Mr.
Field: Although I admire what the hon. Gentleman is trying
to achieve—albeit with the caveats that I mentioned
earlier—has he not summed up the problem? He might be able to
stop somebody who has two properties from being able to flip, but he
cannot stop the serial property owner who, through a buy-to-let
operation, can flip through several properties. Such people just have
to ensure that in any three-year period they do not designate the same
property as the primary property more than once. The proposal is fine
for the average person, but it could be used as a charter for
buy-to-let operators and allow them to avoid
tax.
Mr.
Browne: That is an entirely fair point. However, the
people the hon. Gentleman describes avoid tax at the moment so I would
not be making the situation any worse. This is a probing
amendment.
The
Chairman: Order. It is a new
clause.
Mr.
Browne: It is a probing new clause. I readily accept that
getting the detail of such a proposal right would be difficult for
anybody in Opposition, or indeed for the Government. However, it would
be negligent of us not to explore this issue to see if the law can be
improved. The
problem is similar to the inheritance tax argument with which we are
familiar. The people who plan ahead and employ decent accountants can
avoid paying a tax that those who do not plan ahead and do not use
accountants do not avoid paying, even if their circumstances are the
same. People think that unreasonable. It does not require a
particularly sophisticated accountant to advise people to redesignate
their properties to reduce substantially their capital gains tax
liability in a way that goes against the spirit of the law. Such
revenue is lost to the Exchequer and could have been used on debt
repayment, schools, hospitals, police and so
on. People
who own one property or who do not own any property think it reasonable
that capital gains tax should be paid on the sale of a second property.
They feel that the system that allows people to pick and choose whether
they pay tax on a large proportion of their capital gain on a second
property is unreasonable and ought to be more effectively policed. That
is why we tabled the new clause. This is an important subject and I
look forward to the contributions of the Minister and other hon.
Members.
Mr.
Hands: This has been an interesting and entertaining
debate so far. I congratulate the hon. Member for Taunton on tabling
the amendment and on floating an interesting
suggestion. We
have three broad areas of concern. First, some of the consequences of
the proposal might not have been fully thought through. It sounds as
though the hon. Gentleman would not disagree with that. Secondly, it
will increase bureaucracy, particularly because of the number of
additional letters. It sounds as though HMRC would have to send out a
letter on the completion of any property transaction. If the problem is
as big as he suggests—and perhaps it is—that might be
reasonable. However, we should not underestimate the bureaucracy
involved. At the same time, there would be an obligation for people to
write to HMRC to detail any change in what they perceive as their
residence. That might also be reasonable, but I fear that we would be
adding a great deal of bureaucracy without knowing the size of the nut
that we are trying to
crack. I
also have a couple of concerns about the drafting, but I am getting
more and more confused. I have spoken to two bodies that have concerns
about the new clause, but they cannot agree between them what the
problems are. Therefore, I will not discuss the drafting because it is
likely to make us even more
confused. 3.30
pm We
are broadly sympathetic to the hon. Gentleman’s intention to
prevent the flipping of properties for capital gains tax purposes, seen
most notably recently in the case of Members of Parliament. However,
the measure will affect many thousands of people—it is hard to
tell how many—beyond MPs. Care is needed when making tax policy
such as this. We would want to see far more extensive study of the
impact of the proposed changes before we felt able to give our support.
The status quo, as he pointed out, provides protection for those
selling properties where, for example, they have ended up owning two
properties at the same time due to a delay in the sale. It seems
reasonable to have some protection for those who end up holding both
properties, especially in the current climate.
My hon.
Friend the Member for Wellingborough referred to the last recession. In
the current climate there is likely to be a fair number of stalled
property chains where people have ended up having two principal or
primary residences. I do not think that the new clause is intended for
them. It also might penalise people who end up selling homes or their
principal or primary residence twice in the same year. I do not believe
that that happens terribly often but I am sure it does happen, and we
would not want to penalise that. We have sympathy with the motives and
intention but want to see more study. We are not actively able to
support the new clause at the moment but would like to see more
intensive study carried out by HMRC, if this is perceived as a serious
and widespread
problem.
Ian
Pearson: I begin by congratulating the hon. Member for
Taunton on so ably and frequently deputising for the hon. Member for
Twickenham who is the lead name for the new clause. I am sure that it
is not his fault that the drafting is technically deficient. For the
record, as the hon. Member for Hammersmith and Fulham made some
comments about this, the new clause refers to
part 9 of the Taxation of Chargeable Gains Act 1992 when part
7 is intended. It also purports to amend a provision—section
222(5)(b) of the Act—that was repealed in
1996.
Mr.
Hands: I thank the Minister because I was also told that.
However, I went back to the new clause and it clearly states part 7, it
does not mention paragraph (b) but does mention paragraph (aa). Will he
clarify? I was given the same information—that there was a
drafting error—but, when I checked, there did not seem to be
one.
Ian
Pearson: I am certainly advised that the new clause is
technically deficient along those lines. I will investigate again and
see whether that matter has been cleared up. I hope to go on to explain
the other reasons that the new clause does not work as
intended.
Mr.
Hands: Is the Minister saying that he did not check that
himself?
Ian
Pearson: I am beginning to wish I had never introduced
this part of my speech. [Laughter.] Let me make a
bit of
progress.
Mr.
Hands: I am concerned because the Minister, in
explanation, criticised the new clause for mentioning part 9 of the
Taxation of Chargeable Gains Act 1992. It is clear in front of us that
there is no mention of part 9. The new clause does in fact refer to
part 7, which is the point I was making. It appears to be drafted
correctly. Where does it say part
9?
Ian
Pearson: I stand corrected on that point. Perhaps the new
clause has gone through modifications. There are other reasons why it
should not become part of the Bill and I hope to describe
them. I
do, however, welcome the opportunity to discuss private residence
relief in the capital gains system as an issue more generally. It might
be helpful briefly to outline to members of the Committee how the
relief operates, although I think that a number of our colleagues
understand it perfectly
well. In
general, individuals who own more than one residence pay capital gains
tax on their second home, but not on their main residence. They can
choose which is their main residence and notify HMRC. Any residence
that has been at some point a main residence receives relief from
capital gains tax for the final three years of ownership.
The relief
has been in place since the introduction of capital gains tax in 1965.
The only significant change to it has been the extension of the relief
for the final period of ownership of a property which has at any point
been a main residence. That period was initially one year. It was
extended during housing market downturns from one year to two years in
1980, and from two years to the current three years in
1991. The
system currently has a number of features. It is straightforward to
operate, as it allows individuals to take the initiative in notifying
HMRC of any change of their main residence. It allows people to move
residence as and when they see fit, and it also means that individuals
who move houses during a housing market downturn—for
example, to find work—but have difficulty in selling their old
house in a reasonable period of time, do not have to pay a capital
gains tax charge. However, as hon. Members have pointed out, the very
flexibility of the system has meant that some people have been able to
reduce their CGT liability by flipping their nomination of main
residence between different properties. The new
clause seeks to address some of the perceived problems with the current
system, and I have sympathy with the aims of the new clause, even
though I do not believe that it achieves those aims. First, it would
require HMRC to contact all those who have more than one residence to
tell them to nominate their main one. Although I can see that that
might reduce the scope for abuse in some cases, it would mean
practically that HMRC would need to monitor the movements of every
person in the country who owned more than one property, including
landlords of buy-to-let property, to check where they were spending
their time. That would be administratively impossible. HMRC has neither
the power nor the resources to carry out such a task. It is also,
arguably, far too intrusive into people’s
lives. Mr.
Jeremy Browne: I take the Economic
Secretary’s point that what constitutes a main property can be
hard to define—and Members of Parliament may have discovered
that—and even harder to police. However, although people would
accept that point, they may still have reservations about a situation
where someone’s circumstances have not changed, but they still
flip the designation because of tax liability considerations, not
because they are suddenly spending more nights in one property than
they were before. If they are going to designate a main property, they
should, many people believe, stick with that as their designation
unless there is some reason to change it to some other
designation.
Ian
Pearson: Again, I have sympathy with what the hon.
Gentleman says, but there are real practical difficulties involved in
establishing main residence.
Mr.
Todd: Perhaps HMRC might consider contracting out such an
enforcement process and the checking mechanisms that are required to a
media organisation with experience in this
area .
Ian
Pearson: I will not pursue the line of argument suggested
by my hon. Friend. The new clause would, as the hon. Member for Taunton
recognises, oblige everyone who owned more than one home to nominate
their main residence within six months of HMRC contacting them to ask
for a nomination. The new clause does not specify a time limit within
which HMRC is to contact home owners, and so set off the process, so it
could have the effect of extending the total period for which a
nomination may be made. It would also be an additional burden on home
owners who at present, as has been pointed out in the debate,
“may” contact HMRC, but are not obliged to do so when
there are changes in the homes that they own and occupy. I can see
there are arguments for reducing the period during which a change in
nomination can be made. However, new clause 8 on its own would not deal
with the problems; it would need to be part of a much wider package of
measures to do so.
The third
reason why I think that new clause 8 does not work is that it would
deny any relief from capital gains tax for someone who moved their
nomination of main residence to another property and then moved it back
to the first property. Again, I can see the problem that the hon.
Member for Taunton is trying to solve, but that approach would capture
some people who have moved residence for reasons other than to reduce
their CGT liability.
For instance,
suppose that someone occupies two homes and has nominated the home
where they spend most of their time as their main residence. They then
move away to work and as a result their second home becomes, in fact,
their main residence and they vary their nomination accordingly. If,
because of a change in circumstances, they then shifted their main
residence back to their first home, a switch of nomination to reflect
that reality would mean that they would receive no relief from CGT on
either of the properties under the new clause.
Therefore,
there are some real difficulties in the detail of what the hon.
Gentleman is proposing. However, he raises some important points about
the abuse of private residence relief, which need further
consideration. This is a complex issue, but the new clause would create
the type of difficulties that I have outlined. On that basis, I ask him
to withdraw the new clause.
Mr.
Jeremy Browne: I never pretended that new
clause 8 was a perfect blueprint for administering this
difficult area of taxation and I am grateful to everyone who assisted
me in making it as close to perfection as it ended up being; if it had
been left to me, it might have been a lot further away from perfection.
This is a difficult area and trying to amend all the previous Acts of
Parliament that we are discussing is obviously difficult, for Ministers
as well as for other MPs.
However, I
think that the point that I sought to make remains a valid one. That
point is that people should expect to pay CGT on the capital gains on
properties beyond their first property. Furthermore, a system that is
as open to avoidance as the current system is becomes discredited. As a
result, the people who pay CGT are, as often as not, the people who are
least effective at working their way around the system. Compare their
position with that of people who are least eligible to pay the tax. If
that happens it is unfortunate, because it discredits the tax system as
a whole and people feel that they are not being treated
fairly.
What I was
seeking to do in new clause 8 was to suggest a possible improvement. I
hope that the Minister and other members of the Committee will see
merit in exploring this area further, to see where the law can be
improved. However, having had a useful conversation, I beg to ask leave
to withdraw the new clause.
Clause,
by leave, withdrawn.
New Clause
9Furnished
holiday lettings ‘(1) The
Chancellor of the Exchequer shall, before the publication of the 2009
Pre-Budget Report, have compiled and laid before the House of Commons a
report containing an assessment of the impact
of— (a) section 503 of
ICTA, and
(b) chapter 6 of part 3 of ITTOIA
2005, on the liability to tax
of commercially-let furnished holiday
accommodation. (2) A Minister
of the Crown must, not later than one month after the report has been
laid before the House of Commons, make a motion in that House in
relation to the report.’.—(Mr. Jeremy
Browne.) Brought
up, and read the First
time.
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