I remind the Committee that with this we are considering schedule 5.

I will pick up where I left off by asking the Minister to provide confirmation on the three points I listed, and to provide an assurance that the guidance from His Majesty’s Revenue and Customs is sufficiently clear on those points that those affected are aware of the full implications of the changes.

Finally, in the case of joint ownership, the Chartered Institute of Taxation is calling for an administrative easement to allow declarations to be backdated. Has the Minister considered the possibility of such an easement being implemented? I have not been able to raise all of the many points that the institute has raised with me, and I apologise to it for that. I am sure the Minister is engaging with the institute. I know that in opposition he spent a lot of time with it, as he will be doing with industry. I encourage him to speak to the Chartered Institute of Taxation and get its guidance and input, as I have tried to lay out in my remarks.

I start by putting on the record my thanks to the Chartered Institute of Taxation. It was a great support to me in opposition and continues to be an important stakeholder for us in government.

I will try to respond to some of the shadow Minister’s points. First, he raised concerns articulated by the Chartered Institute of Taxation about trading and property income boundaries. There are established principles that underline what is trading and what is income from property. The bright-line tests that have been put forward distort those principles rather than clarify them. Whether activity is income from property depends on the nature of the activity undertaken, and specifically how the profit is derived. If the profit is derived from the exploitation of land, the income is taxable as property income. The furnished holiday let rules provided for specific reliefs, but for tax purposes it has always been property income, not trading income. Categorising some property income arbitrarily as trading would give more reliefs than FHLs previously had.

The shadow Minister also raised concerns about how the repeal of the FHL rules will apply practically to landlords and how that may affect them. I reassure him that HMRC has already published guidance on the changes and will be publishing more ahead of April, when the changes come into effect. We have also engaged with the industry since the announcements to ensure that we are aware of its reaction.

On the shadow Minister’s other points in relation to business asset disposal relief and roll-over relief, we have considered the impacts of the changes on those two reliefs. It will depend on an individual’s personal circumstances, but broadly each person would need to dispose of the whole or part of an FHL business, or dispose of assets that were used for the purposes of an FHL business that has ceased, before April 2025. We have been fair in our approach not to restrict relief where someone has had an FHL before repeal. Individuals should consult online guidance or a tax adviser before making any decisions.

The shadow Minister asked about married couples. We have considered the impact of the changes on married couples and civil partners. The removal of the FHL rules will mean that a married couple is subject to the same rules as other landlords. For married couples, income is assumed to be split 50:50 unless a declaration is made to split the income in a different proportion, which must be the same as the proportion of ownership between the couple. If they want to change the proportions, married couples will have to make an election for joint ownership arrangements as per the usual process. There will be a deadline of April for married couples to adjust to the changes as we cannot backdate such elections. That was already set out online following the consultation on the draft legislation. Further online guidance will be available.

I hope I have covered most of the shadow Minister’s points. I conclude by recognising my gratitude to him for not opposing the provisions; it would be noteworthy if he had changed his mind since he was in government. I am not sure whether all his colleagues are on exactly the same page as him, but I will not pry at this stage of our consideration of the Bill. Perhaps his slightly caveated response to the clauses reflects some of the discussions happening among Members on the Opposition Front Bench. Notwithstanding whatever is happening behind closed doors, I welcome their support for the clause.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 26

Films and television programmes: increased relief for visual effects

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

With this it will be convenient to discuss clauses 27 and 28 stand part.

Clause 26 makes changes to maximise the potential of the UK’s world-class visual effects industry, and clauses 27 and 28 make changes to ensure continuity for companies claiming expenditure credits for film, TV and video game production, by aligning the legislation with equivalent provisions in the previous tax reliefs.

The UK is a strong performer in visual effects production and is home to several Oscar-winning companies, but in recent years there have been reports of visual effects activity moving overseas. Stakeholders report that that is because of the 80% cap on qualifying expenditure relating to the audiovisual expenditure credit, or AVEC. Currently, companies can receive AVEC on up to 80% of their production costs, including visual effects costs. Visual effects work is done virtually, so companies may place 80% of their production costs in the UK and place their visual effects costs overseas, particularly in countries such as Canada and France, which offer special tax incentives for visual effects.

In November 2023, a call for evidence on the visual effects industry was published. It provided substantial evidence that visual effects work was moving overseas because of the 80% cap and because of increased competition from countries that offer targeted visual effects tax incentives. Separately, previous tax reliefs for film, TV and video game production are being phased out and will be fully replaced with expenditure credits from 1 April 2027. Indeed, companies can already claim expenditure credits instead of the tax reliefs if they wish.

The changes made by clause 26 will increase the amount of AVEC awarded to UK visual effects costs in film and high-end TV production by 5 percentage points, to a total credit rate of 39%. The changes remove AVEC’s 80% cap on qualifying expenditure for visual effects costs, so that all those costs, including those that are above the 80% cap, may receive the enhanced 39% rate of relief. Around 1,300 companies claim film or high-end TV tax relief and stand to benefit from the changes, and the additional tax relief is expected to cost £75 million per year from 2028-29.

Clause 27 sets out that the previous tax reliefs and the new expenditure credits both require companies to provide cultural certificates from the British Film Institute to support their claims for relief. HMRC requires the certificates to be in force at the time a claim is made. The new expenditure credits legislation is less clear on that requirement than the previous tax reliefs legislation; it requires certificates to have effect at the end of each claim period, rather than only at the time the claim is made. The changes made by clause 27 will therefore align the expenditure credits legislation with the tax reliefs legislation, to clarify that cultural certificates must be valid when claims are made, and ensure continuity of treatment between the previous tax reliefs and the new expenditure credits.

On clause 28, the previous tax reliefs and the new expenditure credits both have rules on the treatment of expenses that are not made within four months of the end of the accounting period in which they are incurred. The tax relief rules allow for such expenses to be deducted from profits, but do not allow additional relief on them until they are paid. The expenditure credit rules prevent the expenses from being deducted from profits at all—that is, until they are paid. The changes made by clause 28 will align the expenditure credit rules with the tax relief rules, so that the unpaid amounts can be deducted from profits that are still ineligible for relief until they are paid. This will ensure continuity for companies that are used to the treatment of unpaid amounts under the previous tax reliefs.

In conclusion, the changes to the audiovisual expenditure credit will boost the UK’s offer in visual effects in an increasingly competitive international environment, and incentivise more visual effects work on UK productions to be done here in the UK. Furthermore, the changes to the expenditure credits legislation will align it with the more familiar tax relief provisions, ensuring continuity for film, TV and video game companies. I commend the clauses to the Committee.

As the Minister set out, clauses 26 to 28 create an additional relief for video effects expenditure while making administrative changes to align audiovisual and video games expenditure credits with older reliefs for film, TV and video games.

We announced the additional relief for VFX expenditure at the spring Budget 2024, as part of a wider package to support our world-leading creative industries—which, by the way, grew at more than one and a half times the rate of the wider economy between 2010 and 2019, a remarkable success for any sector. The consultation we launched on the design of the policy directly informs the clauses, and we will not oppose them.

However, one suggestion raised in the consultation that the Government have not chosen to take forward was to allow companies that claim the independent film tax credit to also claim the additional tax relief for visual effects. The Government have said they do not believe this exclusion will have an adverse impact on companies, but it would be helpful to hear from the Minister what assessment was made of the benefit to smaller visual effects studios had the scope of the relief been widened in the way in which many suggested as part of the consultation.

The spring Budget 2024 also announced a 40% relief from business rates for eligible film studios in England for the next 10 years. My understanding is that this has not yet been implemented by the new Government, and has in fact been referred to the subsidy advice unit. I understand that in the last couple of hours, over lunch, the unit has reported its findings. I would be grateful if the Minister could update the Committee on what those may mean for the future of the measure and the expected timeline for delivery.

I thank the shadow Minister for his comments and for setting out some important context around the tax reliefs and expenditure credits, and around why they are so important in supporting growth in the UK economy.

On his question about the independent film tax credit, as he I am sure understands, films that claim the independent film tax credit will receive a 53% rate of audiovisual expenditure credit on up to 80% of production costs. That includes visual effects cost. The independent film tax credit therefore provides generous support for visual effects costs within independent films. Separating the additional tax relief for visual effects from the independent film tax credit helps to ensure that both schemes are simple and easy for companies to understand.

On the publication that the shadow Minister says happened in the last few hours, that is so hot off the press that I am not even authorised to speak about it yet. I have not been briefed on it because I have been getting ready for this Committee. I am sure that if it has been submitted, the right officials and Ministers will look at it as soon as possible.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

Clauses 27 and 28 ordered to stand part of the Bill.

Clause 29

Research and development relief: Northern Ireland companies

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

Clause 29 makes small changes to the rules for enhanced support for research and development-intensive companies with a registered office in Northern Ireland. At the spring budget 2023, the previous Government announced an enhanced rate of relief within the R&D small and medium-sized enterprise scheme applying from 1 April 2023. Separately, from April 2024 slightly different rules applied for R&D-intensive companies with a registered office in Northern Ireland, allowing them to continue claiming relief on a wider range of overseas expenditure than companies in Great Britain, while introducing a cap on the amount of relief that can be claimed.

Clause 29 amends the rules introduced last April to reflect the particular market conditions in Northern Ireland and ensure consistency with the UK’s international obligations. This will introduce some additional requirements around the cumulation of aid and reporting, which will apply to claims made on or after 30 October 2024 by eligible companies with a registered office in Northern Ireland. A very small number of claimant companies in Northern Ireland are expected to be affected, while the vast majority will continue to be better off compared with their counterparts in Great Britain. This is because their claims are too small to be affected by the cap, but they will still be able to claim on overseas expenditure, as before.

The Office for Budget Responsibility has certified this measure as having a negligible impact on the cost of the relief. The Government are committed to supporting R&D investment across the UK through the R&D tax reliefs, which play a key role in supporting the mission to kick-start economic growth. The changes will ensure that the R&D reliefs reflect the particular market conditions in Northern Ireland and ensure consistency with the UK’s international obligations. I commend the clause to the Committee.

As the Minister set out, clause 29 amends the measure in Northern Ireland to set in law a new cap of €300,000 on a three-year rolling basis, alongside other sources of relevant aid. The existing cap of £250,000 is currently defined in regulations. Will the Minister inform the Committee why the provisions have been moved from regulation into law? What are the implications of the change?

HMRC notes that when claiming enhanced R&D-intensive support, companies with registered offices in Northern Ireland now need to take into account other relevant aid that they have received. What steps have been taken to ensure that those companies are aware of this change and are equipped to satisfy the new requirement?

I thank the hon. Gentleman for his questions. It is worth emphasising that this is a small change compared with the rules that already applied from April 2024. In practice, we expect a very small number of companies to be affected by the change, with very few claims to be made before April 2025. Since the change will be a key qualification to the tax rules for a part of the UK, it should be legislated for in the Finance Bill and as part of the Budget process. I hope that helps to explain the process we are taking to implement the changes and reassures the hon. Gentleman that they are small and will affect a very small number of companies.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Clause 30

Research and development intensity condition: transitional provision

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

The clause makes small changes to the higher rate of relief available for R&D-intensive SMEs to ensure that the R&D reliefs remain fit for purpose while providing clarity to businesses. The Government recognise the important role that R&D plays in driving innovation and economic growth, as well as the benefits it can bring for society. The R&D tax reliefs play a key role in this. That is why I was pleased to announce in the corporate tax road map published at the Budget that the Government are committed to maintaining the generosity of the rates in both the merged R&D expenditure credit scheme and the enhanced support for R&D-intensive SMEs to increase certainty for companies when making investment decisions.

In the Finance Act 2024, the R&D intensity calculation for the enhanced rate of relief did not take account of any expenditure for which a company was entitled to claim research and development expenditure credit. That meant that some companies that were supposed to qualify as R&D-intensive might not meet that threshold. The change made by clause 30 will therefore ensure that research and development expenditure credit-qualifying expenditure is included in the calculation of the R&D intensity ratio, as was always intended.

This change will apply to all claims for the enhanced rate of relief from its introduction in April 2023, and to all expenditure incurred from 1 April 2023 in an accounting period that began before 1 April 2024. It will affect some small and medium-sized enterprises that have a high R&D intensity and claim the enhanced rate of SME-payable R&D tax credit relief. This is a small technical change and so it is not anticipated to have any Exchequer or economic impacts.

The Government are committed to supporting R&D betterment across the UK through the R&D tax reliefs, which play a key role in supporting our mission to kick-start economic growth. The changes made by this clause will ensure that all companies originally intended to benefit from the higher rate of relief will now be able to do so. I commend clause 30 to the Committee.

The clause amends the transitional provision, clarifying that expenditure that would qualify for R&D expenditure credit is relevant R&D expenditure when calculating the R&D intensity ratio, which determines eligibility for enhanced R&D intensive support, as was always intended. This provision has a retrospective effect, and I would be grateful if the Minister could therefore tell the Committee what steps the Treasury is specifically taking to ensure that all those who missed out on the relief, but may now be eligible, are aware and equipped to claim this new support.

I reassure the shadow Minister that, as Ministers and Treasury officials, we are routinely in conversation with the industry and those companies that benefit from R&D support. We will ensure that all changes to legislation and all opportunities available for us to support the industry are communicated with clarity, and we will ensure that everyone is aware of what support we can offer for their economic growth ambitions.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Clause 31

Employee-ownership trusts

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

With this it will be convenient to discuss the following:

Government amendments 38 to 43.

Schedule 6.

The clause and the schedule make changes to the taxation of employee ownership trusts to prevent opportunities for abuse and to ensure that the regime remains focused on encouraging employee ownership. The Government are committed to supporting employee ownership as a viable and sustainable business model. Employee ownership gives employees a greater stake in the business in which they work, improving working conditions and in turn driving productivity and growth.

Tax reliefs are currently available for company owners who transition their companies into an employee ownership trust, which is set up to hold and manage the company for the benefit of all employees of the company, rather than for individual shareholders. This model has proven successful, with over 1,500 UK companies held by employee ownership trusts today, improving the working conditions of some 200,000 employees. However, while the success of the employee ownership model is to be applauded, the Government are concerned that the tax regime is vulnerable to exploitation. We are therefore determined to close loopholes to ensure that the reliefs are available only to those who are motivated by a genuine desire to transform their companies into employee ownership trusts.

The changes made by clause 31 and schedule 6 therefore amend the conditions for obtaining capital gains tax relief on disposing of a company to the trustees of an employee ownership trust to ensure that the former owners cannot retain control of the company following disposal. The trustees must be UK residents and they must take reasonable steps not to pay more than the fair market value for their shares. These changes are necessary to prevent opportunities for abuse and to protect the long-term integrity of these reliefs.

Individuals will also be able to provide additional information to HMRC at the point of claiming the relief, and the period of time within which HMRC can take action, if the relief conditions are breached post-disposal, will be increased. HMRC will be given additional powers to monitor the reliefs and to take action when non-compliance is identified.

Lastly, this measure makes technical changes to provide clarity on the tax treatment of contributions paid to the trustees from the company in order to meet costs associated with purchasing the company from the former owner, and also adjusts the conditions for income tax relief on employee bonus schemes. Overall, these changes will simplify the process of setting up and operating employee ownership trusts.

Government amendments 39 and 41 confirm that the relief is available only with respect to contributions paid to the trustees from a company for the purposes of meeting the trustees’ acquisition costs. In doing so, they clarify the policy intent and remove any potential ambiguity within the legislation as drafted. Government amendments 38 and 40 ensure that the distributions relief is available in circumstances where the capital gains tax relief was not claimed because the vendor was a company, rather than an individual, provided that the conditions for obtaining the relief were otherwise met.

Government amendments 42 and 43 expand the scope of the costs that qualify for the relief to include other expenses that may reasonably be incurred by trustees in connection with the acquisition of the company. These amendments make technical clarifications and address the concerns expressed by key stakeholders that the scope of the relief as announced at the autumn Budget was too narrow to reflect the reality of how employee ownership trust acquisitions are funded.

Overall, the clause protects the future of employee ownership in the UK by ensuring that the tax reliefs available to encourage it continue to operate effectively and by preventing opportunities for abuse. I commend clause 31, schedule 6 and Government amendments 38 to 43 to the Committee.

Clause 31 and schedule 6 alter the conditions for obtaining tax reliefs for employee ownership trusts. The current regime was introduced by a Conservative Government, following the independent Nuttall review in 2012, which set out the many strengths of the model and how it could become more widespread in our country.

Since the current regime was implemented in 2014, its tax incentives have achieved great success in encouraging the creation of employee ownership trusts, which have become the predominant model for employee ownership. Today, more and more companies are making the transition to that model. I was pleased to hear the Minister tell us that there are about 1,500 examples in the country. In 2023, we launched a consultation to review the regime, and it has fallen on this Government to respond to it.

The package of changes that the Minister has set out aim to prevent opportunities for the relief to be abused while ensuring that employee ownership continues to be incentivised and supported. We share those objectives, and we warmly welcome these measures, which largely reflect the recent consultation. We will not oppose them but, as hon. Members would expect, I have a few questions.

I would be grateful if the Minister can explain why a few suggestions put forward during the consultation have not been taken forward. For instance, a large number of respondents asked for the tax-free bonus limit for employees to be increased from the current level of £3,600. Had that kept pace with inflation, the maximum today would be close to £5,000. The Government have made it clear that they have no plans to increase the tax-free bonus amount, but they have not said why. A little more detail would be welcome, as would some reassurance that the Government will keep that element of the regime under review so they can react speedily if the weakening of the incentive begins to undermine the overall policy goal that we all share.

Another point raised in responses to the consultation was the issue of double taxation upon the sale of an EOT-owned company to a third party. In that event, trustees would be liable to pay capital gains tax on the disposal, and employees would be charged income tax on their share of the net proceeds. When responding, the Government did not acknowledge that point about double taxation, which the Chartered Institute of Taxation also highlighted. We understand that that concern must be weighed against the main abuse that the Government are rightly trying to prevent with these measures: the exploitation of EOTs by company owners to reduce their CGT liability when ultimately selling their business to a third party.

Surely the second layer of taxation—the income tax charged to employees—does not act as a major disincentive to that kind of behaviour, however, especially in the context of the additional restrictions being introduced in part 1 of the schedule to prevent such abuses. I would therefore be grateful if the Minister can address that point or write to me later with clarification about why that was not taken forward.

The Minister will be aware of concerns about the implementation of the statutory relief for distributions in part 2 of the schedule. As originally drafted, the schedule allowed for only specific costs—for example, payments made by companies to the EOT to fund the share purchase, interest on outstanding considerations, and stamp duty—to be tax deductible, a process which previously would have taken place through a non-statutory clearance request to HMRC.

That had the effect of excluding other costs that many thought would be reasonable to cover. I am glad that the Government have listened and have tabled some amendments to widen the scope of the relief, and I thank the Exchequer Secretary for his letter setting them out—it was a great read. Other costs, however, such as payments to cover the fees of professional trustees and advisers for ongoing services, unfortunately remain excluded. Moreover, HMRC has limited flexibility to provide relief for any excluded cost, now that the relief is on a statutory footing.

I thank the shadow Minister for his broad support for the changes we are making and for recognising the benefit that these measures can bring in supporting the integrity of employee ownership for the future. Where schemes become liable to abuse, it undermines support for them and their longevity. Making sure that the tax reliefs are well designed is important for making sure that this beneficial structure can continue into the future.

The shadow Minister asked a specific question about the level of restrictiveness on the relief for distributions from the company and why various decisions and conversations were had on extending the relief to other costs that may be incurred by the trustees. I can tell him that since the autumn Budget, officials have met stakeholders such as the Chartered Institute of Taxation, which raised concerns about the scope of the distributions relief as initially announced.

The CIT was concerned that that relief was too narrow to reflect the reality of how employee ownership trust acquisitions are funded. In fact, as the shadow Minister referenced, we accepted those concerns, and tabled amendments 42 and 43 to expand the scope of distributions relief to cover all other expenses reasonably incurred by the trustees in connection with their acquisition of the company. As always, I am grateful to the Chartered Institute for Taxation for the constructive engagement it has given to my officials in discussing these issues.

More broadly, the shadow Minister asked a series of questions about policy choices. Of course, the Government keep all policy under review, but it is a question of finding the right balance when calibrating policies such as this to ensure that they use tools of public policy in a targeted way to achieve the right outcome. As I made clear, we were open to feedback from the CIT when it felt that the terms of certain aspects were too restrictive, so we tabled these amendments.

Many of the key changes being introduced now were, to give the shadow Minister credit, the subject of a consultation held by the previous Government in 2023, which sought views on proposals to reform the tax regime. We are now putting those into play today. Our proposals, which were initially contained within that consultation, were met with broad support from respondents. They actually form the core of the changes that we are implementing today, notwithstanding the subsequent changes we have made.

Our relationship with the Chartered Institute of Taxation and other relevant stakeholders in this space helps to inform the policy decisions we are putting in law today, as well as any future changes to the scheme we might consider. We want to ensure that this opportunity continues into the future and that it succeeds. Making sure that we take proportionate measures to avoid tax reliefs being abused is fundamental to ensuring their longevity.

Question put and agreed to.

Clause 31 accordingly ordered to stand part of the Bill.

Schedule 6

Employee-ownership trusts

Amendments made: 38, in schedule 6, page 180, line 32, leave out

“by a person (‘P’) other than a company”.

This amendment allows for the distributions relief to be given in circumstances where the capital gains tax relief for employee ownership trusts is not available because the vendor of the shares in the company to which the employee ownership trust relates is a company (provided the other conditions for the capital gains tax relief being given are met).

Amendment 39, in schedule 6, page 181, line 2, at end insert—

“(d) the payment was made for the purposes of meeting the trustees’ acquisition costs.”

This amendment requires that the distribution that is the subject of the relief was actually made for the purposes of meeting acquisition costs.

Amendment 40, in schedule 6, page 181, line 10, after “trusts)” insert

“, but those requirements have effect for the purposes of this section as if references to ‘P’ were to the person making the disposal whether or not that person is a company”.

This amendment is consequential on Amendment 38, and secures that the capital gains tax relief requirements are capable of applying properly in circumstances where the vendor of the shares in the company to which the employee ownership trust relates is a company.

Amendment 41, in schedule 6, page 181, line 11, leave out “subsection (2)” and insert “this section”.

This amendment is consequential on Amendment 39 (and secures that “acquisition costs” is defined for the purposes of the whole section).

Amendment 42, in schedule 6, page 181, line 12, after “are” insert

“sums expended by the trustees on”.

This amendment, and Amendment 43, expand the scope of acquisition costs that can benefit from the relief.

Amendment 43, in schedule 6, page 181, leave out lines 13 to 19 and insert—

“(a) the acquisition of ordinary share capital in C by the trustees that resulted from the disposal;

(b) the repayment of any sums borrowed to fund that acquisition;

(c) the payment of interest on any such sums or in respect of any deferral of consideration for the disposal to the extent the payment is not in respect of interest exceeding a reasonable commercial rate;

(d) any valuation of C carried out in connection with the acquisition;

(e) any liability to stamp duty or stamp duty reserve tax on the acquisition;

(f) such other reasonable expenses as are directly connected with the acquisition (but this does not include any expenses incurred in connection with the ownership of the ordinary share capital once acquired).”—(James Murray.)

This amendment, and Amendment 42, expand the scope of acquisition costs that can benefit from the relief.

Schedule 6, as amended, agreed to.

Clause 32

Overseas transfer charge: pension schemes in EEA state or Gibraltar

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

With this it will be convenient to discuss clauses 33 and 34 stand part.

These clauses make changes to pension schemes established in, or administered by, persons resident in European economic area states and bring them in line the rest of the world.

Currently, individuals can transfer some or all of their UK pension savings to an overseas pension scheme, provided it is a qualifying recognised overseas pension scheme. Certain transfers to such schemes are subject to the overseas transfer charge, which is a 25% tax charge on the value of the transfer. However, provided they do not exceed the overseas transfer allowance, UK or EEA residents are excluded from this charge for transfers to qualifying overseas pension schemes in the EEA and Gibraltar. That exclusion was introduced to comply with EU fundamental freedoms that were in place at the time. As a result, some pension scheme members can benefit from double tax-free allowances by taking tax-free entitlements from both their UK scheme and their qualifying overseas pension schemes.

The changes made by clause 32 remove that exclusion from the overseas transfer charge for transfers from 30 October 2024. As a result, transfers will be subject to the overseas transfer charge unless another exclusion applies—for example, if the transfer is to a scheme established in a country where the member is a resident. That will reduce the number of tax-free transfers made and help to keep up to £1 billion of pension savings in the UK over the next five years.

Clause 33 concerns the requirements for schemes to be considered as overseas pension schemes and recognised overseas pension schemes. When the UK was a member of the EU, the requirements for schemes based in the EEA were different from those for schemes based in the rest of the world.

The changes made by clause 33 mean that a non-occupational pension scheme established in the EEA must be regulated by a pension schemes regulator in that country—provided there is such a regulator—to be considered an overseas pension scheme. If there is no such regulator, the scheme provider must be regulated for the establishment and provision of the scheme.

Furthermore, to be considered a recognised overseas pension scheme, a scheme based in the EEA must be established in a country with which the UK has either a double tax agreement that allows for exchange of information or a tax information exchange agreement.

The changes will take effect from 6 April 2025. They will align the requirements for schemes in the EEA with those for the rest of the world, and bring the requirements for non-occupational schemes in line with those for occupational ones.

Clause 34 concerns the requirements on administrators of UK registered pension schemes. Under the existing rules for such schemes, the scheme administrator can be a resident in the EEA, which can make enforcement of tax debts from the scheme difficult and costly for HMRC. The changes made by clause 34 would mean that, from 6 April 2026, all scheme administrators of UK registered pension schemes will need to be UK residents. That requirement will support HMRC’s enforcement activities, as there will be a UK resident for it to engage with.

In conclusion, the changes made by these clauses will bring the tax treatment of transfers to EEA and Gibraltar pension schemes, the conditions that EEA overseas schemes need to meet, and the requirements for EEA administrators of UK schemes in line with the rest of the world. I commend the clauses to the Committee.

As we have heard from the Minister, clause 32 reduces tax-free transfers from UK tax-relieved pensions by removing the exclusion from the overseas tax charge. The Government have also announced linked tax maintenance measures in the other clauses. Clause 33 makes changes to the conditions for overseas pension schemes and recognised overseas pension schemes established in the EEA, so that from 6 April this year, they must meet the same conditions as schemes established in the rest of the world.

Clause 34 makes changes to the requirements for pension scheme administrators for registered pension schemes so that they must be UK resident. The OTC was introduced in 2017 to prevent individuals reducing the UK tax due on their pensions by transferring them overseas, particularly to low-tax income jurisdictions, while still benefiting from UK pension tax relief. The 25% charge applies on transfers overseas, unless there is an exclusion from that charge at the point of transfer.

At the Budget in the autumn, the Government announced that they would remove the exclusion from OTC of transfers to qualified pension schemes established in the EEA and Gibraltar where the member is resident in the UK or an EEA state. Aligning the treatment to transfer made with those to the rest of the world will deal with the risk of a double tax-free benefit. The tax information and impact note states:

“Aligning the treatment of transfers to QROPS established in the EEA and Gibraltar with that of transfers to QROPS established in the rest of the world... reduces the risk of around £1 billion of UK tax-relieved pension savings being transferred overseas across the scorecard.”

Could the Minister confirm how many individuals use the current exclusion and at what cost? It would also be useful to know how much has been raised by the OTC since it was introduced in 2017.

Clause 32 brings to an end the exclusion that can currently be used to transfer to schemes in the EEA. According to the Society of Pension Professionals, in doing so, individuals can benefit from a double tax-free allowance of more than £2 million. The tax note acknowledges:

“There will be operational impacts on HMRC caused by removal of the exclusion… HMRC will need to make some changes to forms, guidance and processes to support this.”

Would the Minister provide an update on how far HMRC has got in preparing for those updates and changes?

As the Minister said, clause 34 provides that the scheme administrator must be resident in the UK. That means that, ahead of 6 April 2026, schemes will need to check whether their current scheme administrator will remain valid from this date. Again, the tax information and impact note confirms:

“Changing the rules on who can be a scheme administrator for a registered pension scheme, could mean that some individuals might not be able to pay further funds into a scheme if the pension scheme does not appoint a UK resident pension scheme administrator and is deregistered.”

How many individuals does the Minister estimate this will impact, and what guidance will HMRC provide to prevent individuals from falling foul of the rule change? Again, the Society of Pension Professionals has pointed out that it would be useful if the memorandum indicated how this could impact on schemes where all of its trustees act as the scheme administrator but some are EEA based and some are UK resident. I would be grateful if the Minister could provide some clarity on that point. As I have set out, we support this change, and I look forward to the Minister’s response to the technical questions I have raised.

I thank the shadow Minister for his questions. I hope to answer all of them and, if I do not, I promise to write to him with clarification. He asked some questions about the number of individuals. I can tell him that in 2023-24, there were 7,100 transfers to qualifying recognised overseas pension schemes, and the value of those transfers was £1.14 billion. There is an increasing risk that these transfers were being made tax free and that some of these individuals would have been benefiting from the double tax-free allowances. I note the hon. Gentleman’s support for eliminating the risk of that and not allowing people to benefit from double tax-free allowances, which is obviously the main intention of these clauses. He asked about HMRC being prepared and the operational challenges that it might face as a result of the changes. Treasury Ministers and officials work very closely with HMRC—we are in the same building—and these changes have been drafted and consulted on with HMRC, so I suspect that I can reassure him that everything is in order.

With this it will be convenient to discuss schedule 7.

The clause and schedule make changes to alternative finance tax rules for refinancing, and will promote financial inclusion for those who choose to use alternative forms of finance, for either religious or other reasons.

Alternative finance is a method of raising finance that characteristically involves the sale, purchase and renting of assets in circumstances in which conventional financing would involve lending at interest. Currently, a capital gains tax or, in some cases, corporate tax or income tax liability can arise when entering into alternative refinancing arrangements; this would not occur if conventional financing arrangements had been used.

This issue mostly affects properties that do not qualify for capital gains tax private residence relief, such as rental properties, second homes and commercial properties. The changes made by clause 35 and schedule 7 will ensure that, where qualifying alternative finance provisions are used, individuals and companies will not be liable to capital gains tax, corporation tax or income tax on the transfer of part of the beneficial interest in the asset to a financing institution in order to raise finance.

The Government are committed to the continued strength of the UK Islamic finance sector and to it providing access to alternative finance to anyone who seeks it. These measures deliver on this commitment by putting alternative and conventional financing on a level playing field in relation to their tax treatment when refinancing. As a result, those who choose to use alternative finance will receive broadly the same tax treatment as those using conventional financing arrangements. I therefore commend clause 35 and schedule 7 to the Committee.

As the Minister set out, clause 35 and schedule 7 make changes to the tax rules that apply to alternative finance. They ensure that, where an existing asset is used to raise finance using alternative finance, the tax outcome is broadly the same as it would be had conventional financing been used. The measure aims to level the playing field, and we will not oppose it.

Currently, the refinancing of a residential or commercial property using alternative finance triggers a potential capital gains tax liability on any inherent gain. By contrast, no potential capital gains tax liability arises when a conventional mortgage is used. The policy objective of this measure is one that we support and acted on in government in other areas: to ensure a level playing field across conventional and alternative forms of finance. This issue affects properties that do not qualify for capital gains tax private residence relief, such as residential properties, and will apply to refinancing entered into on or after 30 October 2024.

Once again, I echo the thanks given to the Chartered Institute of Taxation for its work and advice on scrutinising the Bill, as well as for the discussions I have had with it about the clause. The Chartered Institute of Taxation has suggested that the clause could be amended to exempt taxpayers from the liability on inherent gains that were raised on alternative finance transactions before 30 October 2024. They recognise that making such a retrospective change would be unusual. However, they suggest that a retrospective change in circumstances where there is an anomaly in the legislation that is both inconsistent with Government policy during the time the anomaly exists and adversely affects taxpayers, particularly those with protected characteristics, would meet the high bar.

I would be grateful if the Minister could say whether he has considered that point, and what approach HMRC will take to taxpayers who have already incurred a capital gains liability. Can the Minister confirm how many taxpayers using alternative financing will likely benefit from this change? I would also be grateful if he could set out what steps HMRC is taking to deal with any potential for fraud. As I say, we support this measure, and I would be grateful if the Minister would respond to my questions.

I thank the shadow Minister for his support for these clauses, and for what we seek to do through them: as he said, level the playing field between alternative finance and conventional finance. He asked whether the changes can be applied retrospectively. As he is aware, the Government do not generally apply tax changes retrospectively. The changes to alternative finance tax rules announced in the autumn Budget will apply from 30 October last year. The Government appreciate that some alternative finance customers will have already paid capital gains tax on refinancing arrangements, which is where this question arises from. However, to provide taxpayers with certainty over their tax position and to ensure that the law is applied in the way intended, the Government do not generally apply tax changes retrospectively and will not be doing so in this case.

More broadly, the shadow Minister asked whether we will be taking measures to ensure there is no fraud. It should go without saying that, as with any measures the Government take, we will ensure there is no fraud. That does not apply any more or less to this measure than it would to any other; we want to make sure there is no fraud in the way that any tax measures we take are used. That will be on our radar, as it would be with any other tax changes that we make.

In terms of the number of people affected, I know that the previous Government’s consultation on the alternative financing tax rules published in January last year, which closed in April, received 22 responses, including from alternative finance providers, representative groups, tax and legal professionals, academics, and consumers. This is, of course, a sector that we want to grow. It is one of the many sectors of the UK economy that will drive economic growth.

Question put and agreed to.

Clause 35 accordingly ordered to stand part of the Bill.

Schedule 7 agreed to.

Clause 36

Statutory neonatal care pay

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

The clause makes a consequential amendment to the shared incentive plan—SIP—to take account of the introduction of statutory neonatal care pay in the Neonatal Care (Leave and Pay) Act 2023. SIP is a tax advantage share scheme through which a company can award free shares to employees, or enable them to purchase partnership shares through salary deductions authorised by the employee. The SIP legislation requires an employer, when entering a partnership share agreement, to provide notice to inform the employee of the possible effect of salary deductions on their entitlement to social security benefits, such as statutory sick pay or statutory maternity pay.

The Neonatal Care (Leave and Pay) Act 2023 introduced provisions to enable parents whose babies require specialist care after birth to take additional paid time off work. The share incentive plan legislation must therefore be updated accordingly to reflect the introduction of statutory neonatal care pay, which may also be impacted by salary deductions. As a result of the changes made by clause 36, statutory neonatal care pay will be included in the notice that employers must provide to employees when entering partnership share agreements alongside other existing statutory payments. The clause will ensure that employees understand the potential impact of salary deductions as part of a SIP agreement on their entitlement to statutory neonatal care pay. I therefore commend the clause to the Committee.

It is a pleasure to serve under your chairmanship, Mr Mundell. As we heard from the Minister, clause 36 confirms that statutory neonatal care pay is taxable as social security income. The measure will take effect from 6 April 2025, and we support it.

It is important to understand the context in which we are discussing today’s changes; since at least 2014, there have been calls to extend parental leave and pay for parents who have premature babies and would seek neonatal care. I was pleased to stand on a manifesto in 2019 that committed to legislating to allow parents to take extended leave for neonatal care to support those new mothers and fathers who need it during the most vulnerable and stressful days of their lives.

In 2019, the previous Government launched the good work plan proposal to support families, which included proposals to do just that—introduce neonatal care leave and pay. The Government responded to that consultation, which led to the Neonatal Care (Leave and Pay) Bill, introduced as a private Member’s Bill supported by the Government. That new right, confirmed from 6 April, is expected to benefit around 60,000 new parents. It is absolutely right that these measures address some of the difficulties parents face when their baby is in neonatal care.

The impact assessment for that Bill notes that the estimated annual costs to the Exchequer of the care leave paid at statutory flat rate would be around £14 million a year on average. I wonder if the Minister has an update on whether those estimates are still correct. It also suggested that the one-off cost to businesses of familiarising themselves with the new legislation was around £4.7 million, with the resulting annual cost to business estimated at £22 million. Does the Minister have updated figures on the impact of introducing those measures?

The measure we are discussing here is technical and confirm the tax treatment, but it is important—as the Minister said—that employers make clear the implications to their staff members. Can the Minister confirm what action the Government are taking to communicate proactively about the changes? As I have set out, we support this right to neonatal care and pay, and I look forward to the Minister’s response to the specific questions.

I thank the shadow Minister for his support for this measure. If I understood his comments correctly, he asked a series of questions about the Exchequer impact and estimated costs of the measure itself, whereas the clause we are talking about here is really a consequential and relatively minor technical change to what employers have to say when they notify employees who are taking part in share incentive plans. I could try to look into those questions for him after this Committee sitting, but the information that we are discussing today—the scope of this clause—is actually much more limited than his questions suggest.

This clause is really just about employers notifying employees that if they take part in a share incentive plan, it may impact their statutory benefits, which now include neonatal care pay. It does not make any changes to neonatal care pay itself, which is the subject of separate legislation that is not impacted in any way by these clauses. I would not want anyone watching the Committee or reading Hansard to be under the misapprehension that we are in any way changing neonatal care pay, which we think is very important. This is purely about making sure that employees who are considering taking part in a share incentive plan are fully informed of what impact any salary deductions may have on their eligibility for statutory benefits.

In terms of implementing the scheme, again, we may be talking slightly at cross purposes. This clause is really about ensuring that employees are properly informed about how the share incentive plan works and the implications of having salary deductions for that, rather than neonatal care pay itself. That would be a separate question to be picked up at another time. Having neonatal care pay is an important change in legislation and we are very pleased that it is part of the landscape of statutory benefits, but this clause does not impact neonatal care pay. It is purely about informing employees of the potential impact of salary deductions when they want to engage with a share incentive plan.

I beg to move amendment 20, in clause 37, page 31, line 21, at end insert—

This amendment provides for income treated as arising to a settlor of a trust as a result of a capital payment made by the trustees to be eligible for relief to the extent that the deemed income arises from foreign income.

With this it will be convenient to discuss the following:

Clause stand part.

Clause 38 stand part.

Government amendments 44 to 54.

Schedule 8.

Clause 39 stand part.

Clauses 37 to 39 make changes to ensure that from April 2025, individuals moving to the UK who have not been tax resident in the UK for the 10 previous years will not pay tax on their foreign income or gains for the first four years of UK residence.

For context, the Government are removing the outdated concept of domiciled status from the tax system and replacing it with a new, internationally competitive, residence-based regime from 6 April this year. Currently, where a non-UK-domiciled individual moves to the UK, they are able to access the remittance basis of taxation, under which foreign income and gains are not taxable unless they are brought into the UK. Similarly, when undertaking work abroad, newly UK resident, non-UK-domiciled individuals are able to access overseas workday relief, which means that overseas employment income is not taxable unless brought into the UK. The arrangements create a disincentive to invest in the UK and are being changed as a result of these measures.

The changes made by clauses 37 and 39 will provide full tax relief on foreign income and gains for new arrivals to the UK for their first four years of tax residence, provided that they have not been UK tax resident for 10 years before their arrival. To align with the new regime, clause 38 and schedule 8 extend the period of overseas workday relief to four years, and decouple overseas workday relief from domiciled status to align it with the new foreign income and gains regime. Claims to the relief will be capped at the lower of £300,000 or 30% of an individual’s total employment income. Furthermore, the removal of the remittance basis means that it will no longer be necessary to keep income offshore to benefit from relief.

Government amendment 20 amends clause 37 to add an additional category of income to the list of eligible incomes, which will ensure that all eligible income for relief is referenced correctly. Government amendments 44 to 53 have also been tabled to schedule 8 to ensure that the relief on travel costs for qualifying newly resident employees in the UK functions as the legislation intended. Furthermore, Government amendment 54 amends schedule 8 to clarify that it is a general direction made by HMRC, rather than a public notice.

The Government are committed to ensuring that everyone who is long-term resident in the UK pays their taxes here. The new regime ensures that that will be the case, while also being more attractive than the current approach as individuals will be able to bring income and gains into the UK without attracting additional tax charges. That will encourage people to spend and invest those funds here in the UK.

I commend clauses 37 to 39 and schedule 8, along with Government amendments 20 and 44 to 54, to the Committee.

Currently, a person who is UK resident but not UK domiciled pays tax on any UK income and gains but can choose for their non-UK income and gains to be taxed on a remittance basis. Part 2 of the Bill provides for the abolition of non-domiciled status from April 2025, as the Minister points out, and for its replacement with a new regime for the taxation of foreign incomes and gains on the basis of UK residence. It therefore terminates the current tax regime for those who are resident but not domiciled in the UK, while creating a temporary repatriation facility for historical foreign income and gains to be brought into the UK over the next three years. Those changes will also be applied to trusts under the Bill and inheritance tax will also be brought into the new, residence-based system.

Although the shape of the overall package is much the same as the one the Conservatives announced in the spring Budget 2024, there are a few notable differences on the detail. Before I move through the chapters—we will spend a bit of time on that, starting with chapter 1—I will first provide some context by noting that, net of the reforms we announced in March, Labour’s adjustments to the new regime are forecast to raise £12.7 billion over the next five years. This means the measure we are considering is the second biggest revenue-raising new policy in this entire Budget. Labour’s adjustments to the temporary repatriation facility alone account for £10.6 billion.

These are significant sums, but also highly uncertain, according to the OBR. There is significant uncertainty in particular around the behavioural responses and the size of the tax base, according to the OBR’s assessment. The OBR also says it is unclear to what extent inflows to the temporary repatriation facility are additional over the long term rather than bringing forward disposals which would otherwise have attracted full rates of taxation.

When the second biggest revenue-raising new policy in a Budget is so uncertain, according to the OBR, bond market jitters come as no surprise. The emphasis Labour has placed on this policy, which makes up a massive chunk of the Bill, is compounding its conundrum ahead of the OBR’s March forecast. It exacerbates fiscal instability by adding to the risk that revenues will not be as high as anticipated. This brings us back to the same old questions we have been asking, including in the Chamber today: which taxes will Labour have to raise if there is a shortfall, or which services will they have to cut? The Minister will say that we need to wait for the OBR’s revised forecasts, but will those include an update on these highly uncertain figures?

Turning specifically to chapter 1, clauses 37 and 39 introduce the new four-year 100% relief on eligible foreign income and gains for those arriving in the UK who have not been UK tax residents in the 10 tax years immediately prior to their arrival. I acknowledge that that mostly mirrors the proposals we put forward in the March Budget 2024 but would be grateful if the Minister could none the less address the following points.

The hon. Gentleman raises the question of estimates around the level of revenue that would be generated by this important measure. Is he familiar with the work of Andy Summers and Arun Advani at LSE and the University of Warwick? Three years ago, in 2022, they modelled the effect of the 2017 tax reforms on non-doms and used that as a basis for statistical estimates for the proposal before us. While economics is a science that does to the best it can with the data available, I think there are some quite substantial measures available on the table for this proposal.

I am afraid I have not taken the time to read the academic reports, but I greatly value and emphasise the work of the OBR, which the Conservatives established in government. The new Government have taken it forward and are already seeking to bolster its impact on the Treasury’s work. If the hon. Lady will forgive me, it is the OBR’s work that I look at, and that work says that this budgetary measure is highly uncertain. As I was pointing out, that leaves questions for markets and for the Labour parliamentary party when it comes to which taxation will have to go up and what spending will be cut if that figure is not met. I will leave that to the Minister to address.

Regardless of the uncertainty, we know from the projections that, although the tax intake should peak at about £6 billion, it tails off by the end of the period to £95 million—a huge difference. By the time this spending and the costs have been worked into the system, no matter what happens in terms of uncertainty, at the end of that tax period there will be a huge amount of money that was in the system, but which now has to be filled. This policy, if implemented, will mean that there is a hole in the system at the end of the ’29 period that will need to be filled in some way.

That is a very good point—if only I had included it in my speech. That is a classic example of an intervention that adds to the content of the debate on behalf of all those who will be impacted by this measure. It is important to look at the projections over the five-year period on a year-by-year basis. It will be no surprise to the Minister that I look at them very carefully. I look at the timing of when the measures generate revenue, and when they do not. I could provide lots of examples of places where questions need to be asked of this Budget—indeed, we have been asking them today.

In claiming the 100% relief on foreign income and gains, an individual forfeits their eligibility for a whole host of allowances available to normal UK taxpayers, including the personal allowance'; yet even those who were previously taxed on a remittance basis for non-UK income and gains would still pay tax on their UK earnings, just like everybody else. That was surely an uncontroversial element of the old regime, which did not require any attention, so why have the Government taken it upon themselves to make the tax treatment of UK income less favourable as a condition of claiming the new 100% relief—which we of course welcome?

The biggest concern that has been raised with me regarding these new reliefs by the likes of the now-famous Chartered Institute of Taxation, which many of us have referred to, is the requirement to itemise and actively claim each income and gain. As far as I can recall, the technical note that we produced alongside our proposals in March 2024 did not insist on that level of specificity and detail, which is quite onerous on those applying. As a basic matter of fairness, it seems wrong that the window for making a claim is so much less than the 12 years available to HMRC to issue a compliance check, and even more so when the ability to make a consequential claim to correct an error is restricted.

The Budget claims to introduce a regime that is simpler and internationally competitive, as the Minister outlined in his speech, but those two requirements are neither of those things. I would be very grateful if the Minister can explain what exactly the benefit of doing things in that way are.

The main departure from our proposals comes with clause 38 and schedule 8, which introduce financial limitations for overseas workday relief. Is that to compensate for the additional year in which the relief will now be claimable? How significant does the Treasury expect the impact of the alteration to be? I would be grateful if the Minister can indulge me by outlining an explanation on those points.

I thank the shadow Minister for his comments. I was going to thank him for his support for these measures, but I do not know whether he explicitly said that. I think he nearly did, so I will take it as support unless he jumps in to correct me.

One of the key measures that the shadow Minister highlighted in our package of legislative measures that is the subject of clause 37 is the temporary repatriation facility, an important feature of the system we are seeking to introduce. What it does—I say this so that all Members are aware—is to introduce a reduced tax rate for remittances to encourage individuals to bring their capital to the UK and to spend and invest it here. The fact that it will raise considerable revenue is beneficial to the public finances, but it is also critical to recognise that that is a consequence of people bringing money into the UK to spend and invest here, which is something I am sure the Opposition side of the Committee will welcome as well.

To clarify, the point I am trying to make is that the Minister is rightly trying to ensure that this new regime makes the UK as competitive as possible so that assets flow into our country and we derive revenues from that. The first question I have is, why remove the personal allowance for those who seek to do so? The second is that although the point about the reporting is valid in terms of monitoring, does the Minister accept that that in itself could make the system more complicated and onerous to those who may consider moving their assets to this country? That may result in less money coming through the door, which is exactly why the OBR has rated this as highly uncertain revenue generation. That is the point that I am trying to make.

I thank the hon. Gentleman for his further comments. To address his point regarding the OBR, we seek to strengthen that institution, inspired not least by some of his colleagues’ views of the OBR having damaged trust in it under the previous Government. We wanted to make sure that that could never happen again, by strengthening its standing in law.

As the hon. Gentleman will know, when the OBR is looking at suggested tax changes, particularly when they are more complex than simply changing a rate—when they are more involved—it is a matter of course for degrees of uncertainty to be associated with that revenue from different measures.

The point about the design of the scheme is best answered by explaining that this is about striking the right balance. The hon. Gentleman asked whether the reporting requirements are too onerous. It is a balance between making sure that we minimise the burden on individuals, and of course the businesses that they work for—we want to make sure that we are not putting any onerous requirements on them to report information that is not needed—while, at the same time, making sure that we have the information to be able to evaluate the regime, to identify any avoidance risks and to ensure compliance. It is a constant tension within the tax system to make sure that burdens are as low as possible while ensuring that we have adequate information to prevent non-compliance and so on. Those are the judgments that we have to take as Ministers, but we want to take them in the way that achieves the best possible outcome.

To conclude, the overall package that we are proposing, with the foreign income and gains regime, where foreign income and gains will see no income tax for four years, is more generous—is more attractive—than the remittance basis that is currently in place, because it means that those foreign incomes and gains will not be subject to income tax.

Therefore, I hope that our proposed package is not only positive for public finances here in the UK, but serves as an attractive regime for people around the world with talent and with entrepreneurial spirit, who want to work and invest in our country and help our economy grow, and that they can see that the scheme will help them to do just that. I commend these measures to the Committee.

Amendment 20 agreed to.

Clause 37, as amended, agreed to.

Clause 38 ordered to stand part of the Bill.

Schedule 8

Relief on foreign employment income: consequential and transitional provision

Amendments made: 44, in schedule 8, page 194, line 33, leave out “qualifying” and insert “non-resident or qualifying”.

This amendment is to make parenthetical description of sections 373 and 374 of ITEPA 2003 consistent with those sections as amended by Schedule 8.

Amendment 45, in schedule 8, page 194, line 39, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee must not be a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005 to benefit from a deduction under section 341 of ITEPA 2003, as well as not being a qualifying new resident for the purposes of ITEPA 2003.

Amendment 46, in schedule 8, page 195, line 4, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee must not be a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005 to benefit from a deduction under section 342 of ITEPA 2003, as well as not being a qualifying new resident for the purposes of ITEPA 2003.

Amendment 47, in schedule 8, page 195, line 11, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee can benefit from deductions under section 355 of ITEPA 2003 where the employee is a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005, as well as where the employee is a qualifying new resident for the purposes of ITEPA 2003.

Amendment 48, in schedule 8, page 195, line 13, leave out “qualifying” and insert “non-resident or qualifying”.

This amendment is to make the parenthetical description of section 373 of ITEPA 2003 consistent with that section as amended by Schedule 8.

Amendment 49, in schedule 8, page 195, line 36, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee can benefit from deductions under section 373 of ITEPA 2003 where the employee is a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005, as well as where the employee is a qualifying new resident for the purposes of ITEPA 2003.

Amendment 50, in schedule 8, page 196, line 7, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee can benefit from deductions under section 374 of ITEPA 2003 where the employee is a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005, as well as where the employee is a qualifying new resident for the purposes of ITEPA 2003.

Amendment 51, in schedule 8, page 196, leave out line 16.

This amendment reinstates section 375 of ITEPA 2003 which defines “qualifying arrival date” for the purposes of sections 373 and 374 of ITEPA 2003.

Amendment 52, in schedule 8, page 196, line 21, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee must not be a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005 to benefit from a deduction under section 376 of ITEPA 2003, as well as not being a qualifying new resident for the purposes of ITEPA 2003.

Amendment 53, in schedule 8, page 197, line 17, at end insert—

“2A In Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (S.I. 2001/1004), in paragraph 5 (travel costs and expenses where duties performed in the United Kingdom) —

(a) in the heading, for ‘non-domiciled’ substitute ‘non-resident or qualifying new resident’;

(b) in paragraph (a), for ‘non-domiciled’ substitute ‘non-resident or qualifying new resident’.”

This amendment makes the parenthetical descriptions of sections 373 and 374 of ITEPA 2003 contained in the Social Security (Contributions) Regulations 2001 consistent with those sections as amended by Schedule 8.

Amendment 54, in schedule 8, page 198, line 32, leave out “public notice given” and insert “general direction made”.—(James Murray.)

This amendment means that the requirements of notices under new section 690D will be specified in a general direction made by HMRC rather than a public notice.

Schedule 8, as amended, agreed to.

Clause 39 ordered to stand part of the Bill.

Clause 40

Remittance basis not available after tax year 2024-25

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

With this it will be convenient to discuss the following:

Government amendments 55 to 58.

Schedule 9.

Clause 41 stand part.

Government amendment 59.

Schedule 10.

Clause 42 stand part.

Schedule 11.

These clauses and schedules also relate to the non-dom reform, which we just discussing in relation to the previous group of clauses. Clauses 40 to 42 and schedules 9 to 11 make changes to ensure that the remittance basis of taxation will no longer apply from 6 April this year. For previous users of the remittance basis, a temporary repatriation facility will be introduced, which we just discussed under the previous group of clauses. Individuals will be able to rebase their foreign assets to their value on 5 April 2017.

As we know well, the Government are removing the outdated concept of domicile status from the tax system and replacing it with a new, internationally competitive residence-based regime from April this year. Currently, where a non-UK-domiciled individual moves to the UK, they are able to access the remittance basis of taxation, under which foreign income and gains are not taxable unless they are brought to the UK. These arrangements can create a disincentive to invest in the UK.

The changes made by clause 40 and schedule 9 will remove the remittance basis of taxation from being claimed after 6 April 2025, and this clause clarifies how this legislation operates. Although no new claims can be made, foreign income and gains that have arisen through a remittance basis prior to 6 April 2025 will continue to be taxed at the prevailing tax rates if remitted to the UK on or after this date.

Clause 41 and schedule 10 will introduce the new temporary repatriation facility for individuals who had previously claimed a remittance basis, through which they will be able to designate and remit foreign income and gains that arose prior to 6 April 2025 at a reduced rate of tax. That will include unattributed foreign income and gains held within trust structures. That facility, as we discussed in relation to the previous group of clauses, will be available for a limited time period of three years from April 2025, with a rate of 12% for the first two years, rising to 15% in the final year.

Clause 42 and schedule 11 introduce a transitional arrangement for capital gains tax purposes. That will allow those who have previously claimed a remittance basis to rebase foreign assets they held on 5 April 2017 to the value at that date, when they dispose of them on or after 6 April 2025.

Government amendments 55 and 56 amend the wording of sections 56, 61G and 61R of the Income Tax (Earnings and Pensions) Act 2003 to ensure that those sections, which cover chargeability to tax in respect of deemed employment payment, no longer make reference to domicile, which has become redundant in light of the current reforms.

Government amendment 57 amends section 22 of the Finance (No. 2) Act 1931, section 154 of the Finance Act 1996 and section 174 of the Finance Act 1993 to ensure that an individual’s domicile is no longer a relevant consideration for Treasury securities issued with free of tax for residents abroad conditions. Government amendment 58 removes references to domicile in section 614 of the Income and Corporation Taxes Act 1988, relating to relief on income for investments of certain pension schemes, which have become redundant in light of the current reforms.

Finally, Government amendment 59 corrects an incorrect reference in schedule 10. Amendments have also been made to the associated explanatory notes to accurately reflect the legislation. The Government are committed to making the tax system fairer so that everyone who is long-term resident in the UK pays their taxes here.

I thank the Minister for listing the amendments before the Committee. At Davos last week, the Chancellor announced other amendments that will be made to non-dom status. It is disappointing that they have not been put before the Committee, where they can be scrutinised line by line. Why is that not the case, and when will either a Committee or the House get to see those amendments?

I am glad that the hon. Lady was paying good attention to what the Chancellor was saying at Davos. The Government will introduce, as the Chancellor set out, a number of amendments to the Finance Bill on Report, to make the temporary repatriation facility simpler to use and more attractive to those who want to benefit from it, while retaining the structure announced at the Budget.

More broadly, the new regime is more attractive than the current approach, because individuals will be able to bring income and gains into the UK without attracting an additional tax charge. That will encourage people to bring funds into the UK and spend and invest them here. That is good for the UK in terms of investment and spending coming into the UK, and in terms of the tax revenue, which we spoke about in relation to the previous set of clauses. I therefore commend clauses 40 to 42, schedules 9 to 11 and Government amendments 55 to 59 to the Committee.

As the Minister said, clause 40 and schedule 9 abolish the remittance basis of taxation for foreign income and gains from 2025-26. Clause 41 and schedule 10 create a temporary repatriation facility, or TRF, to allow former remittance-based taxpayers to bring historical foreign income and gains into the UK at a lower rate of tax. Clause 42 and schedule 11 allow for foreign assets to be rebased to their value in 2017 for capital gains tax purposes.

On the TRF, I gently point out to the Minister that, given that this is the single biggest revenue-raising part of Labour’s policy—offering a reduced rate of tax on income and gains for a limited time—the Government are not so much closing loopholes in the tax system, as the Labour party consistently said to us when it was in opposition, and as was claimed at the Budget, but creating new loopholes, by their own definition of debates past. As the OBR has stated, there is great uncertainty over how much of that revenue is truly additional. Tom Josephs, one of the three members of the OBR’s Budget Responsibility Committee, told the Treasury Committee:

“most of the revenue that we have scored in the forecast comes from what are…essentially, three years’ worth of lower tax rates…The steady-state impact of the reform is much lower.”

As is so often the case, there is a mismatch between Labour’s rhetoric and the policy reality.

The same would appear to be true for the “tweaks” to the temporary repatriation facility that the Chancellor announced on the slopes of Davos just last week. That indiscretion would be more problematic had there been any substance to the Davos announcement. We are still none the wiser, because the relevant amendments have not appeared, as my hon. Friend the Member for Gordon and Buchan said. This is the Committee stage of a Finance Bill, when we scrutinise the measures of the Government of the day, line by line. The Chancellor of the Exchequer made a conscious decision to get on a plane, fly to Davos and make the announcement—not in this House, but overseas. Then, when she had the opportunity to table amendments for the scrutiny of this Committee, she decided not to do so. I feel sorry for the Minister who has had to explain this, but it is not good enough. The Minister said that we will debate it on Report, but what stopped the Chancellor from tabling amendments today, in Committee? What was it about the line-by-line scrutiny that meant she could not do so? I would be grateful if the Minister could try to explain it, but I think the Chancellor should be explaining it to the House.

Those points aside, the main grievance, which others have raised, relates to the changes to definition of “remittance” in schedule 9. The Chartered Institute of Taxation says the changes are badly drafted, that they should not be retroactive and that, at the very least, implementation should be delayed to allow for them to be rewritten and consulted on. Otherwise, the Minister needs to explain why, under paragraph 5(8), lending foreign income to a foreign relative outside the UK, to be kept outside of the UK, should be treated as a remittance to the UK. Paragraph 5(11), which makes it so that anything that has ever been remitted to the UK without being charged to tax under previous rules should now be treated as if it was a chargeable remittance, is described by the ICAEW as “unacceptable”; it states that the provision “should be deleted”. This is a matter on which I am not particularly expert, but the ICAEW is. I would be grateful if the Minister could explain those points, or follow up in writing to me, so that I can provide these industry bodies with an explanation.

I am always happy to respond to queries from the Chartered Institute of Taxation—they were eloquently presented by the shadow Minister—and will I make sure that any responses to those queries are forthcoming.

However, I think the central point, which the shadow Minister focused on in his comments, is about the temporary repatriation facility and our changes to that. The Chancellor was very clear that these changes, which she mentioned at Davos, are designed to make the system simpler and more attractive. As he will know, Finance Bills are routinely amended both in Committee and on Report by the Government to ensure that the best possible legislation is in place before a Finance Bill gains Royal Assent.

The new temporary repatriation facility, which we are setting up under these clauses, includes rules concerning how income and gains in a trust structure are matched to beneficiaries. These are complex things and the amendments will simplify that process. To provide absolute clarity, the amendments to the temporary repatriation facility, which the Chancellor referred to, are separate from the amendments that we are debating today in Committee, which clarify specific aspects of the legislation and ensure that the policy works as intended.

Collectively, the Government amendments before the Committee ensure that the legislation works as intended, and the amendments the Chancellor mentioned at Davos are designed to make the system simpler and more attractive. If it is a win-win, where it does not have an impact on the income—

I think Opposition Members are somewhat confused. The Chancellor committed to bringing an amendment forward. I know that the Minister says it will be tabled at a later stage, but why is it so complex that it cannot be considered today, so that it can be scrutinised by the Opposition?

At the risk of repeating myself, amendments are routinely brought forward in Committee and on Report, and they are scrutinised at both stages of the Bill. The intention is to make sure that the legislation is in the best possible place by the time it gets to Third Reading and receives Royal Assent.

The focus for us is to make sure that this legislation works as well as possible. We are pragmatic about that; we want to make sure that it functions effectively. That is why we are making technical changes by way of Government amendments today, and why there will be further amendments on Report to make the system simpler and more generous, in the way that the Chancellor has set out.

This is about achieving a system that makes the tax system both fairer, in the ways that we have set out, and as simple and attractive as possible for people who want to come to the UK and bring their money to the UK, to invest and spend it here, which will help us to grow the economy.

Question put and agreed to.

Clause 40 accordingly ordered to stand part of the Bill.

Schedule 9

Income Tax and Capital Gains Tax: Remittance Basis and Domicile

Amendments made: 55, in schedule 9, page 208, line 24, leave out “sections 56(5)(a), 61G(5)(a) and 61R(5)(a)” and insert “sections 56, 61G and 61R”

This amendment together with Amendment 56 omits subsections that have become redundant in light of the ending of the relevance of domicile to income tax.

Amendment 56, in schedule 9, page 208, line 25, leave out from “payment)” to end of line 27 and insert “, omit subsections (4) and (5).”

This amendment together with Amendment 55 omits subsections that have become redundant in light of the ending of the relevance of domicile to income tax.

Amendment 57, in schedule 9, page 210, line 34, at end insert—

“Premium trust funds

21A In section 174 of FA 1993 (premium trust funds), omit subsection (6)(a).

FOTRA securities

21B (1) In section 22 of F(No.2)A 1931 (Treasury power to issue securities with a FOTRA condition)—

(a) in subsection (1)(b), for “persons who are neither domiciled nor resident in the United Kingdom” substitute “exempt persons”;

(b) after subsection (1) insert—

“(1A) For the purposes of subsection (1), the following persons are “exempt persons”—

(a) individuals who are not resident in the United Kingdom, and

(b) persons who are not individuals and are neither domiciled nor resident in the United Kingdom.”

(2) In section 154 of FA 1996 (FOTRA securities), in subsection (1)—

(a) after “applies,” insert “where the person with the beneficial ownership of the securities is not an individual and”;

(b) for “the person with beneficial ownership of the securities” substitute “that person”.

(3) Any security issued before 29th April 1996 with a FOTRA condition shall be treated in relation to times on or after 6 April 2025 as if—

(a) it were a security issued with the post-1996 FOTRA conditions (and with no other FOTRA condition), and

(b) the post-1996 FOTRA conditions had been authorised in relation to the issue of that security by virtue of section 22 of F(No.2)A 1931.

(4) In sub-paragraph (3) —

“a FOTRA condition” means a condition about exemption from taxation authorised by section 22 of F(No.2)A 1931;

“the post-1996 FOTRA conditions” means the conditions about exemption from taxation with which 7.25% Treasury Stock 2007 was first issued by virtue of section 22 of F(No.2)A 1931.”

Amendment 58, in schedule 9, page 210, line 34, at end insert—

“Reliefs in respect of income from investments etc. of certain pension schemes

21C In section 614 of the Income and Corporation Taxes Act 1988 (exemptions and reliefs in respect of income from investments etc. of certain pension schemes), in subsections (4) and (5), omit “not domiciled and”.”—(James Murray.)

This amendment removes references to domicile in provisions of the Income and Corporation Taxes Act 1988 relating to relief on income from investments of certain pension schemes.

Schedule 9, as amended, agreed to.

Clause 41 ordered to stand part of the Bill.

Schedule 10

Temporary repatriation facility

Amendment made: 59, in schedule 10, page 214, line 6, leave out paragraph (a) and insert—

“(a) Part 2 of this Schedule (exemptions etc for designated qualifying overseas capital),”—(James Murray.)

This amendment corrects an incorrect reference.

Schedule 10, as amended, agreed to.

Clause 42 ordered to stand part of the Bill.

Schedule 11 agreed to.

Clause 43

Trusts: connected amendments, transitional provision etc

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

With this it will be convenient to discuss the following:

Government amendments 60 and 61.

Schedule 12.

Clause 43 and schedule 12 make changes to ensure that the foreign income and gains arising within settlor-interested trust structures will no longer be protected from tax for non-domiciled and deemed-domiciled individuals who do not qualify for the four-year foreign income and gains regime, which we have been discussing in relation to earlier groups of clauses.

As we have established in previous debates in Committee, the Government are removing the outdated concept of domicile status from the tax system and replacing it with a new internationally competitive residence-based regime from April of this year. Currently, where a non-UK-domiciled individual settles an offshore trust, foreign income and gains arising within that trust are protected from UK tax, which remains the case even if the individual is later deemed domicile.

The changes made by clause 43 and schedule 12 will mean that from 6 April 2025, foreign income and gains arising in settlor-interested trusts will be taxed on the same basis as UK-domiciled settlors, unless the settlor is eligible for and claims the new four-year regime, regardless of when the trust was established. In addition, the trust protections will not apply to the legislation on the transfer of assets abroad. This will mean that all income arising in a settlor-interested trust or an underlying company can be taxed on a UK settlor as it arises if the transferor has the power to enjoy the income or receives capital sums from the trust or company.

Government amendments 60 and 61 ensure that the onward gifting provisions continue to operate effectively, as under the existing regime. These provisions ensure that taxpayers cannot avoid a liability to tax by diverting benefits to other persons not liable to that charge. The Government are committed to making the tax system fairer so that everyone who is a long-term resident in the UK pays their taxes here. The new regime ensures this while also being more attractive than the current approach, as individuals will be able to bring income and gains into the UK without attracting an additional tax charge. As we have debated already, this will encourage them to spend and invest these funds here in the UK. Therefore, I commend these provisions to the Committee.

Clause 43 and schedule 12 mirror the proposals that we set out in March 2024. The Minister will therefore be very pleased to hear that I have not picked up any significant murmurings of discontent on this clause, and I have no further comments.

I thank the shadow Minister and encourage him to respond in similar terms in future.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Schedule 12

Trusts: connected amendments, transitional provision etc

Amendments made: 60, in schedule 12, page 238, leave out lines 21 to 23 and insert—

“(b) the original recipient—

is liable neither to income tax nor to capital gains tax by reference to the amount or value of the original benefit, or

is a qualifying new resident for the tax year in which the original benefit is provided,”.

This amendment expands the scope of the onward gifting rule to circumstances where benefits are routed via individuals who are UK resident but who are not themselves within the scope of the benefits charge (because they are not the settlor or a close family member).

Amendment 61, in schedule 12, page 239, line 41, at end insert—

“(5A) Where the original recipient is liable neither to income tax nor to capital gains tax by reference to the amount or value of part only of the original benefit, this section applies as if the two parts of the original benefit were separate benefits.”—(James Murray.)

This amendment supplements Amendment 60.

Schedule 12, as amended, agreed to.

Clause 44

Excluded property: domicile test replaced with long-term residence test

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

With this it will be convenient to discuss the following:

Clauses 45 and 46 stand part.

Government amendments 62 to 65.

Schedule 13.

Clauses 44 to 46 and schedule 13 make changes to replace the current domicile-based system of inheritance tax with the new residence-based system. Currently, an individual’s domicile status determines whether their non-UK assets are in scope of inheritance tax. The non-domiciled individual’s personal non-UK assets are not in scope until they become deemed domiciled. However, if such assets are placed into a trust they will remain out of scope in perpetuity, even if an individual later settles in the UK.

As the Minister set out, clauses 44 to 46 and schedule 13 bring inheritance tax into the residence-based system so that it applies to non-UK assets owned outright or held in trusts. This was our stated intention in March 2024, subject to consultation.

As the Minister set out, non-UK assets will now be in scope for inheritance tax where an individual is considered a long-term resident—that is, if they have been resident in the UK for at least 10 of the last 20 tax years that immediately precede the chargeable event. This is subject to a tapered 10-year tail where a person who was resident in the UK for 20 years or more would no longer be considered long-term resident after 10 consecutive tax years of absence, whereas a person with 19 years of UK residence in the last 20 years would no longer be considered a long-term resident after nine years, and so on down to a minimum of three years for those with between 13 and 10 years of residence in the last 20 years.

As far as I am aware, there are no details of consultations which have taken place and nothing has been published on this. I am told by the likes of the Chartered Institute of Taxation that certain provisions such as the tapering of the 10-year tail were put forward during that process. I would be grateful if the Minister could confirm to the Committee the nature and extent of the consultation that has taken place by the Government to inform the creation of these clauses.

One point made by the Chartered Institute of Taxation is that there is now an anomaly whereby individuals who leave the UK before the new regime begins on 6 April are considered long-term residents when the legislation comes into effect, meaning they will incur an inheritance tax exit charge for trusts they have settled when their long-term resident status ends. As the Chartered Institute of Taxation points out, it seems unfair that a person who has already left the UK should face an exit charge due to legislation that comes into effect after their departure. I would be grateful if the Minister could explain that anomaly, which seems a little unfair. According to the Office for Budget Responsibility, these clauses raise very little revenue—I think it is in the range of £100 million a year on average—so the Government can afford to get this right. I would really appreciate a fuller explanation.

I thank the shadow Minister for his remarks. He asked about the consultation and how we developed these policies. It is worth pointing out that there has been quite extensive discussion about the legislation on non-domicile status. The Government published a technical note at the autumn Budget in October 2024 explaining the proposed changes to provide certainty ahead of the rules coming into force in April 2025. Officials have engaged extensively with interested specialists and individuals over the summer and throughout the development of this policy. Many elements, such as the tapered tail and the transitional arrangements, were proposed by representative bodies. Those representative bodies also told us that people want certainty about the proposed new rules as early as possible, which is why we published information ahead of the Finance Bill and discussed it with people who might be affected and have views to add.

I will write to the shadow Minister with details on the very specific question he asked, so he has that information for reference. The objective with this policy is to achieve our aim of making the tax system fairer while making the new regime as attractive as possible and internationally competitive to encourage people to come to the UK to invest here, work here, create jobs and wealth, and grow our economy. That is the balance that we seek to strike. We have done that in close consultation and discussion with those affected to get the legislation to the best possible place.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clauses 45 and 46 ordered to stand part of the Bill.

Schedule 13

Inheritance tax

Amendments made: 62, in schedule 13, page 266, line 35, at end insert—

“(2A) In subsection (1)—

(a) in the definition of “excluded property”, for “6 and 48” substitute “6, 48 and 48ZA”;

(b) omit the definition of “formerly domiciled resident”.”

This amendment updates the definition of “excluded property” in section 272 of the Inheritance Tax Act 1984 in consequence of the amendments made by clause 45. It also removes the now-redundant definition of “formerly domiciled resident”.

Amendment 63, in schedule 13, page 266, line 36, at beginning insert “Also”.

This amendment is consequential on Amendment 62.

Amendment 64, in schedule 13, page 267, line 25, at end insert—

“28A “(1) Schedule A1 (non-excluded overseas property) is amended as follows.

(2) In paragraph 1, for “48(3)(a)” substitute “48ZA”.

(3) In paragraph 5(2)(a), for “or 48(3)(a), (3A) or (4)” substitute “, section 48(4) or section 48ZA”.”

This amendment is consequential on clause 45 (which amends section 48 of the Inheritance Tax Act 1984 and inserts new section 48ZA).

Amendment 65, in schedule 13, page 271, line 39, at end insert—

“(1A) In construing section 267 of IHTA 1984, so far as saved by sub-paragraph (1), the repeal of the definition of “formerly domiciled resident” by paragraph 28(2A)(b) is also to be disregarded.”—(James Murray.)

This amendment clarifies that the definition of “formerly domiciled resident”, which is being removed from the Inheritance Tax Act 1984 by Amendment 62, will still be relevant in construing section 267 (which by virtue of paragraph 48 of Schedule 13 will continue to apply for certain limited purposes).

Schedule 13, as amended, agreed to.

Clause 54

Alternative finance: land in England, Scotland or Northern Ireland

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

With this it will be consider clause 55 stand part.

Clauses 54 and 55 make changes to alternative finance tax rules to put alternative and conventional financing arrangements on a broadly level playing field for annual tax on enveloped dwellings. As with the changes made in clause 35, which we debated earlier, these changes promote financial inclusion for those who choose to use alternative forms of finance, either for religious reasons or otherwise.

The annual tax on enveloped dwellings is an annual charge payable by non-natural persons, such as companies, owning UK residential property valued at more than £500,000. It is intended to discourage non-commercial enveloping of residential property in a company in order to avoid other property-related taxes, such as stamp duty land tax. The charge is not intended to apply to individuals who use alternative finance to purchase residential property.

These clauses fix an issue whereby an unintended annual tax on enveloped dwellings may arise on individuals and financial institutions when using certain alternative finance arrangements. The changes made by clause 54 would ensure that an annual tax on enveloped dwellings charge does not arise just because alternative finance has been used to purchase the property. It does that by disregarding the financial institution’s interest in the property, so that the tax liability is assessed on the basis of the client of the alternative finance arrangement.

Clause 55 fixes an error with the existing legislation and ensures that the treatment for annual tax on enveloped dwellings is the same for those entering into alternative finance arrangements in Wales as it is for those in the rest of the UK.

These clauses, alongside clause 35, which we debated earlier, deliver on the Government’s commitment to the continued strength of the UK Islamic finance sector by putting alternative and conventional financing on a broadly level playing field in their treatment for annual tax on enveloped dwellings. I therefore commend the clauses to the Committee.

As we heard from the Minister, these clauses extend existing alternative finance provisions to ensure that the ATED charge arises only where the client is a person within the scope of that charge. Clause 54 extends those provisions for land in England, Scotland or Northern Ireland and clause 55 does so for land in Wales.

As we discussed when debating clause 35, alternative financing is a method of raising finance involving the sale, purchase and renting of assets in circumstances where conventional financing would involve lending at interest. Although based on Islamic financing, it can be used by both followers and non-followers of that faith. These changes reflect the approach that we took in government, which the new Government have taken on, to ensure, where possible, a level playing field between conventional and alternative finance transactions. We support the changes.

The ATED is an annual charge payable by companies, partnerships with a company member, and collective investment vehicles that own residential property valued at more than £500,000. An enveloped dwelling is a property that is used or can be used as a residence—for example a house or flat—and that is owned through a corporate structure. The amount of ATED due is worked out through a banding system. The current chargeable amount for properties worth more than £500,000 and up to £1 million is £4,450. If a property is worth more than £20 million, the charge is £292,000. I would be grateful for any data that the Minister has on how much is raised by this tax every year, including any per-band figures. The tax information and impact note includes an annual £5 million negative impact on the Exchequer from 2025 through to 2030. Will the Minister explain what lies behind that? It would also be useful to know how many individuals using alternative finance will be impacted by these changes.

I am grateful to our friends at the Chartered Institute of Taxation for their comments on these measures. They have queried what they term the Government’s piecemeal approach to levelling the playing field for alternative finance arrangements. The CIOT has said that the current legislation does not provide for a look-through to the underlying buyer for stamp duty land tax reliefs such as charities relief, group relief and relief for acquisition by a house builder from an individual acquiring a new dwelling. The effect is that that relief is denied when alternative finance arrangements are in place. This is inconsistent with a policy of providing parity of treatment between alternative finance and conventional financing, and should also be addressed. Will the Minister confirm whether he will consider such changes and, when horizon-scanning, consider adopting a more consistent approach more widely to level the playing field? As I have set out, we support these changes. I hope that the Minister will respond, briefly, to my questions.

I thank the hon. Gentleman for his support on this matter. He asked about the receipts from ATED. The most recent figures are from 2022-23 and show £124 million of receipts from ATED overall. I hope that puts in context the small, £5 million impact of the changes that these clauses and clause 35 would introduce.

The hon. Gentleman also asked how many people are impacted by these changes. We recognise that they will benefit a small number of finance providers and individuals, and anticipate that the number of people who will benefit will be low. However, it is important to give this sector the confidence to grow and to ensure a level playing field. The shadow Minister agreed that it is important to ensure that the Islamic or alternative finance sector has that level playing field, so that it can contribute towards our country’s economic growth. These clauses, along with clause 35, seek to achieve that goal.

Question put and agreed to.

Clause 54 accordingly ordered to stand part of the Bill.

Clause 55 ordered to stand part of the Bill.

Clause 56

Testing of FMI technologies or practices

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

Clause 56 introduces a power enabling changes to be made to stamp duty and stamp duty reserve tax in relation to financial market infrastructure sandboxes. The Government are committed to developing the UK’s capital markets and, as part of that, have announced that they will take forward the private intermittent securities and capital exchange system, known as PISCES. That power will be used to provide an exemption from stamp duty and stamp duty reserve tax for PISCES transactions. This will be a carefully targeted exemption, representing a cost-effective approach to boosting growing private companies and supporting our capital markets.

PISCES is a new type of trading platform that will allow private companies to have their shares traded intermittently, supporting private companies to scale and grow, and boosting the pipeline of future initial public offerings in the UK. Using powers from the Financial Services and Markets Act 2023, which was introduced by the previous Government, this Government will establish the regulatory framework for PISCES in a financial market infrastructure sandbox. That will allow the Treasury to temporarily modify or disapply certain pieces of legislation, to support market operators to trial new or developing technologies or practices, while still achieving appropriate regulatory outcomes. The Government published a response to the PISCES consultation paper at Mansion House on 14 November 2024. As part of this, the Government will lay a statutory instrument to establish the PISCES sandbox by May this year.

Clause 56 will allow the Treasury to make stamp duty and stamp duty reserve tax changes by statutory instrument, in connection with any exercise of the time-limited FMI sandbox power in the Financial Services and Markets Act 2023. The power will be used to introduce an exemption from stamp duty and stamp duty reserve tax for PISCES transactions, as announced at the autumn Budget. That exemption will boost the attractiveness of PISCES, incentivising investors and private companies to participate, and it demonstrates the Government’s commitment to the success of PISCES as part of our wider ambitions to reinvigorate UK capital markets and to deliver growth. The Government will introduce this exemption ahead of the first PISCES trading events. The effect of the exemption will be time-limited, in line with the duration of the PISCES sandbox.

Clause 56 introduces a stamp duty and stamp duty reserve tax power in relation to financial market infra-structure sandboxes that will be used to provide an exemption for PISCES transactions. This will increase the attractiveness of PISCES and demonstrates the Government’s commitment to ensuring its success. The announcement of the exemption has been welcomed by stakeholders.

As we heard from the Minister, clause 56 introduces a power enabling the Treasury to make stamp duty and stamp duty reserve tax changes in connection with any exercise of the time-limited financial market infrastructure sandbox power. This power will be used to provide an exemption from stamp duty for PISCES transactions, and we warmly welcome these measures.

Like many other aspects of the Bill that we have discussed today, the PISCES trading platform was the previous Government’s idea, as part of our commitment to trial new or developing technologies and practices to help companies to scale and grow. While in government, we introduced significant reforms to the UK listings regime, supporting public markets and companies choosing to list in the UK. That included implementing Lord Hill’s listing review reforms. The PISCES consultation noted:

“A key challenge for private companies is that, at early stages in their growth, there are no standardised ways for shareholders to realise their gains…or to allow companies to rationalise their shareholder base by providing their early investors an exit route. Similarly, it is harder for investors to access companies that are not yet operating on public markets.”

PISCES provides a regulatory framework for the intermittent trading of private company shares on a multilateral system. I welcome the Government’s support for PISCES, which will form an important part of the UK’s offer to companies seeking to grow and list in the UK.

I would be grateful if the Minister provided an update on the impact that PISCES is expected to have by incentivising current and potential investors to buy shares on the system, bringing greater transparency and efficiency. I note that PISCES will run for an initial period of five years. Will the Minister commit to regularly updating the House on progress?

There will not be a public market-style market abuse regime; instead, the Financial Conduct Authority will be given rule-making powers over a disclosure regime. I am sure the answer will be yes, but can the Minister confirm that it is her expectation that the FCA will be properly focused on growth as it devises those rules, and that it will ensure that any new rules are proportionate to the objective that we are seeking to achieve?

The provisions of clause 56 relate specifically to exempting PISCES share transfers from stamp duty and stamp duty reserve tax, a measure that, in their response to the consultation, UK Finance and the Association for Financial Markets in Europe said

“should be strongly considered by HMT in order to help incentivise use of the platform”.

They added that it is important

“to generally reduce frictions for companies and shareholders using the platform as far as…possible,”

and the FCA rules are important in that respect.

Stamp duty and SDRT both tax transactions that transfer securities between parties in exchange for payment. In 2023, the then Government held a consultation entitled “Stamp Taxes on Shares modernisation” and proposed a mandatory single tax on securities instead of separate taxes for electronic transfers and paper instruments. It was suggested that that approach would reduce complexity, and it was widely supported in the call for evidence responses and by the working group that was established. In considering the application of both taxes, I would be grateful if the Minister provided an update on this Government’s view on the previous Government’s proposals, and whether she plans to bring forward any changes in the future.

As I have set out, we support the measures, but I would be grateful for responses to the points I have raised.

I thank the shadow Minister for the way he has approached this subject. He is correct, of course, that the previous Government consulted on PISCES in March last year. We responded to the consultation in November, alongside the Mansion House speech delivered by my right hon. Friend the Chancellor.

I am glad that there is cross-party agreement on these issues. When we were in opposition, we were very constructive in our feedback on such proposals. The shadow Minister is right that there are other reforms in this area, which came from the Lord Hill listings review and others—there were other reviews pertinent to capital markets when the Conservative party was in government.

The shadow Minister asked me a number of questions. On estimating the impact, it is really important to note that many stakeholders in the City and across financial services, not least the Investment Association, have welcomed this innovation. We know that investors and those in the market are interested in it, and I think there is great optimism about the demand for shares on PISCES. We still have to lay the statutory instrument, but the innovation is of interest to Members across the House, so I am very happy to update it on the development of PISCES.

On the shadow Minister’s questions about the FCA, we stress to the financial services regulators at every opportunity that any new rules should be proportionate, and I assure him that that is how I will approach my work with the FCA. On his final question, although I am quite new to this position, I am familiar with the demands for the simplification of stamp duty and stamp duty reserve tax—we might make it a little bit easier to say, let alone to pay. I will absolutely prioritise looking at simplification, because any kind of simplification is good for the market and helps to get things going. I am happy to look at that, but I cannot give the shadow Minister an exact answer now.

Question put and agreed to.

Clause 56 accordingly ordered to stand part of the Bill.

Clause 57

Rate bands etc for tax years 2028-29 and 2029-30

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

The clause makes changes to the inheritance tax thresholds so that they continue at the current levels in 2028-29 and 2029-30. Subject to reliefs and exemptions, inheritance tax is payable if the net value of an estate exceeds the respective thresholds for two bands: the nil-rate band, for which the threshold has been £325,000 since 2009-10, and the residence nil-rate band, for which the threshold has been £175,000 since 2021. Those thresholds rise with the consumer price index each year, but have in recent years been frozen until April 2028, by the previous Government.

The changes made by clause 57 will fix the threshold at current levels for a further two years, until April 2030. This will raise £355 million in 2029-30.

We heard earlier that the thresholds for income tax will be unfrozen as of 2028; why will the thresholds for inheritance tax not be? What impact will that have on, for example, agriculture and business property reliefs? Have the Government done an assessment of the number of additional estates that will be brought into inheritance tax beyond 2028, and how many of those will be family farms?

Broadly speaking, the reason why we have had to take a number of decisions, including some of the more difficult decisions in the Budget, is the fiscal inheritance from the previous Government. I do not need to spend time in Committee rehearsing the arguments on that, because they are well known and widely accepted. We inherited a mess from the previous Government and had to take difficult decisions at the autumn Budget to fix that problem, put the public finances back on an even footing and get public services back on their feet. Extending the freeze for inheritance tax thresholds is one of many difficult decisions we had to take.

On the number of estates that will pay inheritance tax as a result of the freeze, fixing the nil-rate bands is forecast to increase the number of tax-paying estates by 1,400 in 2028-29 and by 2,900 in 2029-30. That means the proportion of all UK deaths subject to inheritance tax will rise by 0.2 and 0.4 percentage points in ’28-29 and ’29-30 respectively, when compared with the thresholds rising with CPI. If we look at all inheritance tax measures, the latest forecast indicates that 37,700 estates will have an inheritance tax liability in ’24-25, which equates to 5.8% of all estates. That will increase to 66,600 estates in ’29-30, which equates to 9.5% of estates. I hope that helps to put the measures in context.

We have debated the specific changes to agricultural and business property reliefs several times, and I have shared with the hon. Member for Gordon and Buchan the data on that, which shows the limited impact of the freeze in terms of the number of estates affected. Most estates will not be subject to any inheritance tax because of the way we have designed the reforms to agricultural property relief and business property relief. We have had several other debates on that issue in this place.

Clause 57 fixes the inheritance tax thresholds at their current levels for a further two tax years, as the Minister set out. The nil-rate band, which remains fixed at £325,000, has been unchanged since 2009. The residence nil-rate band, which comes into play when a person leaves a property to their direct descendants when they die, was introduced at £100,000 in 2017-2018 by a Conservative Government, before being increased by £25,000 in succeeding years. In reaching the current level of £175,000, we delivered on our manifesto pledge to create an inheritance tax threshold for married couples and civil partners of up to £1 million. Since then, the legislative default is for the thresholds to be increased in line with the consumer prices index, although Parliament agreed to override that provision in the aftermath of the pandemic and to maintain the current thresholds to 2027-2028.

Although we do not oppose the measures, HMRC has reported that the Labour Government’s decision to extend the freeze on the current thresholds for a further two years will, as the Minister just set out, increase the number of tax-paying estates by 1,400 in 2028-2029 and by 2,900 in 2029-2030. It was perfectly reasonable for my hon. Friend the Member for Gordon and Buchan to ask why this Labour Government have chosen to unfreeze income tax in 2028 but not inheritance tax. I am afraid the answer we got was not good enough in the context of a Budget and a series of measures that have spent £8 billion on GB Energy, an energy company that will not produce any energy or reduce any energy bills; £7 billion on a national wealth fund, which basically means repainting the UK Infrastructure Bank building; and £9 billion on union pay deals that came with no reform and no productivity gains, but massive pay rises that, by the way, the OBR has assessed as inflationary.

Sure enough, inflation has gone up and interest rates are going to stay higher for longer. It is mortgage payers who will pay the price. That is the state of the public finances that Labour inherited. While we are on the subject, Labour inherited the fastest growth in the G7, half the deficit—[Interruption.] It is true. Labour Members do not like facts, and we know they are not good with numbers, but being the fastest growing economy in the G7 is a pretty good inheritance. On top of that, the deficit was 50%—[Interruption.] Even the Liberal Democrats are reacting.

This is a very important point. People out there want to know why these difficult decisions are being made. It is important to set out the facts on how the economy was doing when the Government came into office. There was 2% inflation; it is now higher. The deficit was half of what it was. These are important factors. It was very reasonable of my hon. Friend the Member for Gordon and Buchan to point out the dichotomy and the choices that this Government have made.

The election last year was momentous: it was a landslide election for the new Government. I note the hon. Gentleman’s glowing impression of the inheritance from the previous Government; where did it go wrong?

Where it has gone wrong is that the Labour party said pre-election that it would not increase national insurance, but has now gone back on that. Labour said it would not hit farmers and would support them, but we now have the family farm tax. We are slightly veering off topic, as Mr Mundell will point out, but I say gently to the hon. Gentleman that although I hope he retains his seat at the next election—[Laughter.] The Chancellor, who is completely out of her depth, has made his life a little more difficult. He is laughing now but I am not sure he will be in four years.

In the context of more drastic changes to inheritance tax elsewhere in the Budget, and the changes to agricultural relief in particular, my hon. Friend the Member for Gordon and Buchan asked about the Government’s assessment of how many of the estates being brought into the regime as a result of the threshold freeze are family farms. I did not quite hear an answer. On behalf of all the farmers we all represent, I say it would be good to hear the Treasury’s estimate as to how many family farms will be impacted.

Ministers frequently cite the inheritance tax thresholds in mitigation of their decision to introduce the family farm tax, but that mitigation is being steadily eroded by inflation. By the time the family farm tax comes into effect next year, Labour’s excuses will be worth even less than they are today, not least because the OBR forecasts that inflation will be higher for longer under Labour. It has already gone up in this short period. It is a shameful exercise in how not to govern, and we will be holding the Government to account going forward.

That was a fairly wide-ranging response from the shadow Minister to what is quite a straightforward clause. I could not help but notice that he began by saying that he supported what we are doing in the clause, that he understood that we needed to take tough decisions and that he will not oppose the decision to extend the freeze to inheritance tax thresholds—which the Conservatives began—for a further two years. He then proceeded to explain why he did not support it. I know the Opposition have not made their policy on many things, but it seems that even individual Members have not made up their minds.

I was pointing out the discrepancy in how, as we covered earlier, the Government are unfreezing income tax—apparently, although they are not legislating for it—but keeping the freeze on inheritance tax, which I pointed out that we did, not least for public finance reasons. Not only that, but the freeze has also been used as a mitigation against the disgraceful family farm tax that has impacted many of our farmers. Every year that inflation goes up—and it is going up under Labour—that mitigation goes away. That was the point I was trying to make, and it would be great if the Minister could address it.

The shadow Minister alleges that there is some discrepancy on this side of the Committee; I feel like there is some discrepancy within his own views. I return to the central point that he seemed to begin by saying that he welcomed our measures—that he supports them and understands why tough decisions have to be taken—but then seemed to explain why he did not support them.

The shadow Minister asked why we decided to extend the threshold freeze for inheritance tax while not, for instance, increasing income tax rates; that is a political choice. It is a difficult choice, but it is a political choice. As a Government we have made the choice to make sure that we do not raise income tax. We went into the election saying that we would not raise taxes on working people, and we have kept that pledge through our policies on income tax, employee national insurance and the rate of VAT. We made those commitments and we are honouring them.

Will the Minister consider the fact that the increase in national insurance has harmed many companies that have really struggled? An increase in the top rate of income tax or capital gains tax would at least have hit organisations that are making proper profits and proper money.

The debate is only in the context of the clause. If the Minister feels he can find a context, he can respond.

I will attempt to link that question to inheritance tax thresholds. I am thinking rapidly on my feet and struggling somewhat. With your permission, Mr Mundell, I will respond briefly to the hon. Gentleman’s point about the difficult decision—one of the toughest we took in the Budget—to increase employer national insurance contributions. We did not want to have to take that decision, but we had to take a series of difficult decisions because of the state of the public finances. We recognise that it was difficult for businesses as well. What is critical for businesses, and for the economy more widely, is having the public finances in balance, meeting our fiscal rules and ensuring that we have stability in the economy. As I said earlier, without that, the investment in growth that we are determined to pursue will not have the right foundations.

I will return to inheritance tax thresholds. I set out the number of estates that will be affected as a result of the thresholds. I do not know whether the shadow Minister is aware of the data that has been put out on the changes to agricultural property relief and business property relief. The number of estates affected that claim agricultural property relief, and agricultural property relief with business property relief, is estimated to be up to 530 in ’26-27. I have referred to that information in the Chamber several times, and it was in the letter that the Chancellor sent to the Treasury Select Committee.

To conclude, although the shadow Minister’s position is confusing, I welcome the Opposition’s support for the measures.

Ordered, That the debate be now adjourned.—(Christian Wakeford.)