New clause 7 rectifies a minor omission from clause 105 by applying the reduction of the threshold to £500,000 for the 15% stamp duty land tax higher rate charge to the SDLT relief for the exercise of collective rights by tenants of flats.
Clause 105 reduces the starting threshold for the 15% higher rate SDLT charge from £2 million to £500,000 for transactions where the effective date is on, or after, 20 March 2014. This is part of a package of measures including changes to the annual tax on envelope dwellings and the ATED-related capital gains tax charge. The purpose of these measures is to tackle tax avoidance and to ensure that those who wrap residential property in corporate and other envelopes, and do not use them for a genuine commercial purpose, pay a fair share of tax. However, clause 105 omitted to apply the reduction to the SDLT relief in section 74 of the Finance Act 2003.
This relief benefits lessees of flats who collectively acquire freehold of their block under rights afforded by the Landlord and Tenant Act 1987 and the Leasehold, Reform, Housing and Urban Development Act 1993. The relief sets the rate of SDLT according to the consideration given for the freehold divided by the number of flats. This brings the amount of SDLT paid by lessees more into line with what they might have paid had they been able to acquire the freehold of their flat separately. These acquisitions are commonly undertaken by a company in which the lessees are shareholders. In these circumstances, the 15% higher rate of SDLT will apply if the average consideration exceeds the higher rate threshold.
The changes made by new clause 7 mean that where lessees of flats purchase the freehold of their block through a company and claim relief, SDLT will be charged on the purchase price at 15% if that price divided by the number of flats comes to more than £500,000. The new £500,000 threshold applies to the relief where the effective date of the purchase, usually the date of completion, is on or after 1 July 2014. Transitional provisions will, in the great majority of cases, preserve the existing £2 million threshold where contracts were entered into before 20 March 2014. We estimate that the impact of this minor change will be negligible. In practice, very few transactions of this kind are likely to attract SDLT at 15%. I understand that no tax has been put at risk by delaying the implementation of this change.
On stamp duty reserve tax, amendment 67, tabled by the Opposition Members, asks for the Government to lay before Parliament, within six months of the Bill receiving Royal Assent, a report setting out the impact of clause 107 on tax revenues and who benefits from it. The Government announced at Budget 2013 that they would abolish the schedule 19 charge as part of their investment management strategy to improve the UK’s competitiveness as a domicile for collective investment schemes.
Schedule 19 is a special stamp duty reserve tax charge levied on UK collective investment schemes, or “funds”. A charge arises when investors surrender back to the fund manager firm either their units in UK unit trust schemes, or shares in UK open-ended investment companies. It is paid by the fund management firm, but the cost is ultimately borne by the investors in schemes. The investors are largely pension schemes, life companies and individual savers. It is worth stressing that this charge is payable only by UK schemes. An identical scheme established outside the UK would not be subject
to the charge, placing the UK at a competitive disadvantage as a domicile for collective investment schemes. Investors who do not wish to pay the schedule 19 charge already have the option of investing in funds domiciled offshore.
The schedule 19 regime is regarded as complex and burdensome, requiring frequent tax calculations and returns to be sent to HMRC. Additionally, because of how the tax operates, its headline rate implies a much greater tax burden than the annual cost actually suffered. This is difficult to explain to investors and gives rise to presentational complications when trying to market UK funds, especially overseas. It is for these reasons that schedule 19 was identified as a major deterrent to domiciling funds in the UK, with a particularly damaging effect on the ability of UK funds to attract non-UK investors. Clause 107 repeals part 2 of schedule 19 to the Finance Act 1999, thereby abolishing the schedule 19 charge. This levels the playing field between the UK and other countries as domiciles for collective investment schemes. The abolition has effect from 30 March 2014.
The Government rightly keep all tax policy under review, but there would be little merit in producing a report in the way suggested by the amendment. We have already had the impact of this measure independently assessed by the Government Actuary’s Department. It has calculated that a typical 22-year-old currently earning average weekly earnings and investing the equivalent of 10% of gross income each year over a 45-year period would see a fund value £11,200 greater at retirement as a result of this change—equivalent to approximately 1.3% uplift in total fund at retirement. In current money terms, that is equivalent to an additional £4,600.
I stress again that the schedule 19 charge is borne by investors and not by fund managers. Data from the Investment Management Association suggest about 85% of the charge is borne by pension and insurance companies together with retail and public-sector investors. Therefore, these underlying investors are beneficiaries of the change. Furthermore, as the new auto-enrolment of workers into pension schemes changes the pensions landscape, even more ordinary hard-working people will benefit from the change in future. Further detail on the distributional impact of the measure has already been included in the tax information and impact note produced in December alongside the draft legislation.
As for the benefits due to the improved competitiveness of the UK as a fund domicile location, the time taken to authorise and launch new funds means that any positive effects of the change would not have had time to become established. Therefore, such a report would be premature. For the avoidance of doubt, let me also reiterate the point—which the Government have made on many occasions—that abolishing schedule 19 to the Finance Act 1999 is not a tax cut for hedge fund managers or hedge funds, which have in fact never paid tax under the schedule 19 charge. I noticed that the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) was very careful in Committee not to say that it was a tax cut for hedge funds or hedge fund managers, and I would be grateful if she confirmed that that is the case.
3.15 pm