of the asset concerned at 6 April 2008.
(6) An election under subsection (5) is irrevocable and shall be made within two years of the end of the first accounting period ending after 5 April 2008.
(7) An election under subsection (5) shall be made in the way and form specified by the Commissioners for Her Majestys Revenue and Customs..
Amendment No. 391, in schedule 7, page 189, line 36, at end insert
93A (1) The following provisions apply to a company if
(a) section 13 of TCGA 1992 applies to the company for the tax year 2008-09, and
(b) the directors of the company have not opted out from the provisions within this paragraph.
(2) An election to opt out from the provisions within this paragraph may only be made on or before the anniversary of the first 31 January to occur after the end of the first tax year (beginning with the tax year 2008-09) in which chargeable gains are attributed under section 13 of TCGA 1992 to a participant in the offshore company.
(3) An election under sub-paragraph (2) is irrevocable and must be made in the way and form specified by the Commissioners for Her Majestys Revenue and Customs.
(4) The only information that need be provided in the course of making the election is the name of the offshore company and the name of the director making the election.
(5) Sub-paragraph (7) applies if
(a) chargeable gains are treated under section 13 of TCGA 1992 as accruing to an individual in a tax year, and
(b) the individual is resident, but not domiciled, in the United Kingdom in that year.
(6) The individual is not charged to capital gains tax on so much of the aggregate chargeable gains attributed to him in the tax year as exceeds the relevant proportion of the gains.
(7) The relevant proportion is A/B where
A is the portion of the gain that would what have been treated as accruing to the participator, if immediately before 6 April 2008 every relevant asset had been sold by the directors and immediately re-acquired by them at the market value at that time; and
B is the actual gain attributed to the individual.
(8) For the purposes of sub-paragraph (7) an asset is a relevant asset if
(a) by reason of the asset, a chargeable gain or allowable loss accrues to the trustees in the relevant tax year, and
(b) the asset has been comprised in the company from the beginning of 6 April 2008 until the time of the event giving rise to the chargeable gain or allowable loss..
Government amendments Nos. 412 to 435.
Amendment No. 392, in schedule 7, page 196, line 28, leave out made an election under this sub-paragraph and insert
have not opted out from the provisions within this paragraph.
Amendment No. 393, in schedule 7, page 196, line 30, leave out An election under sub-paragraph (1) and insert
An election to opt out from the provisions within this paragraph.
Amendment No. 394, in schedule 7, page 196, line 30, after the, insert anniversary of the.
Government amendments Nos. 436 and 437.
Amendment No. 395, in schedule 7, page 196, line 40, leave out (1) and insert (2).
Amendment No. 396, in schedule 7, page 196, line 42, at end insert
(4A) The only information that need be provided in the course of making the election is the name of the trust and the name of the trustee making the election..
Government amendment No. 438.
Amendment No. 397, in schedule 7, page 197, line 24, at end insert and.
Amendment No. 398, in schedule 7, page 197, line 27, leave out from gains to end of line 34.
Government amendments Nos. 439 to 462.
Jane Kennedy: I almost say, Hurrah, Sir Nicholas. This is the final group of amendments and the vast majority of them are technical changes to ensure that the code on chargeable gains of non-resident trusts, and its interaction with the code for offshore income gains, works effectively. There are more substantive changes following our discussions with external stakeholders on
Mr. Hoban: Before I talk to amendments Nos. 390 to 398, I wish to make a couple of brief points about Government amendments Nos. 402A to 462. Matters are not quite as bad as they are presented on the order of consideration, but when we realise that the Government have tabled 60 amendments in the group under discussion, my own eight amendments pale into insignificance in respect of number, although perhaps not in points to discuss.
As for Government amendments Nos. 402A to 462, we may return to such matters on Report. External bodies consider that the volume of amendments tabled in Committee, although they would affect their understanding of matters from discussions with officials, show continuing thought. We do not know whether they would address the issues that they want dealt with, given that lurking in the amendments is the use of our old friend just and reasonable, which was dealt with an eternity ago. On new paragraph 108A under Government amendment No. 432, I do not know whether the intention is for HMRC to provide guidance about that or to discuss matters on a case-by-case basis, but it would be helpful to know if that is the route that the Government intend to take. It is also fair to say that some of the Government amendments address issues slightly more elegantly than do my amendments.
Amendments Nos. 390 and 391 deal with a matter that a number of people have raised with me, which almost pushes people to use more complex structures to manage their tax bills. I understand why people do that, but it would be better not to drive them down that route. I am talking about the treatment of capital gains tax. Offshore companies that do not have a United Kingdom branch or agency are not subject to United Kingdom capital gains tax. From the introduction of CGT, anti-avoidance provisions have been designed to prevent UK-domiciled, UK resident and ordinarily resident individuals from avoiding it by exploiting the fact that an offshore company is outside the territorial scope of CGT by holding its assets within offshore companies that they control.
Paragraph 93 to schedule 7 introduces new section 14A that extends the anti-avoidance provisions to UK residents or ordinarily resident non-doms. I wish to draw the Committees attention to a distinction and to present matters clearly. The current effect of the anti-avoidance provisions is such that they attribute gains arising to an offshore company that would be a closed company if it were resident in the UKthat is how companies are caughtto a UK resident or ordinarily resident person, or UK-domiciled qualifying participators who were chargeable to tax on the gain attributed in the year of attribution, and offshore trusts that meet the qualifying participator conditions.
The Finance Bill extends the provisions so that gains will be attributed to non-domiciled residents or ordinary residents. When the non-dom is a remittance basis user, they will be taxed on the gains attributed on the basis of UK gains subject to tax with respect to the tax year on
Part of the problem appears to be that the Finance Bill contains no transitional provisions, which means that the non-dom would be subject to tax on gains that relate to the period prior to 6 April 2008 and, as has been recognised by the Government, where trust structures are concerned, non-doms had a legitimate expectation that they would not be subject to UK capital gains tax with respect to gains and disposal of chargeable assets held within offshore structures. There are transitional arrangements in place for those non-doms who hold assets in trust structures, but there are no transitional provisions for offshore companies held directly by individuals in the same way as is provided for in the Finance Bill for assets held within trust structures immediately before 6 April 2008.
As I understand it, if in one situation a non-dom has a house in, say, Eaton square and that house is owned by a company, and in another, the non-dom has the house in Eaton square, a company and an off-shore trust on top of that, there are transition provisions for the offshore trust to rebase the capital gains, but there is not a mirroring provision for companies. That creates a bias in favour of complex trust structures rather than a more immediate way in which a company may own an asset.
Amendments Nos. 390 and 391 attempt to draw out that comparison. It was never expected that foreign domiciled individuals would receive a rebasing to 6 April 2008 in relation to their direct holdings and offshore companies, with respect to which they are qualifying participators, but it is hard to follow the logic of allowing a wholesale rebasing of assets within an offshore trust structure, including assets owned by an underlying company, when there are no comparable provisions to allow rebasing of assets owned by an offshore company.
My amendments seek to bring about two changes: first, the gains attributed to offshore companies should be taxed only if there is remittance to the UK and, secondly, to introduce a rebasing election that can be made by directors of offshore companies. The first group of amendments deals with the transitional provisions and what is available for companies as opposed to trusts. The second group comprises amendments Nos. 392 to 398. Amendment No. 494, which is also in that group, is an alternative way to address the issues that I have highlighted in amendments Nos. 390 and 391. It does have a broader impact as well, which relates back to amendments Nos. 392 and 398.
I have already mentioned the rebasing election that trustees can make. I have read the rules on rebasingI lead a sad life, when I spend my afternoons doing things like thatand I am not going to go through them at this point for fairly obvious reasons. Trustees are able to elect for a settlement that is non-resident at 6 April 2008 to make what could be described as a rebasing election. The election is relevant only where the trust has beneficiaries who are non-doms and the election is irrevocable. It is an all-or-nothing provision, applying to every asset within the trust structure immediately before 6 April 2008.
The legislation states that the rebasing election
"must be made in the way and form specified by Her Majesty's Revenue and Customs".
and I am sure that there will be a prescribed form on which to do that. I am sure that disclosures will be required, but I am not yet sure what they will be. The deadline for making the election is 31 January, following the end of the tax year in which the first of the following take place: capital payment is received or treated as received by a beneficiary regardless of their domicile of a settlement, and the beneficiary is a resident of the UK in the tax year in which it is received or; the trustees transfer part, but not all, of the trust property to a new settlement.
Again, this is a situation where well-advised taxpayers will receive the right advice. The concern is that not all taxpayers may benefit from rebasing elections if the trustees do not make the election in time. Prior to 6 April this year, offshore trustees did not necessarily need much knowledge of the UK tax system to act as trustees. So, my argument is that we should introduce into legislation a presumption that the election will be made. Broadly, people believe that the election is beneficial for the purposes of rebasing capital allowances. What we are seeking is, rather than having an election to opt for the rebasing, we have an election to opt out of the rebasing. It is probably in the best interests of taxpayers to start on the basis that they will be rebasing.
As I understand it, the Government thought that the arguments behind my amendments Nos. 397 and 398 were rather good, despite not having heard them. I understand that they tabled amendments Nos. 439, 440, 467 and 447 to address those issues.
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