Finance Bill

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Schedule 9

Chargeable gains: share exchanges

and company reconstructions

Mr. Flight: I beg to move amendment No. 71, in page 173, line 31, after 'capital', insert

    ', preference share capital or debentures'.

The Chairman: With this we may discuss the following amendments: No. 72, in page 173, line 33, after 'capital', insert

    ', preference share capital or debentures'.

No. 73, in page 173, line 34, after 'capital', insert

    ', preference share capital or debentures'.

No. 74, in page 173, line 37, after 'capital', insert

    ', preference share capital or debentures'.

No. 75, in page 173, line 39, after 'capital', insert

    ', preference share capital or debentures'.

No. 83, in page 173, line 41, after 'capital', insert

    'preference share capital or debenture capital'.

No. 76, in page 173, line 42, after 'capital', insert

    ', preference share capital or debentures'.

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Mr. Flight: The amendments deal with essentially the same technical issue, which was raised by the Law Society. Clause 44 and the schedule provide welcome codification of the definition of reconstruction for the purposes of capital gains tax reliefs, and the amendments would ensure that company reconstructions included those in which not only ordinary shares, but preference shares or debentures were exchanged for new shares. The Law Society raised several specific points, although I will not read out a great addendum. The Government could, however, usefully consider such points before the Bill becomes law.

12.15 pm

Ruth Kelly: I cannot support amendments Nos. 71 to 76, but I hope to persuade the hon. Gentleman that they are not necessary.

A company may wish to simplify its capital structure as it goes through a scheme of reconstruction, and the amendments are designed to facilitate that. However, various arrangements that are already in place and which meet the requirements in the Bill will enable a company's structure to be simplified in that way. For instance, the company can reorganise its capital structure before starting the scheme of reconstruction, or the successor company can reorganise its capital structure afterwards. We have included provisions in the Bill to allow for such changes.

I should also note that the meaning of ordinary share capital is quite wide. For example, participating preference shares can count as part of a company's ordinary share capital. Some companies with preference shareholders will, therefore, have no difficulty in simplifying their share capital.

I do not oppose amendments Nos. 71 to 76 simply because companies can already effect a scheme of reconstruction by making arrangements fit their circumstances. The problem is that the amendments would have the undesirable effect of widening the scope of what is a reconstruction of a company beyond reasonable bounds. The essential feature of such a scheme is that those who effectively own the business before the reconstruction are still the owners afterwards. We have preserved that key concept in the new provisions by requiring that only holders of ordinary shares receive ordinary shares in the arrangements for the reconstruction. It is the holders of ordinary shares who own the business, because they are entitled to the profits.

That essential feature of reconstructions has received long-standing approval from the courts and we should not abandon it, but that is what amendments Nos. 71 to 76 would do. They would allow debenture holders and others who are not co-owners of the business to acquire an ownership stake. Arrangements whereby the ownership of a business is passed to someone else could then be structured as schemes of reconstruction and would benefit from the capital gains rollover treatment that applies to such schemes. For that reason, I must ask the Committee to reject the amendments.

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Mr. Flight: I understand the point of principle that the Minister raises, and I do not want to undermine it. I simply want to know what the position will be within the existing parameters if our amendments are not made. Will there be a problem with reconstructions that are designed to simplify a company's capital structure, where ordinary shares are issued to preference shareholders or debenture holders of the original company or companies?

Ruth Kelly: I do not believe that that is the case. There is nothing in the new rules to prevent such companies from effecting a scheme of reconstruction. It is merely that preference shareholders and debenture holders cannot be issued ordinary shares in the reconstruction. If a company wishes to simplify its capital structure and go through a reconstruction, it can arrange its matters in such a way that they fall within the meaning of reconstruction as it is now defined. I hope that that reassures the hon. Gentleman.

Mr. Flight: I thank the Minister for her comments. The Government might want to look at that area in a little more detail, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 9 agreed to.

Clause 45

Taper relief: holding period for business assets

Question proposed, That the clause stand part of the Bill.

Mr. Flight: We have not tabled any amendments to the clause, but I want to make several points. The clause is a positive step, as it reduces the holding period necessary for business assets to obtain maximum taper relief. It has been broadly welcomed, but it does not address certain anomalies. For example, the holder of a business asset can never reduce his taxable gain to nil, whereas the holder of a non-business asset can do so, if indexation is greater than the gain.

That situation arises because the maximum taper relief is 75 per cent. of the gain and 25 per cent. is taxed. Indexation allowance, which applies to non-business assets provides an inflationary allowance such that the index cost of the asset is effectively what someone would pay today for the same asset, if it had risen in value by the rate of inflation. That means that only the real increase in value is taxed.

If an individual held a business asset since January 1985, with an original cost of £100,000, and sold it this year for £200,000, the unindexed gain would be £100,000. Taper relief would be £75,000, leaving £25,000 charged to tax, so he would have to pay tax of £10,000, if he was a 40 per cent. taxpayer. However, if the asset was a non-business asset, the individual would be able to claim indexation allowance of some £91,000, and pay tax at 40 per cent. of £3,460. That anomaly arises because the retail prices index increased by 91.34 per cent. from January 1985 to April 2002, which is the proportion that can be attributed to inflation. In that case, the holder of the non-business asset would be better off than the holder

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of the business asset. Perhaps the Government would address that to allow the holder of an asset on which taper relief can be claimed to elect for indexation allowance to apply and for the asset to be treated as if it were not a business asset, if that would benefit him.

We will come to another anomaly in subsequent clauses, which has been pointed out by the Chartered Institute of Taxation. That is the unfairness of the situation that applies to someone who acquired shares in the company for which they work before September 2000. Supposing an employee, who was made redundant last month, sells his shares later this year and, through no fault of his own, finds that 25 per cent. of his gain is deemed to be a non-business asset. Assuming that he is a higher rate taxpayer, the marginal rate of tax will be 70.5 per cent. For every £1,000 gain, £250 will be taxed in full at 40 per cent., so £750 will be subject to 75 per cent. taper relief. Therefore, the total tax burden on each £1,000 gain will be £175, which is 70.5 per cent.

We have tabled an amendment to clause 46, a starred amendment, which would allow individuals, in calculating the length of ownership, to discount the time when the asset was used for non-business purposes. That would not help in the particular examples of retirement or redundancy, but it would deal with the unfairness between pre-2000 and post-2000 business assets.

Chris Grayling (Epsom and Ewell): I rise to address a couple of points, the first of which follows on from the comments made by my hon. Friend the Member for Arundel and South Downs.

On business and non-business assets and potential changes of status in relation to an organisation, Ministers need to be mindful of the situation that can often exist in the early stages of the formation of a business, and in particular the stages in its development when it is backed by venture capital. It is often the case that a person who sets up a business does not end up leading it further down the track. It is very common for somebody to take a business through its first, and possibly its second, round of financing, and then discover that as the business becomes established and developed the investors who are supporting it bring in an additional group of managers to add new experience to it. Very often the person or persons who founded the business may find themselves moving on, retaining shareholdings and no longer working for the company. It is important to tackle that anomaly because it could have an adverse effect that we would not want on entrepreneurial groups in our society and I hope that the Economic Secretary will give that due consideration.

Secondly—I refer hon. Members to my declaration in the Register of Members' Interests—I want to probe the status of property assets with the Economic Secretary. In which cases will property assets become business assets? In relation to the burgeoning residential property market and people's involvement as investors in that marketplace, what is the status of property under clause 45? In which circumstances, if any, will it be classified as a business asset?

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