Mr. Flight: I am delighted, and thank the Minister for her kind comments. I seek your guidance, Mr. Gale, on the technicalities. It appears that it would it be appropriate for me to beg leave to withdraw amendment No. 22 so that we can vote on amendment No. 21. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: No. 21, in page 34, line 24, leave out from 'where' to ', or' in line 26 and insert
'paragraph 44, 45 or 46 of that Schedule (exercise of option to acquire shares) applies'.[Mr. Flight.]
Mr. Flight: I beg to move amendment No. 66, in page 36, line 46, leave out 'acquired' and insert 'disposed of'.
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The amendment relates to one of the issues raised by the Institute of Directors. It seeks to apply the relief to all disposals after 6 April 2002, not only to shares barred after that date; hence it would bring forward the relief and let it apply to more people.
Ruth Kelly: Despite the Committee's natural enthusiasm for the previous amendment, I cannot support amendment No. 66, and I hope to persuade the hon. Gentleman that it is unnecessary. It would allow the new election to apply whenever the shares were acquired, but there is a strong practical reason for not doing that. It would add considerable and unwelcome complexity to the provisions.
The normal rule for shares acquired before 6 April 1998 requires them to be pooled with all other shares of the same class in the same company. Extending the election to shares acquired before 1998 would therefore necessitate modifying all the rules relating to the pooling of shares. Restricting the new rules introduced by clause 49 to those acquired on or after 6 April 2002 avoids all the complications that modifying the pooling rules would bring. In any case, there was no need for the provisions to have an earlier commencement date, because we have satisfactorily addressed the problem put to us in the representations that we received. The intended target of the provisions are those people who sell some of the shares in question almost as soon as they have exercised the option to acquire them. Indeed, they may sell the shares on the same day. The usual reason for people wanting to make an early sale of some of the shares is, as we have heard, that they incur an immediate income tax liability on the exercise of their option and they want to pay that tax charge out of the proceeds.
There is another reason why amendment No. 66 is not acceptable. If the taxpayer elects for the new identification rule to apply, it affects all disposals of shares acquired on the day in question. The amendment, however, has effect only in relation to disposals on or after 6 April 2002. That would set up a conflict of rules, as some of the shares would have been disposed of before that date. As I understand the amendment, the normal identification rule would apply to disposals before 6 April 2002 and the new rule would apply to disposal of the rest of the shares. That is a recipe for utter confusion, as the rules would conflict with each other.
In any case, the amendment is entirely unnecessary. Given the reasons for clause 49, I recommend that the Committee does not accept the amendment.
Mr. Flight: I accept that the primary intention of the clause is as described--to deal with situations when people are forced to sell shares because of the high taxation on group share option schemes. As I said earlier, the issue was raised by the IOD; it needed an
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airing, but it is not fundamental to the main problem that the clauses seeks to deal with. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 49, as amended, ordered to stand part of the Bill.
Deduction of personal losses from gains treated as accruing to settlors
Mr. Flight: I beg to move amendment No. 52, in page 37, line 15, leave out 'has' and insert
'and Schedule (set off of losses treated as accruing to settlors) to this Act have'.
The Chairman: With this it will be convenient to discuss the following: Amendment No. 53, in schedule 11, page 185, line 22, leave out from beginning to end of line 44 on page 187 and insert
New schedule 1Chargeable gains: set off of losses treated as accruing to settlors
1 The Taxation of Chargeable Gains Act 1992 (c. 12) is amended in accordance with paragraphs 2 to 6.
2(1) Section 2 (persons and gains chargeable to capital gains tax, and allowable losses) is amended as follows.
(2) In subsection (2) (computation of capital gains tax), for the word ''and'' at the end of paragraph (a) substitute
''(aa) any attributed loss accruing to that person, and''.
(3) After that subsection insert
''(2A) Where on a disposal a loss accrues to trustees of a settlement in circumstances where, had it been a gain that gain would have been attributed to another person by virtue of sections 77 or 86, then that person may elect for that loss to be an attributed loss accruing to that person for the purposes of subsection (2) above for the year of assessment in which the disposal occurs.
(2B) Attributed losses must be deducted first from any gains accruing to a person by virtue of sections 77 and 86 chargeable for the year in question before they may be deducted from any other chargeable gain.''.
3 In section 77 (charge on settlor with interest in settlement), in subsection (1) at the end insert ''No deduction of any loss shall be made by the trustees in respect of any disposal which gives rise to a loss which the settlor informs them is to be regarded as an attributed loss for the purposes of section 2(2).''.
4 In section 86 (attribution of gains to settlors with interest in non-resident or dual resident settlements), after subsection (1), insert
''(1A) For the purposes of subsection (1)(e) above no account shall be taken of any disposal which gives rise to a loss which the settlor informs the trustees is to be regarded as an attributed loss for the purposes of section 2(2).''.
5 In section 86A (attribution of gains to settlor in section 10A cases), after subsection (8) insert
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Mr. Flight: By way of background, when the rules on settlor trusts were changed, it was the Government's objective to render the settlor liable to the gains of income of such trusts as if they accrued to him directly. The provisions of clause 50 have been generally welcomed, but they raise two questions.
''(8A) For the purposes of this section, no account shall be taken of any disposal which gives rise to a loss which the settlor informs the trustees is to be regarded as an attributed loss for the purpose of section 2(2).''.
6 In section 87 (attribution of gains to beneficiaries), before subsection (4) insert
''(3Z) In making any computations under this section, no account shall be taken of any disposal which gives rise to a loss which the settlor informs the trustees shall be regarded as an attributed loss for the purpose of section 2(2).''.
7 This Schedule applies to persons and gains chargeable to capital gains tax and allowable losses in the year 2003-04 and subsequent years of assessment.
Election for Schedule to apply for years earlier than 2003-04
8(1) This Schedule also applies, if the person so elects, in relation to chargeable gains and attributed losses accruing to a person in any of the years of assessment 2000-01, 2001-02 and 2002-03.
(2) An election under this paragraph
(a) must be made by notice given to an officer of the Board no later than 31st January 2005;
(b) where attributed losses may be regarded as arising in respect of two or more settlements, may be restricted to those regarded as arising in respect of the settlement or settlements specified in the election.
(3) All such adjustments shall be made, whether by way of discharge or repayment of tax, the making of assessments or otherwise, as are required to give effect to an election under this paragraph.
(a) a person makes an election under this paragraph for any one or more of the years of assessment 2000-01, 2001-02 and 2002-03, and
(b) the effect of the election, or (as the case may be) both or all of them taken together, is to increase the total amount of tax that the person is entitled to recover from the trustees of a particular settlement for those three years under section 78(1)(a) of the Taxation of Chargeable Gains Act 1992 (c. 12) or paragraph 6 of Schedule 5 to that Act,
the trustees of that settlement must join in the election, or (as the case may be) each of them that has that effect or contributes to it.'.
If the clause is to apply to the deduction of losses from gains treated as accruing to persons, why should someone elect for it to apply the other way round, to deem losses to accrue and be deducted from gains realised by him? Given that the Government's main intention was to look through the trust, why does the provision work one way and not the other? Extensive legislation provides that settlors recognise trust gains as their own. As it stands, losses remain with the trustee and are netted off against gains within the trust before they are attributed to the settlor.
The amendment would extend the intended changes to trust taxation, to permit settlors to offset their losses against their direct gains. It would allow the taxpayer to choose between accelerating the benefit of losses in trust by taking the risk of higher taxable gains from the trust in future, and leaving the position as it stands.
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The changes that we propose are designed to be compatible with schedule 11, irrespective of whether our amendments to that schedule are accepted.
Amendment No. 53 deals with a different issue, and I hope that the Economic Secretary will tell me that it is not necessary. As we understand it, the clause would also remove taper relief to settlors if they opted for the choice provided in it. We cannot see the logic for doing so when the trust's gains and losses are to be viewed as exactly pari passu, as if the settlor owned them directly.
I apologise for the length of new schedule 1, but we understood from the Bill Office that there was no alternative way to address the issues. It is necessary to achieve the transfer of losses and gains both ways, which requires a complete amendment to schedule 11.