§ The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)
My right honourable friend the Paymaster General (Dawn Primarolo) has made the following Written Ministerial Statement
Schedule 15 to the Finance Act 2004 provides for an income tax charge on the benefit that taxpayers gain, in certain circumstances, from the continuing enjoyment of assets they formerly owned. The primary legislation leaves some matters—the operative date for valuations, and the rates of return which apply for purposes of the schedule—to be specified in secondary legislation. They also allow regulations to provide for assets to be valued less frequently than annually. More generally, they enable regulations to make further exemptions from the charge set out in Schedule 15.
The Inland Revenue issued a consultative document on 18 August 2004 Taxation of Pre-Owned Assets: Further Consultation seeking views on the matters to be covered by regulations. There was a full and constructive response and I am grateful to all who took part. We propose to make regulations as follows, having regard to the responses received.
As proposed in our consultation document, the valuation date for a tax year will be 6 April in the year or, if later, the beginning of the "taxable period" for which the asset in question first becomes chargeable.
The "prescribed rate"
The "prescribed rate" (to be applied to the values of chattels and intangible assets when quantifying the cash value of the benefit enjoyed) will be equal to the "official rate" of interest, as defined in Section 181 of the Income Tax (Earnings and Pensions) Act 2003. The rate is currently 5 per cent.
Valuations at extended intervals
Regulations will provide, broadly, that land and chattels will be valued every five years. That is to say, a valuation will be made as prescribed in the primary legislation for the first tax year in which a particular asset becomes chargeable under Schedule 15. That valuation will also be used in any of the four succeeding years in which a charge arises.
If a charge arises in the fifth year after the first chargeable year, a fresh valuation will be made which will apply in the next four succeeding years, and so on for years 10, 15 and subsequent five-year anniversaries. If no charge arises for the fifth year, or any later five-year anniversary, no valuation need be 24WS made until the next tax year (if any) for which a charge arises, and a fresh series of five-yearly valuations will start from that year.
Valuations will be carried forward in cash terms without adjustment (e.g. for indexation against asset price inflation, as the enabling power would permit).
Schedule 15 provides exemption for any case where the former owner continues to enjoy an asset they have sold, so long as they have disposed of their whole interest in it (apart from the right of continuing enjoyment) and have done so either at arm's length or on arm's length terms.
It became clear in consultation that this was not sufficient to accommodate all open-market equity release transactions, under which homeowners often sell only a part share in their property. I made clear last autumn that regulations under Schedule 15 would cover the full range of bona fide equity-release schemes with arm's length providers, while continuing to bear down on schemes aimed at avoidance. With that in mind, we do not in general think it is appropriate to provide exemption for sales of a part interest which are made otherwise than at arm's length. If one member of a family needs to raise cash and another member of the family is willing and able to provide it, there are other and more straightforward ways of structuring this than adopting the form of an equity release transaction.
The point was, however, made in consultation that some intra-family part disposals can arise from patterns of behaviour adopted for good family or business reasons: for example, where a child moves in to care for an aged parent and acquires an equitable interest in their shared home as a corollary of that, or where younger members of a family take over the active role in a family partnership, and in doing so acquire an interest from the partners who preceded them. We also accept that any cases where asset owners have already sold a part interest within their family are unlikely, given the law as it stood at the time, to have chosen that approach primarily for tax avoidance purposes.
Bringing together these different considerations, the regulations will extend the existing exemption (described above) to all sales done at arm's length where they involve the whole or a part of the vendor's interest in their asset. They will extend this exemption to any part sale, even if not at arm's length, so long as it was made before today and on arm's length terms. This will also apply to future disposals if they are made for a consideration other than money or readily realisable assets.
Regulations to this effect will be made shortly, in time to take effect from the commencement of the new charge on 6 April. The Inland Revenue will also be publishing its guidance on the interpretation and operation of Schedule 15, it will be announced and made available at www.inlandrevenue.gov.uk