Finance (No. 2) Bill (Second sitting)

Mark Garnier Excerpts

Tuesday 27th January 2026 Public Bill Committees

[The Economic Secretary to the Treasury (Lucy Rigby)]

Turning to the non-Government amendments, new clause 28 asks His Majesty’s Revenue and Customs to assess the potential benefits of establishing a digital application process for taxpayers seeking to pay capital gains tax by instalments following disposals to employee ownership trusts. The facility to pay CGT in instalments is a long-standing feature of the tax code and is well understood by both taxpayers and HMRC. The process for applying to pay by instalments is clearly set out within HMRC guidance and applications are dealt with swiftly once they have been received by HMRC. My officials have met representatives from the employee ownership sector to provide bespoke guidance on how these instalment payment provisions apply to disposals to EOTs. That engagement continues. I therefore ask the hon. Member for Maidenhead to withdraw new clause 28. In any event, it should be rejected.

New clause 29 asks the Chancellor to lay a report before the House within the next 12 months assessing the impact on small and medium-sized enterprises of the changes made under clause 35. The Government monitor the impact of all changes made to existing tax reliefs. However, publishing a report on the change introduced by clause 35 within the next 12 months would not be reasonable as the first full tax year of these changes is the tax year 2026-27, so HMRC will not have complete information to assess their impact. New clause 29 should therefore be rejected.

In addition to rejecting new clauses 28 and 29, I commend clause 35 to the Committee.

[Mark Garnier (Wyre Forest) (Con)]

Clause 35 introduces a 50% chargeable gain on shares sold by a company to an EOT. That will have a direct effect on trustees’ ability to benefit company employees. The 2014 Conservative Government introduced 100% capital gains tax relief to incentivise companies to transition to EOT models. EOTs have benefited employees by rewarding and motivating them—for example, by distributing annual tax-free bonuses of up to £3,600 a year to each employee. These tax changes would hurt employees most of all.

The Office for Budget Responsibility’s “Economic and fiscal outlook” from November 2025 forecasted that this will raise just £900 million a year on average from 2027 to 2028. However, the OBR also gave this measure a “very high” uncertainty ranking. The OBR highlighted the fact that these tax changes could have a behavioural effect: company owners would instead hold on to their shares for longer before realising gains. That means that company owners will slow the flow of shares they sell to trustees, so trustees will receive far fewer shares and, as a result, less value will be passed on to employees.

It is worth mentioning the commentary from other organisations. The Financial Times reported that tax advisers have warned against this measure and are concerned that entrepreneurs would have to cover the tax bill before they receive the proceeds of the sale. Chris Etherington of RSM UK is concerned that these changes will slow the pace of change to EOTs. The Centre for the Analysis of Taxation stated that this was a “good reform” and supports withdrawing relief entirely. This is not very popular, and there is a high uncertainty of it even raising any revenue.

[Mr Joshua Reynolds (Maidenhead) (LD)]

New clause 28 in my name would require HMRC to assess the potential benefits of establishing a digital application process for taxpayers to pay capital gains tax by instalments in respect of disposal to employee ownership trusts. The digital application process would make it far easier for taxpayers to apply to pay capital gains tax by instalments, reducing delays and administrative burden. The Government aim to make tax digital—this digital application process would be a small way to help to get there. It would help to ensure that the new relief works in practice, not just in theory, smoothing the implementation process and ensuring that taxpayers know where they stand. The digital process could help improve speed, accuracy and the consistent handling of instalment applications. Including this requirement in the Bill would promote modernisation and better taxpayer services and would signal that HMRC should consider practical delivery as well as policy. I hope the Minister will support it.

New clause 29, also tabled in my name, would require the Chancellor to lay a report before the House on the impact of clause 35 on small and medium-sized enterprises. It is fairly simple. It would explain whether clause 35 is achieving the policy goal by tracking the number of employee-ownership trust transactions compared to previous years. Not until we are in the process will we actually know what the impact will be. By tracking the numbers, we can see whether the policy the Government are undertaking has been a success. I hope the Minister will support it.

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[Lucy Rigby]

Clauses 36 to 38 make changes to the CGT anti-avoidance provisions that apply to company share exchanges and reconstructions, or the reconstruction rules, as they are known. Clause 36 revises the collective investment scheme reconstruction anti-avoidance rule to align with modern provisions with a similar purpose. Clause 37 revises the share exchanges and company reconstruction anti-avoidance rule to align with modern provisions with a similar purpose, too. Clause 38 does exactly the same. The changes made by these clauses, which take effect from Budget day, modernise the anti-avoidance rule so that it focuses directly on arrangements where the purpose, or one of the purposes, is the avoidance of tax.

The amendments introduced by the clauses will allow HMRC to address situations where arrangements have been added to otherwise commercial transactions that reduce or eliminate, rather than just defer, a tax charge, allowing them to be more effectively challenged. The rule has been updated so that it affects only the shareholders who benefit directly from the avoidance. Where HMRC agrees that there is no avoidance and the reorganisation is carried out within 60 days of the Budget announcement or if HMRC’s decision is later, the current legislation will apply. For those reasons I commend clauses 36 to 38 to the Committee.

[Mark Garnier]

On clause 36, we support tougher measures to tackle tax avoidance and close the tax gap. Under the previous Government, the tax gap of the total theoretical tax liabilities fell from 7.5% in 2005-06 to 5.3% in 2023-24. But it is crucial that legislation is not so broad to the extent that people entering into arrangements for legitimate commercial reasons face the brunt of HMRC’s enforcement powers. The scale of genuine tax avoidance as a proportion of the total tax gap is important to note.

According to HMRC, in 2023-24, avoidance behaviour as a share of the tax gap was just 1%. It was also 1% in the 2022-23 tax year and was 2% in 2021-22, 2020-21 and in 2019-20. Avoidance ranked lowest among the behaviours that contributed to the tax gap. Contrast that with 31% due to failure to take reasonable care, 15% due to error and 12% due to legal interpretation. What those behaviours have in common is they involve genuine mistakes being made, so pursuing the route set out in clauses 36 and 37 risks hurting those who enter arrangements for solely commercial purposes who may have simply made honest mistakes.

With regard to clause 37, we support tougher measures to tackle tax avoidance to close the tax gap. The methods of deferring tax for general company reconstructions and share exchanges are identical to each other’s and to that for collective investment schemes. The key difference between clauses 36 and 37 is the business practice to which the anti-avoidance measures apply when arrangements are made to avoid tax liability. Clause 36 applies to CISs, and clause 37 applies to share exchanges and company reconstructions, so the argument pertaining to the general principle and practicality of the Government’s new anti-avoidance measures also applies to those clauses.

With regard to clause 38, we support tougher measures to tackle tax avoidance to close the tax gap. The clause seeks to change the no gain/no loss rules if HMRC suspects that a transfer of business has taken place to secure a tax advantage. Those rules have been instrumental in the process of transferring a business. They are especially useful for arrangements between complex structures. No gain/no loss rules can ensure fluidity throughout the transfer process, and they stave off cash-flow issues during the process itself.

While we support tackling tax avoidance, we must also recognise the role that no gain/no loss rules play during delicate business practice. We understand that there are already safeguards in place from HMRC, such as the general anti-abuse rule. Nevertheless, we must also ensure that no business that utilises no gain/no loss for legitimate commercial purposes is penalised or hung out to dry through denied relief claims.

[Lucy Rigby]

I welcome the support that was expressed, on the whole, by the shadow Economic Secretary to the Treasury. I suspect that that support is born from a recognition that we really do need to make the changes. Recent court decisions have shown that the rules as they stand, which date back to the ’70s, do not work as intended, especially when the avoidance carried out is a smaller part of a larger commercial reconstruction.

The main effect of the rules will be to discourage the minority—and it is very much a minority—who would otherwise seek to avoid tax. It is about protecting our tax base from abuse for the benefit of the majority of taxpayers who apply the rules correctly. For those reasons, I truly believe that the clauses strengthen the protection against avoidance and will catch tax avoiders.

Question put and agreed to.

Clause 36 accordingly ordered to stand part of the Bill.

Clauses 37 and 38 ordered to stand part of the Bill.

Clause 39

Incorporation relief: requirement to claim

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

[Lucy Rigby]

Clause 39 makes a change to incorporation relief for CGT, requiring taxpayers to make a claim for relief and, as a result, improving the data available to HMRC to undertake analysis and compliance activity. Specifically, the change will mean that taxpayers need to make a claim for incorporation relief on their self-assessment return. That will apply to transfers of a business on or after 6 April 2026, and it will allow HMRC to monitor the relief and tackle avoidance more effectively, protecting revenue and helping to close the tax gap, with an additional £225 million expected to be collected over the scorecard period.

[Mark Garnier]

Clause 39 requires taxpayers to claim incorporation relief or pay CGT up front. It is key that sole traders and other eligible people understand the changes the clause makes. What concerns us is whether enough awareness has been made to affected people, and that is crucial as claiming incorporation relief has always been a passive process because it happens automatically. Soon, people who have been accustomed to this passiveness must acutely manage their relief claims. We do not want anybody who has been conducting legitimate business to suddenly be hit with an unexpected tax bill. Landlords, for example, are a common entity who claim incorporation relief. They do so by transferring their rental property portfolio into a limited company. Should a landlord undertake that process and then find themselves receiving an unexpected tax bill, that could add significant pressure on their investments, which in this case involve houses occupied by tenants.

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[Lucy Rigby]

Clauses 40 and 41 make various changes to the capital gains rules that apply to disposals of UK land and property by non-UK resident persons.

Turning first to clause 40, the changes that are being made have been in effect since Budget day and ensure that, for the purposes of the non-resident capital gains legislation, each cell in a cell company is looked at individually for the purposes of the property richness rules. That will prevent the use and ongoing exploitation of such entities to avoid the non-resident capital gains rules and will protect the tax base.

Clause 41 makes changes to the rules for non-resident capital gains in respect of double taxation treaties and the requirement to claim double taxation relief, and it also clarifies some unclear terminology. The effect of the changes made by clause 41 is that investors are not required to make or deliver a return in order to claim relief in respect of a particular disposal. In fact, the clause reduces administrative burdens by clarifying when non-resident companies and individuals have to notify HMRC of a disposal. I therefore commend these clauses to the Committee.

[Mark Garnier]

Clause 40 tackles the use by UK non-residents of protected cell companies to avoid paying non-resident capital gains tax. We agree that corporate structures should not be exploited to shelter people from paying their fair share of tax. However, we must consider the practicalities of how an audit of one cell may affect other cells and the PCC itself.

PCCs have their benefits. For example, the ringfencing of assets and liabilities can ensure that any issue with one cell does not spread to others. In that sense, PCCs can be more robust and durable. Audits, of course, are absolutely necessary to ensure compliance and legality. However, they can also prove costly and stressful for a company owner who is simultaneously running a business. Cells do not have full autonomy; much of that resides in the core of the PCC.

Different cells may behave differently from each other or have differing risk appetites—therein lies the risk. A situation where one cell is investigated by HMRC, and the audit process proves frustrating because that cell’s conduct is aggressive or inappropriate, risks tarnishing the entire PCC in the assumption that the other cells behave similarly. Subsequent audits could then become more aggressive and difficult. As I said, we support measures that tackle any exploitation of the corporate structure to avoid paying tax. The Government must ensure that the implementation of clause 40 protects innocent parties that may be affected.

Clause 41 focuses on non-UK residents, individuals and companies in collective investment vehicles who sell UK land or property connected to CIVs under double taxation treaties. Under the clause, non-UK residents in CIVs will no longer be required to register for corporation tax or claim capital gains tax relief if the double taxation treaties fully cover the gains they have made. The Government’s rationale for that is to streamline paperwork and reduce redundant filing—hurrah! I cannot begin to explain my happiness about trying to reduce red tape. It is fantastic to get rid of it where we can. Our tax code is 22,000 pages long and has 10 million words. Anything that makes that easier is hugely welcome.

[Lucy Rigby]

I welcome the “hurrah” from the shadow Minister. On his latter point about double taxation treaties, as he will know, many of the agreements were negotiated before the introduction of the non-resident capital gains regime. As treaties come up for renegotiation, as they do, or as we negotiate new treaties, we will seek to include a provision in the capital gains article to allow the UK to exercise our domestic taxing provisions in full.

On the shadow Minister’s point about cell companies and the extent to which they are used to avoid tax, there is anecdotal evidence that such structures have been created to help individuals avoid paying tax on gains made through the disposal of UK land and property, and the changes to the rules seek to cure that.

Question put and agreed to.

Clause 40 accordingly ordered to stand part of the Bill.

Clause 41 ordered to stand part of the Bill.

Clause 42

Abolition of notional tax credit on distributions received by non-UK residents

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