The final session of today’s debate considers a number of changes to capital gains tax, along with Government amendments and one Opposition amendment.
Clause 72 will provide an incentive for people to invest in companies by reducing the main rate of capital gains tax from 18% to 10% and 28% to 20% on most gains made by individuals, trustees and personal representatives. The Government want to ensure that companies can access the capital they need to grow and create jobs, and want the next generation to be backed by a strong investment culture. We believe the best way to encourage this is to let investors keep more of the rewards when their investment is successful. At 28%, our higher rate of capital gains tax is among the highest in the developed world. We do not want high tax rates to deter investment. The lower capital gains tax rates introduced by this clause will make it more attractive for people to invest in companies, helping those companies to access the capital to expand and create jobs. Gains made on residential properties that do not qualify for private residence relief, and those from carried interest, will remain subject to the 18% and 28% rates. Retaining these rates will create an incentive for individuals to invest in companies rather than in property.
Clauses 73 to 75 make changes to ensure that entrepreneurs’ relief on capital gains tax rewards business owners and entrepreneurial investors while safeguarding the effect of measures introduced last year to prevent abuse of the relief. The Government are committed to supporting enterprise and entrepreneurship, but they are equally committed to fairness in the tax system. Entrepreneurs’ relief allows certain capital gains to be taxed at 10%, rather than the normal rates, and plays an important role in supporting the enterprise culture of this country, but, as with all tax reliefs, we need to make sure that it is not being claimed in circumstances where it does not achieve its intended purpose.
These changes will improve the targeting of the anti-abuse rules introduced in 2015. The changes in clause 73 will allow relief for gains on disposal of a private asset used in a business in cases of genuine retirement or where members of the claimant’s family succeed to the claimant’s business. These changes will level the playing field for family-run businesses and allow them to be passed to the next generation without an unfair tax charge.
The changes in clause 74 will allow someone selling their business to a limited company to claim relief on the goodwill of that business, providing they have only a small stake in the company. The relief will still be denied where the former proprietor or partner could continue running the business through the company and benefit directly from future profits and business growth. Entrepreneurs’ relief on gains on shares is due only where those shares are in trading companies or the holding companies of trading groups. Clause 75 amends the definition of a trading company to ensure that relief is available for shares in a company that has no trade of its own but which holds shares in a trading joint venture company where the investor effectively holds 5% or more of the joint venture company. The further changes made by these clauses will be backdated to the date on which the 2015 changes came into effect, meaning that no one who has made a genuine disposal for commercial reasons should be disadvantaged by the new rules.
The Government have tabled several minor amendments to the clauses. Amendments 30 to 33 simply move one of the new conditions introduced by clause 73 to a different place in the relevant statute. Amendments 34 and 35 correct two unintended retrospective effects of clause 73. Without the amendments, someone who made a disposal after Budget day 2015 and was eligible for entrepreneurs’ relief could find themselves deprived of that relief by changes announced at Budget 2016. Amendments 36 to 38 clarify the commencement provisions for the new rules introduced by clause 75 and ensure that the new definition of a trading company supersedes the definition used by the Finance Act 2015. These amendments do not reflect any change in policy and will have no impact on the costings of the measures.
Now is an appropriate time to address new clause 11, tabled by Opposition Members, which proposes that my right hon. Friend the Chancellor of the Exchequer should publish within six months of the passing of the Act a report of the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. Opposition Members will be aware that the Government keep all tax policy under review. This includes entrepreneurs’ relief, as demonstrated by recent action taken to ensure
that the relief is effective, well targeted and not open to abuse, and we will continue to act where appropriate. I can inform the Committee that officials have for some time been developing a detailed research programme designed to identify taxpayers’ motivations for using entrepreneurs’ relief, and I expect the results to be published at some point in 2017. I do not believe it is necessary to legislate for a review, so I hope that the Opposition will not press the new clause.
Clause 76 and schedule 14 introduce investors’ relief and apply a 10% rate of capital gains tax to gains accruing on the disposal of qualifying shares held by an external investor in an unlimited trading company for at least three years. Many companies struggle to attract the long-term external investment they need to grow and expand, and this can be particularly difficult for unlisted companies, which is why, on top of cutting the capital gains tax rates, the Government are introducing this additional financial incentive to invest in these companies over the longer term. Investors relief has been designed to help unlisted companies attract inward equity investment from external investors. This clause and schedule apply a 10% rate of capital gains tax to gains accruing on the disposal of qualifying shares held by an investor in an unlisted trading company or trading group. The investor must not be an employee or officer of the company at the time of subscription. In addition, the shares must have been newly issued after 17 March 2016 and held for a period of at least three years starting from 6 April 2016. The amount of relief is capped, with individuals subject to a lifetime cap of £10 million on qualifying gains.
We are today making a number of amendments to this clause to ensure that the rules surrounding the relief are fair and clear, and to extend the scope of the relief to prevent market distortions and unlock further sources of capital. Amendments 39 to 41, 43, 44, 50 and 61 will ensure that trustees of a settlement as well individuals who choose jointly to subscribe with other individuals are able to subscribe for investor relief qualifying shares. In the case of trusts, amendment 51 includes rules that prevent individuals from creating multiple trusts, each with a £10 million lifetime limit.
Amendments 45 to 49 clarify how to determine the number of shares that qualify for investors relief when a disposal is made that consists of a mixture of qualifying and non-qualifying shares. Amendments 52 to 60 and amendments 65 to 68 clarify the provisions that deal with share disposals, share exchanges, elections, subscriptions and the distribution of value to existing shareholders.
Finally, some investors may wish to monitor and protect their investment through a seat on a company’s board. Amendments 42 and 62 to 64 allow such an investor to become a director after their investment has been made as long as they are not remunerated in that capacity. They also allow an individual who becomes an employee of the company to access relief in most situations after 180 days of the share issue. Investors’ relief is designed to attract new capital into unlisted companies, enabling them to grow their business. It will help to advance this Government’s aims for a growing economy driven by investment and supporting businesses to grow.
Let me turn to the Opposition amendment that was tabled by the hon. Member for Feltham and Heston (Seema Malhotra), but is now being taken up by her
successor—and may I congratulate the hon. Member for Salford and Eccles (Rebecca Long Bailey) on her promotion? Amendment 181 seeks to end the relief after a period of five years, with the option of an additional 12-month extension if agreed by both Houses, subject to the Chancellor laying a review of the operation of the relief before both Houses. The amendment is unnecessary when the Government rightly keep all tax policy under review in line with normal tax policy-making practice. There would be limited merit in conducting the review within five years; the first data on the uptake of the relief in its first year of operation would not be available to HMRC until 2020-21. The Government believe that legislating for a review within five years is unnecessary and inappropriate. I therefore hope that amendment 181 will be withdrawn.
Clause 77 relates to shares given to employees who accept employee shareholder status. It places a lifetime limit of £100,000 on the capital gains tax exempt gains that a person can make on disposal of those shares. The limit will apply to shares received under arrangements entered into after 16 March 2016. The change will enable employee shareholders to realise the significant growth in the value of their shares without paying any capital gains tax, while helping to ensure that the status is not misused. The clause provides for fair and consistent treatment of transfers of shares to a spouse or partner. The change will benefit the Exchequer by £10 million in 2019-20 and £35 million in 2020-21.
It is also an appropriate point to address amendment 182, which was tabled by Opposition Members. It proposes that the lifetime limit be £50,000 rather than Government’s proposed £100,000. This is not a change that the Government would welcome. The introduction of a cap of £100,000 where there was none before is, we believe, a significant change. The level of the cap is a matter of weighing up two policy objectives—ensuring that employee shareholder status is not misused, and encouraging and rewarding entrepreneurship. The Government believe that setting the cap at £100,000 strikes the right balance. It encourages entrepreneurship by allowing an exemption from capital gains tax which is still generous while reducing the likelihood of abuse by ensuring that the benefits for individuals are proportionate and fair. I therefore invite hon. Members to reject amendment 182.
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On Government amendment 29, the normal CGT rule is that when a share is involved in certain paper-for-paper transactions, such as a bonus issue or a share-for-share takeover, a tax charge is prevented from arising at that time because the shareholder receives no cash from which to pay that tax. The new lifetime cap in clause 77 means we need a rule to ensure fair and consistent treatment when an exempt employee shareholder share is involved in these types of transactions. This amendment ensures that an employee shareholder will not have to pay CGT at the time of those transactions. Without the amendment, an employee shareholder who has used the whole of his or her lifetime limit may suffer a tax charge owing to events beyond their control although they receive no cash from which to pay that tax. That would plainly be unfair and inconsistent with the treatment of other shareholders in similar circumstances.
Clause 78 introduces a further limit to the relief from CGT on the disposal of employee shareholder shares. The clause is designed to ensure that investment fund
managers cannot take advantage of the employee shareholder rules to avoid tax on the rewards they receive for managing funds. Clause 78 is part of the legislation introduced by this Bill to ensure fund managers are eligible to pay CGT on their performance-linked rewards or carried interest only when the underlying fund they manage holds investments for the long term. To continue the Government’s work ensuring that fund managers pay the right amount of tax, this clause is designed to ensure that any planning that seeks to exploit the employee shareholder rules will not work. The changes made by clause 78 are narrow in scope. They amend the rules governing the relief afforded to employee shareholders to make it clear that the relief from CGT does not apply to the management fees and carried interest paid to fund managers. Those funds were never intended to benefit from this relief and should always be charged to tax at the appropriate rate.
Turning to new clause 2, the SNP proposes a review within six months of Royal Assent of the tax treatment of investment fund managers’ remuneration. Legislating for a review in six months is unnecessary. The Government have already undertaken extensive work on this area over the last year, launching a consultation after last year’s summer Budget on the remuneration of investment fund managers and publishing draft legislation at autumn statement. Indeed following this work the Government have included provision in this Bill to ensure that investment managers’ rewards will be charged to income tax whenever the underlying fund is not investing for the long term. By contrast, treating carried interest that arises to fund managers from long-term investment strategies as essentially a capital gain, rather than an income issue, is the right approach, and one that keeps the UK in step with other countries. It is also the approach consistently adopted by previous Governments in this country over a long period. Of course if any part of a manager’s reward payments are properly regarded as income rather than capital they should be charged to income tax and the clauses included by the Government in this Bill will ensure fund managers do not access CGT treatment except where they are long-term investors.
I welcome this debate. The Government have already looked closely at income and capital for fund managers’ remuneration and have introduced clauses in this Bill to ensure that the line is drawn in the right place. Again I hope hon. Members opposite will not press new clause 2.
Clauses 79, 80 and 81 make minor changes to ensure the CGT system for non-residents operates effectively. Since April 2015 non-residents disposing of UK residential property have been subject to CGT. This has addressed a significant unfairness in the tax regime and ensures that non-residents investing in the UK property pay their fair share of tax. While the regime is working well overall, the Government have identified a small number of technical issues that need addressing. The changes made in clause 79 will ensure that there is neither double counting nor under-counting in the determination of how much capital gains tax is due when a non-resident disposes of UK residential property. The changes made in clause 80 will provide for two circumstances in which a capital gains tax return by a non-resident is not required when no tax is due, and gives the Treasury secondary legislative power to add, amend or remove circumstances. That will minimise the administrative burden on taxpayers.
Clause 81 adds capital gains tax to the provisions in the Provisional Collection of Taxes Act 1968, which allows tax to be collected on a provisional basis between Budget and Royal Assent. Before capital gains tax for non-residents was introduced, it was normally payable at the end of the tax year, so there was no need to collect tax on a provisional basis. However, non-residents are required to notify and pay any capital gains tax that is due within 30 days. From April 2019, UK residents disposing of residential property will also notify and pay capital gains tax within that period. It is therefore now necessary for any rate cut or rise to apply properly to UK residents and non-residents disposing of residential property before a Finance Bill receives Royal Assent.
A wide range of measures is before us, and I have already spoken for long enough—for too long, some might argue. Taken together, those measures do much to support entrepreneurship, investment and economic growth. The introduction of investors relief and the reduction in the main rates of capital gains tax for non-property investments in particular are big, ambitious steps. Meanwhile, we are also being vigilant in tightening areas of capital gains tax and associated reliefs that have the potential to be exploited, and addressing any instances in which restrictions unfairly exclude justified users. I encourage Members on both sides of the Committee to support our proposals.