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Mr. Flight: I am glad to hear that the Minister has established processes to examine this territory to try to make sensible modernising reforms. She knows that the CIOT is not seeking beneficial tax avoidance schemes, but rather the modernisation of our tax regime. I trust that whatever makes sense in this area will be advanced in due course. I still think that active versus passive will become the main difference for the future. On the basis of what the Minister has said, I beg to ask leave to withdraw the motion.

Paul Flynn: No.

Question, That the clause be read a Second time, put and negatived.

New Clause 13

Exemptions from stamp duty on the disposal of a substantial shareholding

'.—(1) This section applies where a company ("the transferor company") disposes of shares or an interest in shares ("the transferred shares") in another company ("the second company").
(2) If the first, second and third conditions (as defined below) are fulfilled, stamp duty under Part I of Schedule 13 to the Finance Act 1999 (conveyance or transfer on sale) shall not be chargeable on an instrument executed for the purposes of or in connection with the transfer of the transferred shares.
(3) An instrument on which stamp duty is not chargeable by virtue only of subsection (2) above shall not be taken to be duly stamped unless it is stamped with the duty to which it would be liable but for that subsection or it has, in accordance with section 12 of the Stamp Act 1891, been stamped with a particular stamp denoting that it is not chargeable with any duty.
(4) The first condition is that the transferor company satisfies the requirements relating to an investing company, and the second company satisfies the requirements relating to the company invested in, set out in Part 3 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 ("the 1992 Act").
(5) The second condition is that, were the disposal of the transferred shares to give rise to a gain, that gain would not be a chargeable gain by virtue of the terms of Schedule 7AC to the 1992 Act.
(6) The third condition is that the disposal is effected for bona fide commercial reasons and does not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is avoidance of liability to stamp duty, income tax, corporation tax or capital gains tax.
(7) This section applies to any instrument which is executed after the day this Act comes into force, unless it is executed in pursuance of an unconditional contract made on or before that day.'.—[Mr. Flight.]

Brought up, and read the First time.

Mr. Flight: I beg to move, That the clause be read a Second time.

New clause 13 introduces stamp duty exemption to mirror the Government's new capital gains tax exemption for the disposal of substantial shareholdings. One of the main obstacles preventing companies from acquiring the

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shares of another company is the cost of stamp duty reserve tax at 0.5 per cent. of the value of the shares. The Government said, when they introduced the substantial shareholding legislation in March, that they wanted to move to a system under which tax was not the driver in commercial decisions. Hence an exemption from tax has been introduced on the disposal of qualifying shares. However, tax is still a driver in the form of stamp duty. If a company makes a disposal of an asset that the Government accept is free from corporation tax—[Interruption.]

Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I am sorry to interrupt the hon. Gentleman. Could hon. Members who are not taking part in this debate withdraw from the Chamber or resume their seats? We are discussing the Finance Bill.

Mr. Flight: Thank you, Mr. Deputy Speaker.

If a company makes a disposal of an asset that the Government accept is free from corporation tax, surely there is an argument for the asset being exempted from SDRT. The Government may respond that 0.5 per cent. SDRT is cheaper than 4 per cent. stamp duty on assets. However, since this Finance Bill, stamp duty is levied only on land and buildings. Therefore, acquiring assets used in a trade would cost the acquirer 4 per cent. of the value of the land and buildings. This may be significantly lower than the cost of 0.5 per cent. levied on the value of the whole of the trade if the shares are acquired, particularly if the company trades from rented premises.

Ruth Kelly: The Bill contains the new corporation tax exemption regime for gains and losses made when groups dispose of substantial shareholdings. A substantial shareholding broadly means 10 per cent. or more of the ordinary share capital of the company being disposed of. There are a number of other conditions that have to be satisfied before the new exemption applies and which ensure that it is properly targeted.

The purpose of the new clause is to make the disposal of a substantial shareholding also exempt from stamp duty. Corporation tax on gains and stamp duty are quite different in nature. Corporation tax on capital gains is a tax on the gain made when an asset is disposed of. In contrast, stamp duty is paid at a much lower rate, on the consideration given when an asset is transferred. Corporation tax on capital gains is paid by the seller of an asset, stamp duty is paid by the purchaser.

The purpose of the new substantial shareholdings exemption is to facilitate corporate restructuring by, for example, removing a cost for trading companies that wish to restructure by disposing of part of their business by way of a disposal of shares. However, there is no reason why the acquiring group should be given a stamp duty exemption based upon the extent of the previous owner's investment. Such an exemption would be unfair to persons investing in other companies which were not substantially owned. Indeed, in its recent paper on stamp duty on shares, the Institute for Fiscal Studies recommends against an exemption for acquisitions activity.

I can see no reason to make transactions that benefit from the new substantial shareholdings exemption also exempt from stamp duty, and I urge the hon. Member for Arundel and South Downs (Mr. Flight) to withdraw the new clause.

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12 midnight

Mr. Flight: The essence of the argument is that the new exemption on substantial disposals in relation to capital gains tax is to stop tax driving commercial decisions, as, in nearly all cases, capital gains will be involved. We are making the point that, in group restructuring—which we are looking to encourage—there is still the drive in the form of stamp duty. This is an issue of principle, depending on what the Government are seeking to achieve.

Rob Marris: Is this not the fourth new clause in a row proposed by the hon. Gentleman that seeks simply to institute a tax break for the rich and to benefit the economy and society not at all?

Mr. Flight: These clauses have been proposed by the non-political and unbiased Chartered Institute of Taxation, which meets regularly with Labour, Liberal Democrat and Conservative Members of Parliament. The institute seeks to support the efforts to simplify the tax system where material costs are not involved, one way or the other. It is the proper role of the House on Report to consider reforming proposals from such neutral tax bodies. It is entirely proper and sensible to hear whether there are issues that the Government—whoever is in power—feel it makes sense to address. With the greatest of respect, the hon. Gentleman's comment is entirely off-beam as to the new clauses.

This issue is not appropriate for a vote, and we have moved the new clause as a probing measure in the context that I have just described. There may be further discussions between the Revenue and the Chartered Institute of Taxation.

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 17

Investment income of sinking funds and service charge funds (No. 2)

'.—Profits comprising investment income accrued on funds held on trust—
(a) under section 42 of the Landlord and Tenant Act 1987 (c. 31), or
(b) exclusively for the purpose of repair and refurbishment of property in the interests of tenants by registered social landlords or other exempt landlords under section 58 of that Act,
are not chargeable to income tax or to corporation tax.'.—[Mr. Heath.]

Brought up, and read the First time.

Mr. David Heath (Somerton and Frome): I beg to move, That the clause be read a Second time.

I hasten to assure the House, after the comments made during the previous speech, that this new clause seeks to deal with the interests of those on very low pay, rather than the rich. The matter was drawn to my attention by constituents who live in sheltered accommodation. They live in what was Royal British Legion sheltered accommodation, but is now run by a housing agency at Mow Barton in Martock. The issue was raised by my

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constituent Commander Barkaway, who was very concerned by what he had construed as a change in tax law that was affecting him and fellow residents.

My constituent is concerned about the taxation of the money that residents are required to pay into a trust to deal with repairs and dilapidation; what is known as a sinking fund. Residents are required, as part of their tenancy agreement, to pay a set amount into a fund that is used for running costs, cleaning and minor repairs, and is set aside for more major repairs such as to roofs.

The problem is that the income accruing on that fund is taxed at a rate of 34 per cent., which, the residents put to me, is a punitive rate for those on low incomes. They had assumed that there had been a change in the law of which they had been unaware. I am not an expert in this area and I assumed that there must have been a change in the law that I had not noticed. In fact, it was a change in interpretation of the law by the Inland Revenue that gave rise to the concerns. The Inland Revenue issued guidance in October 1998, because although some trusts were apparently applying the law—the unified 34 per cent. tax rate—correctly, others were not, and were continuing to charge a rate equivalent to the basic standard rate. The guidance suggested that that was an incorrect interpretation of the law, and needed to be amended.

There was also some confusion because, under section 42 of the Landlord and Tenant Act 1987, the money must be held in a trust, and must therefore be taxed as if it were a trust. However, there are housing schemes that are outside the requirements of the 1987 Act, as well as registered social landlords and other exempt landlords. The Inland Revenue again issued guidance, in August 2000, suggesting that even those trusts that did not fall within the precise terms of the 1987 Act would also comprise a trust, and must be taxed on the same basis.

As I said, this has given rise to considerable concern. It is not surprising that lay people, myself included, felt that there had been a change in the tax situation. Even those who are supposed to advise us on these matters made the same mistake in the newspapers. According to a November 1998 edition of The Sunday Times:

The article goes on to discuss a new tax rate.

I ask the Minister not to dwell on the detail of the new clause. I readily accept that it is a vehicle for debate, not a proposal that is necessarily complete. I made two attempts to table the original new clause 15—it, too, was on the original amendment paper, but it was not selected for debate—and I also attempted a slightly more complex version. The new clause before us is not perfect. First, it does not identify the specific groups that I am seeking to help; secondly, it removes them from tax altogether, rather than returning them to the basic tax rate. That would be a more appropriate position, but it would require a much more complex new clause.

I hope that the new clause stimulates debate—not only here but within the Treasury—on how we might deal with this anomaly. I do not argue with the fact that trusts have been used as a means of avoiding tax in several ways, and I have no doubt that a trust such as this was equally capable of being abused in that way. As I understand it, the unified tax rate was introduced to establish an

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approximation of the rate that might apply to a range of beneficiaries to the trust—some paying the basic rate, others paying the higher rate, and others still falling outside the tax rate altogether.

The problem is that the taxation of trusts is not linked to the circumstances or tax position of any particular beneficiary—in this case, the tenant. I cannot believe that the Government or the law intend that people whose income falls below the tax thresholds, or who would normally pay the basic rate—and who, if they owned their own property, could put the money aside on that taxable basis to pay for repairs—should, because they are required by this legislation to put the money into a sinking fund that forms a trust, be taxed at a much higher rate. I ask the Minister to give serious consideration to finding a way to help such people, who are often pensioners in reduced circumstances, so that they can avoid paying excessive tax for a purpose—keeping a roof over their heads—that is wholly beneficial to them and to society.

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