§ (1) It is hereby declared that in relation to a lease which has determined the person in whom the lessor's interest was vested immediately before the expiration of the term for which the lease was granted, or if the lease has determined before that time, immediately before the transaction or event in consequence of which the lease has determined is the lessor for the purpose of Section fifteen of the Finance (1909–10) Act, 1910 (in this Act referred to as the principal Act), and is the person to whom any benefit accrues from or by reason of the determination of the lease for the purpose of the other provisions of that Act relating to Reversion Duty.
§ (2) Where, whether before or after the passing of this Act, a lease of any land determines on the vesting of the lessor's interest and the lessee's interest in the same person before the expiration of the term for which the lease was granted, the amount of the Reversion Duty (if any) payable shall not be the full duty, but such an amount as would, with compound interest at the rate of four per centum per annum for the residue of the term for which the lease was granted, produce the amount of the full duty.
§ For the purposes of this provision the full duty means the duty (if any) which 1466 would have become payable if the lease had not determined until the expiration of the term for which it was granted, and if the total value of the land were at that time the same as it is when the lease actually determines.
§ (3) Sub-section (3) of Section fourteen of the principal Act shall cease to have effect and shall be deemed never to have had effect.
§ Mr. CAVE moved to leave out Section (1).
§ I have put down this Amendment mainly to draw an explanation from the Government as to what the Clause really means. I confess I do not fully understand it, and consequently I am rather suspicious about it. This Sub-section provides that for the purposes of the Reversion Duty the person who has the reversion immediately before the merger shall be deemed to be the lessor. This cannot be a mere definition' Clause, because I find in the principal Act a sufficient definition clause in Section 41, and I do not see why it is necessary to have a further definition. Sub-section (1) contains the following words: "and is the person to whom any benefit accrues." I should like to know what the meaning of that proposed enactment is. Surely there is no difficulty in knowing to whom a benefit accrues. The hon. Member for Argyllshire (Mr. Ainsworth) said the meaning is that the person who gets the benefit pays the tax. Is it really necessary to have a statute declaring who gets the benefit? Take the purchase of a lease by reversion. Who gets the benefit? If the lessor gets a good bargain he gets the benefit, but if he does not make a good bargain he gets no benefit at all. I find it very difficult to discover what the meaning and the purpose of this Section is, and that is why I have moved the omission of this Section.
§ 7.0 P.M.
§ Sir JOHN SIMON
The hon. and learned Member has asked for a few words of explanation as to why this Clause is proposed in the Revenue Bill of this year. The explanation of it, put in plain terms, will not occupy much time. The Committee will remember that under the Finance Bill of 1909–10 Reversion Duty became payable on the determination of a lease. It is no doubt a true construction of that Clause to say that the Reversion Duty becomes payable whether the lease be determined by the effluxion of time or at an earlier period, owing to the circumstance 1467 that the landlord's interest and the tenant's interest fall into the same hands. That earlier determination may arise because the landlord buys the tenant's interest, or, on the other hand, it may arise because the tenant acquires the landlord's interest. It may arise in a case where neither of the two parties to the lease acquire the interest of the other, but where the interests of both fall into the hands of a third person. Whichever of those things happen, the lease thus determined comes to an end before its natural life and expires before the period of the lease in the ordinary course of events. That being so, a Reversion Duty no doubt has to be paid. But by whom? I think the hon. and learned Member opposite (Mr. Cave) will agree with me that this is a difficult question. It is not easy on the language of the Finance Act of last year to say in that case which of the two persons concerned is the person who by the language of the Act is required to pay the duty, and it is in order to make that plain that this Clause has been proposed. The Committee will see that this is a Clause which does not effect any change in the law, but merely declares what is intended. It does not alter the law, but begins by saying "It is hereby declared." It provides that "the person in whom the lessor's interest was vested immediately before the expiration of the term for which the lease was granted is the lessor for the purpose of Section 15 of the Finance (1909–10) Act, 1910." If there has been a determination before the end of the natural term, either by surrender or merger, the person who shall pay is the person who held that interest immediately before the term came to an end. As has been pointed out a great many times on the first Clause by the Noble Lord (Lord Hugh Cecil), and others, of course, the economic effect of this will be adjusted necessarily from time to time, but, however that may be, you must make it plain which of two possible persons is to pay the duty, and it is solely for the purpose of making that plain that we propose these words should be inserted.
§ Mr. PRETYMAN
I do not think the learned Solicitor-General's explanation quite enlightens the House as to the history of this Clause. There is nothing new in this. All the points were discussed in the Debates of 1909, and the difficulty 1468 arises really because the Government use an expression in this Act which conveys a wrong impression altogether. This duty is supposed to be levied upon the person to whom the benefit accrues. In Section 13, Sub-section (1), the duty is levied upon the person to whom the benefit accrues, and then in Sub-section (2) we are told that for the purpose of this Section the value of the benefit accruing to the lessor shall be deemed to be something totally different. That is why all this trouble arises. The Government use an expression which is commonly understood, and the country and the House are informed that this is a duty levied upon and paid by the persons to whom the benefit accrues, and then they say here that the person to whom the benefit accrues is to be deemed to be somebody who may get nothing at all. That is really the position. Persons who are getting no benefit and who cannot conceivably get any benefit are being made liable to the payment of the duty. The Solicitor-General did not make that clear, but it is a fact, and he knows it. These heavy burdens are being imposed on the supposition that benefit accrues, whereas no benefit of any kind accrues at all. It certainly is a very remarkable way of drawing up an Act of Parliament, when it is necessary now to have a further clause to decide who is the lessor in the case of merger. The point I suppose is that one person is the lessor before the merger, and another person is the lessor after merger, and no lawyer has yet been able to decide which is the lessor of the instant of passing when the duty falls due. This is another example of the Serbonian bog of difficulties into which the whole land market is plunged by this kind of legislation, and I suppose as long as we continue to sit here we shall be trying to get the Government out of the mess.
§ Amendment, by leave, withdrawn.
§ Mr. St. MAUR moved, in Section (2) after the word "granted" ["before the expiration of the term for which the lease was granted"] to insert the words, "Reversion Duty shall not be levied upon such vesting of the lessor's interest and the lessee's interest in the same person, provided that such vesting of the lessor's and lessee's interests is completed by the thirty-first day of March, nineteen hundred and fifteen, after which date."
§ I have ventured to put down this Amendment in order to draw attention to one result of this Revenue Bill. The 1469 point has been raised before on one or two occasions, but I do not think it has ever received very serious attention. It is proposed to charge Reversion Duty upon the merger or the vendor of the lease prior to its natural determination. That is the intention of the Clause. Certainly, since it was first put in, when nobody understood what was to happen in these cases at all, considerable concession has been made, as we now see in this portion of the Clause, but my point is that the levying of this duty is checking the willingness of owners to sell, and will probably do so several, if not many, years to come. Some of them hope, vainly no doubt, that at some future time there may be a chance of reversing this particular scheme, but the fact remains, and it affects the West of England especially, that owners are not so willing to sell as they were. Consequently, it is really acting as a check upon leasehold enfranchisement which I think many of us wish to see come about. I think I am right in saying there was a concession made in another portion of the Finance Bill of 1909, in which a period of five years' grace was given for schemes which were then under development, or were to come under development. Surely, those persons who developed schemes years ago deserve just as much consideration as those who have only just begun to develop. Is it too much to suggest, therefore, that a period of four or five years should be allowed in which those who own property now be enabled, if they choose, to meet their tenants without paying this particular duty? It is chiefly on account of the checking of leasehold enfranchisement in that part of the country with which I am more or less intimately acquainted—it is actually a fact at present—that I have put this Amendment down, and I hope the Government may see their way to meet us in the matter.
§ Sir JOHN SIMON
The Committee, I am sure, will appreciate the fact that the hon. Gentleman has put this point very clearly, and I want to deal with it in the spirit in which it deserves to be dealt with. It is impossible to accept his suggestion for a reason which, I think, he will see. The question at the moment is not whether the Reversion Duty is a good tax or a bad tax, but it is whether it will be right to make an exception which is a special, exception for one particular kind of person, who might otherwise have to pay without giving a similar exception or favour to others who might be nearly 1470 in the same position. I would suggest that we cannot in this matter very well pick and choose. If the duty is going to be imposed, it must be imposed on some general principle, and instances of this kind, though very naturally asked to be protected by those who think a hard case arises, can hardly be provided for by a Clause of this sort. May I point out to the hon. Member that what he is proposing is that the Reversion Duty shall not be levied, supposing there is a merger, any time before 1915. Supposing a lease lapses in the ordinary course because its time has run out, and not because of a merger, he would by this proposal be making a distinction between two cases which really do not deserve such discriminating treatment. Therefore, while one appreciates his point, it is quite impossible to accept a motion which in effect would give a special favour to a special class. For those reasons I would ask my hon. Friend to consider whether he wishes to press his proposal. It does seem impossible to us to make a distinction between one man and another.
§ Mr. AGAR-ROBARTES
I have put down an Amendment very similar to that moved by my hon. Friend. I do not propose to trouble the House with it, but I should certainly like to support the Amendment which, in my opinion, is of the greatest importance, especially in the West of England. I put down my Amendment for two reasons and with two objects. My first reason and my first object was to carry into effect that pledge which has been given by the Chancellor of the Exchequer, and which has been repeated and reiterated by hon. Gentlemen on this side of the House on hundreds of platforms, that no man could or would be taxed on his own improvements. I want to show the Committee what effect this Reversion Duty, as it now stands, will have on a man who has made improvements himself. My second object in putting down an Amendment similar to this was in order to encourage what in the West of England, and especially in my Constituency, is a most important question, the question of leasehold enfranchisement. I hope on this side of the House there are several hon. Gentlemen who still believe in that old Liberal doctrine and principle that you should make the transfer of land as easy as possible instead of trying to check it, as you are doing by this Reversion Duty. There is in my Constituency the great industry of china clay, 1471 and there is a teeming population of clay workers, for whom it is difficult to find houses to live in. Therefore in many cases they obtain a lease of land, and on that land they build houses out of their hard-earned savings, or sometimes they borrow money. What happens when the lease expires? There are various leases. Some are for forty years and some for ninety-nine—I think that is the longest—and there is also a system of life leases. When the lease expires, the house which the clay worker has built out of his own savings goes back into the hands of the ground landlord. I believe that is described by the Chancellor of the Exchequer as a system of blackmail. Well, this Reversion Duty does nothing to check it. The Government, in fact, are really sharing in the spoil. If this be a system of blackmail, then they are guilty—I believe it is the legal phrase of such transactions, the Solicitor-General will contradict me if I am wrong—of compounding a felony. There are certain cases in Cornwall where landowners give the option of purchase to china clay workers, and this Reversion Duty, as it now stands, will militate against that. I hope to make my case clear to the Committee by reading correspondence which I had with one of my Constituents in December last, just before the election. The letter, which came from St. Austell—I do not propose to give the name of the writer—I will call him Augustus Reginald—was in these terms:—Dear Sir.—Will you please inform me if it is a fact that in the case of a leaseholder purchasing the free hold of his land, the landlord would have to pay the Government 10 per cent. on the value of the land, plus the value of any buildings, etc., on it. A case in point.—I have an opportunity of purchasing my freehold at 30 years' purchase, which would amount to (roughly) £150, but I have put £600 worth of buildings on the land, and I am informed that 10 per cent. will be charged on the buildings as well as on the land, consequently unless I agree to pay this 10 per cent. on the buildings the landlord will not sell. Is this the law? Your reply will oblige.—Yours truly,
§ AUGUSTUS REGINALD."
To this I replied:—
Dear Sir.—I regret to have to inform you that under the existing law, if you want to obtain the house which yon have built you will have to pay a sum of money to Mr. Lloyd George for the privilege of doing so. I congratulate you on having such a shrewd idea of the law.
I had a doubt whether I was interpreting the law correctly, and in order to make doubly sure I obtained the assistance of an hon. Gentleman now on the Front Bench. I went to him and showed him the letter from my Constituent and asked him whether he could get me first-hand information. He was kind enough to do so,
and he returned me a reply from the Inland Revenue authorities to the following effect:—
Under the original provisions of the Finance (1909–10) Act Reversion Duty would have been payable on the excess of the total values on the determination of the lease over the total value at the grant of the lease of the basis of rent reserved and payments made in consideration of the lease. But under the Proposal contained in the Revenue Bill now before the House, the sum payable will be only the present value of the duty discounted at 4 per cent. for the unexpired term of the lease. As the unexpired term of Mr. Augustus Reginald's lease appears to be a long one—(he is getting the freehold for 30 years' purchase of the ground rent)—the sum payable will be extremely small.
§ It matters not in the way of principle whether the sum is small or big. The question is that this gentleman is paying directly to the Treasury on his own improvements. We have been told over and over again by the right hon. Gentleman that that would not be the case under the Finance Act. What would be the effect if this Amendment were accepted, as I hope the Government will accept it when they have considered the matter more carefully than they appear to have done up to the present time. The effect will be that during the next five years landowners anxious to escape the Reversion Duty will offer their leaseholds for sale, and we shall see good opportunity given in many cases to workers to purchase their freeholds. In this Amendment the period is put at five years, but there is no magic in that term; I would like to see it extended to ten, fifteen, or even twenty years, so as to give opportunity and encouragement to lease-holders to enfranchise their holding. By so doing you will bring land into the market, you will unlock the door of this monopoly, and you will remedy many real grievances. Unless the Government are determined to prevent leasehold enfranchisement in this country—and I cannot think that they are—they will accept this Amendment.
§ Mr. WATSON RUTHERFORD
The point made in this Amendment is certainly one that needs very careful consideration, though I am not quite certain of the words of the Amendment itself and the exact manner in which it is proposed do not merit the reply which it received just now from the Solicitor-General as being rather impracticable. If adopted it would create at once a very serious discrepancy between the purchase of a freehold interest in four years and of one in six years, and, of course, that is a matter which would give rise to obvious unfairness. The principle of the Amendment is one which is exceedingly valuable, 1473 but before it is passed it ought to be looked carefully into. There are a large number of Members on this side of the House as well as on the other side who have been convinced, by personal experience that freehold property is a much more desirable thing in itself than leasehold property, and the principle of leasehold enfranchisement is one which we would like to see very much more largely adopted. We would like to see every possible facility given for leaseholds to be made into freeholds. There are two ways of getting rid of leasehold interests in property. One is by the landlord purchasing the leasehold interest, and the other is by the leaseholder purchasing the freehold. With regard to the landlord purchasing the leasehold interest that is frequently done in order to make a new lease and with a view to improving the property, and that is certainly an object which, I think, it ought to be the policy of every tax and every Act of Parliament to assist in bringing about.
The true principle, to my mind, of property owning—in the case of landed property in particular—is that it should be made the best use of in the interests of the general community, and if that principle were borne in mind and carried out in dealing with such matters as we have now before us it would give us a very important lead. What is the position? There are scattered all over the country a very large number of leasehold estates, and it has become the practice lately of a good many of the freeholders—the freehold landlords—to give their tenants the option of purchasing the freehold upon certain reasonable terms. The Reversion Duty in the way in which it was passed in the Finance Act, makes that transaction a taxable one, and when the leaseholder buys out his principal landlord and becomes his own landlord there is a tax which has to be paid. This Clause meets a grievance which at present exists. It provides that when that transaction takes place—that when the leaseholder buys the landlord out he shall not have to pay the full Reversion Duty, but he shall be allowed a rebate at the rate of 4 per cent. That is a valueable concession. I for one appreciate it. I think the Government are very much to be congratulated on having brought this Clause in, because it does meet an existing difficulty to some extent. The object of the Amendment is that in those particular cases where the leaseholder buys the freehold, and therefore becomes the free-holder 1474 of the property, if he carries out that transaction within the next five years he shall not be subject to any tax. In supporting the general principle of the Amendment I venture to suggest it should be made clear that whenever the leaseholder buys the freeholder out he ought not to have any tax to pay at all, either now, or in five years, or at any other period. I put it very strongly to those who are in charge of this Bill whether they cannot see their way to make an exception which would not create an injustice and would not be capable of being criticised as being inconsistent, but which would directly conduce to this most desirable course being adopted, of enabling every leaseholder who had the option to purchase to exercise that option and turn his leasehold into a freehold without that transaction being taxed. It is in the hope that the Government may see its way to extend this section by adopting the principle of this Amendment, or some similar Amendment, that I have ventured to make these observations to the Committee.
§ Mr. TUDOR WALTERS
I beg to submit to the Committee that the Amendment proposed by the hon. Member does not really improve the position, but rather the reverse, as compared with what is done in this Revenue Bill. Towards the end of a long lease of ninety-nine years within the operation of the Amendment it would be possible for the landlord to sell that lease at a very considerable profit to himself compared with the terms on which the lease was originally granted. The china clay worker having expended a considerable sum of money in building a house the landlord, in fixing the price whether the duty is payable or not, would receive a considerable portion by way of purchase of the amount expended by the china clay worker. The landlord would not be likely to sell the lease to the lessee without having regard to the fact that by that sale he would acquire considerable advantages as compared with holding the lease until its natural expiration, so that clearly, even in the case of a lease expiring in the next few years a lease granted some years ago, to which additional value has been created by the expenditure of the lessee's money, profit would accrue to the lessor. Therefore it is just as fair that it should be taxed. The point of value in this Revenue Bill is that it gives encouragement to a man to acquire the freehold of his lease in its early stage. It frequently happens that in developing an estate first 1475 the land is leasehold with the option to acquire the freehold in a certain term of years. The price is fixed when the lease is granted. It is not fixed on the basis of profit to the ground landlord, but it is simply fixed for the convenience of the lessee to enable him to enter on the land at once and put up a house thereon. If he chooses at any time within the three or five years to acquire the freehold he does that without additional payment and without profit to the landowner. But if I understand this Clause aright, even if the freehold is acquired within one, two or three years, or one, two, or three days, after the house has been erected, then presumably the lessor has made a profit in theory equal in value to that of the house that has been built, and added to the land, whereas, in point of fact, having granted an option for the enfranchisement of the lease, he has not made a penny. I suggest to the Solicitor-General, in addition to what he has done in the way of concession under this Clause, he ought to make some provision that encourages a man to acquire a freehold within a reasonable time that the land has been granted to him, because that will be of benefit to many working men. But I do not think the amendment of my hon. Friend would at all meet the case. In addition to the inequalities which, the Solicitor-General has already pointed out, I think it would place the ordinary lessee when an end came to the operation of the short-term limit in a very much worse position than this clause in the Bill proposes to place him.
§ Mr. BOYTON
I hope that the learned Solicitor-General, if he is not prepared to concede this reasonable Amendment, will introduce words which will give effect to a suggestion made in some correspondence with the Chancellor of the Exchequer and which appeared in the Press. It has reference to a very well-known way of preventing a merger in these cases, and that would be to vest the interest in a trustee. I was hoping to find that this concession had been made and that it would be quite clear in the Act that it would be a perfectly legal and everyday occurrence for a person wishing to escape a Reversion Duty to vest in a trustee the interest which is between landlord and tenant.
§ Mr. M'CURDY
I entirely agree with what my hon. Friend the Member for the Tyneside division has said as to this proposed Amendment not in any way meeting 1476 the hardships which hon. Members opposite allude to, and I merely rise to suggest that all that hardship would be met, and the interest of the Revenue fully safeguarded, if the Government could see their way to accept an Amendment which appears lower in the name of the hon. Member for the St. Austell Division (Mr. Agar-Robartes), who sits behind me, and which runs:—
"Where the interest of the lessor merges into that of the lessee no duty shall be payable on any value directly or indirectly due to the improvements made by the lessee prior to the merger of such interest."
In that form I have no doubt the Government might take proper objection to it, but if the words were altered either by prefacing on the words: "In the case of a lease which still has, say, eighty or eighty-five years to run," or alternatively by making it read: "Where the interest of the lessor merges into that of the lessee within, say, five or ten years from the date of the granting of the lease no duty shall be payable." The Amendment so altered would meet the case put by the hon. Member for the Brightside Division—the case of the Reversion Duty which, under the provision, would be claimable upon the exercise of the option of purchase within-one or two years after the lease had been granted. It would also meet another difficulty which has been suggested by an hon. Member near me—a very common case—of working men clubbing together to form a house-building club, and the land is originally vested in trustees, and the practice is, after the houses have been built, that there is a surrender by the trustees and a fresh grant of individual leases in respect to individual houses in regard to which Reversion Duty is claimable upon that transfer. Both that grievance and those voiced by hon. Members opposite would be met if that were accepted by the Government in a modified form.
§ Mr. PRETYMAN
I think the Government will agree that there is obviously a feeling on both sides of the House that something should be done here. I can quite understand, however, that before accepting any actual words consideration is necessary. It is obvious that there must be legal advice as to what the final effect of such words would be, and. I may say at once that it would meet the wishes of hon. Gentlemen on this side of the House if the Government will say that they will accept the spirit of this Amendment, and will on the Report stage 1477 introduce words to carry it out. The spirit of this Amendment I take it is a perfectly plain one, which was very ably stated by the hon. Member for the St. Austell Division. It is that there should be no tax upon the enfranchisement of leaseholders. That really is the main point. May I point out this, which is rather an important fact, that the mere alleviation of the duty does not meet the case, because a duty of this kind, even if it is reduced in size where the whole process has to be gone through, gives rise to great expense. What is required is not an Amendment which will enable enfranchisement to be carried out free of duty after going through the whole mill of inquiry, but a perfectly clear provision which will make it plain that in an ordinary enfranchisement, where under ordinary conditions in fact, apart from its being deemed to accrue, no benefit does accrue to the landlord—that in that case it shall be perfectly clear that no duty shall be payable, and the enfranchisement of such land shall take place without there being any passing through the mill at all. That is what the Committee desire, and I am sure that the right hon. Gentleman will be meeting the wishes of hon. Members on both sides if he will deal with it in that spirit.
§ Mr. HOBHOUSE
In the very practical and conciliatory speech which has just been made by the hon. Gentleman, he is really in accordance with the views of the Government. I think we are really anxious to arrive at the same thing, although we are getting at it by different routes. Our view is this, in regard to the point raised by the hon. Member for Cornwall and the hon. Member for Northampton, that there is this difficulty, that supposing we accepted the Amendment of my hon. Friend the Member for Cornwall, we might find ourselves in this position, that everybody who has got a lease which was going to expire in a short time—in a few months—and who at the expiration of that lease would have to pay a very considerable amount of fresh duty if he were allowed to merge his interest, would take a lease in somebody else's interest and in that way escape duty altogether. Supposing the principle of Reversion Duty is accepted, I am sure that that is not what the hon. Gentleman means.
§ Mr. M'CURDY
My suggestion was that the Amendment of the hon. Member for 1478 St. Austell prefaced by the words "in the case of a lease in which upwards of eighty years have still to run," would meet the practical difficulty.
§ Mr. HOBHOUSE
I am afraid I do not agree with my hon. Friend on that point. I do not think he is correct in that sense. We do want to meet, if we can, the general sense of the Committee, and we think we do that by reducing the Reversion Duty to what is practically the vanishing point. Take the extreme case of my hon. Friend. A man builds a house and lets it on lease, and then after two or three days and before any sort of reversion value is created to him he has to pay a duty. By discounting the Reversion Duty which is payable on the termination of the lease we really do bring it down to the vanishing point. The sooner that lease is transferred or merged—the sooner the interests are merged after the lease has been granted—the greater is the amount of advantage reaped by the reversioner. Supposing within ten days of the original lease the merger takes place, that means that there are eighty years or practically eighty years to run. Inasmuch as his: reversionary interest has got eighty years to run by redeeming it at once, the point of reversionary value being so far distant the man gains. May I give a concrete case of a man who has got fifty years to run. As it now stands the duty which would be payable would be £112. Under our proposals we say, discount £112 pounds duty fifty years hence, and instead of having to pay £112 his Reversion Duty is only £15. Make the point at which that reversion is still more distant—make it eighty years instead of being down to £15 it might be down to £5 or £10. The further off the Reversion Duty is payable the less is the tax laid upon the person. In this way we do get out of the difficulty, and people will avoid the Reversion Duty altogether who ought to escape payment. We, therefore, really think that by reducing the Reversion Duty to vanishing point we reduce the hardship and diminish it also to vanishing point.
§ Mr. TUDOR WALTERS
Why should you not exempt altogether a lease, say, within five years of its creation. After all, you say the working man would only have to pay £5, but why should he pay £5? The landlord has agreed to grant a lease on the terms on which the freehold can be acquired. Those terms provide the landlord with no profit. If I know anything about landlords, if they have £5 to 1479 pay they will put it on the lessee. Why, then, should the working man pay £5 for his house when no value has accrued?
§ Mr. PRETYMAN
It is a common case that leases are granted with option of purchase for ten years at a fixed sum. It is absurd to suggest that the tax can be leviable on an agreed sum like that upon which the lessor has no option, and on which he can make no possible profit, and why in such a case should there be Reversion Duty levied? Surely the responsibility lies upon the Government if they introduce a tax to see that it does not act contrary to public policy. It is their duty, surely, to so frame their tax that they do not levy it unjustly, and do not in the levying of it interfere with a process which is admittedly beneficial, namely, the enfranchisement of leaseholds.
§ Mr. HOBHOUSE
If I understand the last point of the hon. Gentleman it is this. Why in the case where there is a fixed price should you levy a duty? I imagine the fixed price contains a very considerable element of benefit.
§ Mr. PRETYMAN
Not a penny. The process is this. You have a piece of land worth £1,000, and the person who is going to purchase it to build on says: "I do not want to find the £1,000 now, though I may want to find it later, and rather than pay you the £1,000 down I prefer to take a ninety-nine years' lease on a 4 per cent. basis, and pay £40 a year ground rent, with an option of purchase at £1,000 any time during the first ten years." That is an ordinary business transaction. Surely it is contrary to the public policy that lessees should be deprived of that advantage. It is the option of the lessee from the first. The owner would probably sooner have his £1,000, particularly under the present circumstances. But it is purely and solely for the convenience of the lessee. This is a common-place of the land market. Surely it is desirable to understand these matters before legislating upon them. The Government goes into the land market just like a bull in a china shop. Now we are producing broken crockery, and the Government are trying to say that they have not broken it, but the people on their side know just as well as the people on ours that they are breaking it, and we desire that they should do as much as they can before they leave the shop, to mend the damage which they are doing.
§ Mr. W. ROCH
I fully appreciate the difficulty of the Amendment, but I should like to call the Financial Secretary's attention to a case which is very common, I am told, in South Wales with regard to building clubs, and in which very great difficulty arises. From the information which has been given to me, I understand the practice is very frequent of forming building clubs. The practice is then for the trustees of the club to take en bloc a large area of land. What happens then is that their members build various houses on the one block, and as soon as they are completed they are ready to take separate leases, and the practice is for the trustees to surrender their lease to the landlord and then get him to grant a fresh lease to each of the individual members who have built their houses. The effect of these particular cases is this. The lease, unfortunately, in many cases contains a condition that they cannot underlet or assign without consent, and the landlord will not grant a fresh lease, and they are compelled to surrender and take a fresh lease. In each of these cases, when the house is built, the unfortunate lessee who takes his lease is at once caught with the Reversion Duty on the whole house which he has just built, which is a very hard case. I do not know what the difficulties are in the way of the Amendment next down on the Paper in the name of the hon. Member (Mr. Agar-Robartes), but what I would submit is this: I cannot see that there is any real difficulty if the restriction is confined to the first five years of the original granting of the lease if in fact the new lease is one and the same transaction as the original lease, and there will be no loss of revenue or any real difficulty in that case if the first five years are excepted.
§ Mr. HOBHOUSE
The hon. Gentleman was good enough to see me the other day in regard to this particular case. It is a case which, so far as I know, only occurs in parts of Wales. I am not aware of it occurring in other parts of the country. It seems to be a real substantial grievance. I cannot undertake to accept the words of the hon. Member (Mr. Agar-Robartes), but I will take care to consider this point, and if we possibly can find words, without in any way endangering the principle, to which we attach the greatest importance, we will meet this particular hardship.
§ Mr. PERKINS
There are two points which arise to my mind out of the discussion 1481 I have considerable sympathy with the Amendment before the House, and I am not quite certain that it goes far enough. There is in my constituency a very great grievance that, if this Bill becomes law, a great many people who hope to enfranchise their leases will be prevented from doing so, and in the case particularly of Bournemouth, which is a new area, all held nearly on leases of various lengths, and sub-leases, the matter is of very great importance. It has been represented to me that the case of Bournemouth may be the case perhaps of a great many other seaside resorts which have grown up lately. I will give the instance of one estate in Bournemouth where the grievance is especially feared. There is a large building estate upon which I understand there are some eighty properties. The whole of that estate was leased by the ground landlord to one lessee, and he, in his turn, sub-leased to some seventy or eighty persons, and they, in their turn, have sub-leased again to the present lessee, so there are four parties to the transaction. Under this Bill, as it stands, it is believed, and I want to know whether there is reason for this belief, that before any one of these sub-lessees can enfranchise his property no less than three duties will have to be paid. The position is this. The first person to enfranchise will be the original lessee of the freeholder. The freeholder sells his interest to lessee A, and pays the duty. He, in his turn, settles with the person next under him, and he pays his duty, and that person in his turn settles with the lessee under him. On each one of these transactions the Reversion Duty, as we fear, will have to be paid. That is absolutely prohibitive to any transaction, and there are many pending in leasehold enfranchisementin Bournemouth. I beg the hon. Gentleman to give the matter his attention because I am sure all sides of the House are agreed as to the advantage of leasehold enfranchisement, and it will be a thousand pities if leasehold enfranchisement were stopped, as it is being stopped, by an error in the drafting of the Act. Another point arises in connection with the Clause. It is the opinion of all practical surveyors with whom I have discussed the matter that the rate of interest for discounting is too high. The rate mentioned in the Bill is 4 per cent., but for discounting, to arrive at the present value of leasehold property, 5 or 6 per cent. would be none too much, and I suggest 1482 that the rate should be reconsidered, and that, certainly in the case of inferior property, particularly cottage property, 5 per cent., or even 6 per cent., should be the table adopted. I am backed in that opinion by many surveyors of repute with whom these matters are of daily occurrence. Any attention the hon. Gentleman can give to the matter will be received most gratefully by those who are interested and who have transactions, as I have, in leasehold enfranchisement.
§ Mr. JAMES ROWLANDS
I should like to press on the Secretary to the Treasury the very great importance of the issues which have been put before the House, as one who has taken a great interest for many years in leasehold enfranchisement. This has a much wider range throughout the country than appears even by the enthusiasm of the hon. Member (Mr. Agar-Robartes) in putting the case of his constituency. It is not confined to his constituency, but it occurs in the whole of Cornwall and in the whole of Wales, and I will give a case in the South of England. I think you will find in the Devonshire leases at Eastbourne that a tenant is allowed to enfranchise any time during the first ten years of the lease. What we want to do is to protect the man who has put upon the land a house which is, with the added value, the result of his thrift and his industry. We think it is a case worthy of the consideration of the Government, and I endorse the point put by the hon. and gallant Gentleman (Mr. Pretyman), that they should promise us to carefully look into it. The impression was that the Secretary to the Treasury, in his answer to my hon. Friend (Mr. Roch), was only dealing with the case of Wales. The matter, however, has a wider scope. I gather now that his promise applies to the larger question, and thank him for having given it.
§ 8.0 P.M.
§ Mr. CAVE
I understand the matter is to be considered, and I want to press the Government to consider it from rather a wider point of view. I do not think the stress of the question is confined to cases where there is an option to purchase, nor to cases where the lease may be enfranchised in five or ten years, I wish rather to take the wider view, that there should not be a tax on leasehold enfranchisement. I entirely agree that you must not allow any such exemption to be used for the purpose of escaping duties which would be payable at the end of the term. It will 1483 not do to induce people to say "our term is running out, we are going to be subject to Reversion Duty, therefore let us buy the reversion a year or two before the end, and escape the duty altogether." It is quite easy to prevent that kind of evasion by saying that there must be a substantial time to run at the time the reversion is purchased. You may put it at ten or twenty years. I do not mind what it is, but you must use some precaution. Subject to that, I do hope that sooner or later we shall get a rule laid down that no taxation shall prevent the enfranchisement of a lease. I should like to say that I think, at all events, if you levy Reversion Duty, you should not levy it on the lessee's own improvements, whatever they are. I quite agree that there are certain deductions, but still it remains a fact that the lessor has paid duty on the lessee's improvements. I do not think that anybody would like that to be the rule. I only rose to press the point that we do not wish the consideration which the Government have promised to give to this matter to be confined to the option of buying in five years, or something of that kind, but that they should also take into consideration that there should be no tax on tenant's improvements.
§ Mr. J. M. HENDERSON
I rather agree with the hon. and learned Gentleman opposite (Mr. Cave). The object of the Reversion Tax, as I understood, was to get at the landlord at the end of the term when he comes into property in the shape of houses which he has not built. I sincerely hope that the Government will not do anything to stand in the way of leasehold enfranchisement. Twice in this House a Bill has been brought forward and obtained a Second Reading for leasehold enfranchisement. I agree that you should not limit it to five or fifteen years. If I remember rightly, the Bill provided that any tenant could enfranchise his lease by paying so many years' purchase of the ground rent. I hope to see such a Bill brought in again. I am sure it will receive much support on this side of the House and also some support on the other side. If in the first five, ten, twenty, or thirty years of a lease the landlord is forced to enfranchise at so many years' purchase of the ground rent, he gets no profit at all, and I do not see why the lessee should have to pay the duty, seeing that he is coming into nothing at all either. Of 1484 course, at the end of the term he has to pay Increment Duty, whenever he sells. I agree with the general principle that a man should be allowed to enfranchise his property without any penalty of any kind so long as so many years' ground rent may be fixed by agreement or by statute. I trust the Government will not allow anything to get into the Bill which would prevent that being done.
§ Mr. PRETYMAN
Would the Government say exactly what the pledge is? We do not understand whether the pledge given was only given in reply to the hon. Member from Wales who spoke regarding Welsh clubs, or whether it was given also in regard to leasehold enfranchisement as a whole. Can we get a clear understanding that the Government will on the Report stage introduce a Clause to meet the general wish of the House that leaseholds should be free from this duty altogether, while having regard at the same time to the principle of the Bill that, where the lessor has received the real benefit of something which he has not created, he should pay the duty.
§ Mr. HOBHOUSE
What I have undertaken to do did arise on the occasion of Wales being mentioned. I am very unwilling to pledge myself to exact words. As to the point which the hon. Gentleman raised that there shall be no form of duty charged in certain circumstances that seems to me to raise difficulties, for, while remitting duty in certain genuine cases, it might be really necessary to go through the form of charging duty in order to protect the Revenue against fraudulent intent, or at all events casual evasion. Therefore I am very unwilling to pledge myself to distinct words—not merely the words of the Clause, but as to the exact concession. What I undertake on behalf of the Government is this. We will look into these cases which have been mentioned, and will, on the Report Stage, bring up amending words, and endeavour to meet the views expressed on both sides of the House. I cannot limit myself as to how far I shall go on this point.
§ Mr. SPEAR
As this is a matter which very extensively affects many of my Constituents I desire to give my cordial support to the Amendment before the Committee. I am glad to note that the right hon. Gentleman has promised to favourably consider the matter. I am satisfied that, unless this obstacle is removed, in 1485 some parts of my Constituency, at any rate, it will seriously hinder what I am sure we all wish to see, namely, the better housing of the people. Some of us were very much opposed to the land clauses of the Budget because we believed they would hinder the making of better provision for the housing of the working classes, and I think we have here evidence that to some extent at least that has been the case. I may say, as one who on a previous occasion supported the bringing in of a leasehold enfranchisement Bill, that I do think, in the interest of the well-being of the nation, we should do whatever we can to encourage the ownership of the land and the house in which a man dwells. But we cannot always secure land whereon to build a house, and the next best thing is to be able to have a lease. Indeed, in many cases it is more convenient for the builder to proceed on a lease, because for financial reasons it would not be convenient for him to purchase the land. I may say that we owe a debt of gratitude to even speculative builders who have done so much to provide houses for the people when other sources of supply have failed.
§ Mr. W. R. PEEL
Mr. Deputy-Chairman, on a point of Order. I wish to know whether an hon. Member is entitled to call another hon. Member to order and give his name?
§ Earl WINTERTON
Is it not against the Standing Orders to call an hon. Member to order by naming him. Has not that been laid down by the Speaker?
§ The DEPUTY-CHAIRMAN
I do not think it is the duty of the Chair always to take notice of interjections which have not reached him.
§ Mr. W. R. PEEL
May I respectfully ask a ruling on the point as to whether it is in order for an hon. Member to call another hon. Member by his name? That is the point on which I should like to ask your ruling.
§ Earl WINTERTON
My hon. Friend was called upon by his name, and I would like your ruling on the point of Order as to whether it is in order to call an hon. Member by his name?
§ The DEPUTY-CHAIRMAN
I have already said I do not see that any point of Order arises here. I deprecate interjections of any kind while discussion is proceeding.
§ Mr. SPEAR
I am sure that the interruption which has taken place does not indicate that we are not anxious to see the people better housed. I would like to see every unreasonable hindrance taken out of the way of men who are prepared to acquire land at a fair price on which to build houses. Next to that we do want that the man who builds on leasehold shall be encouraged as soon as opportunity occurs to become the owner of the land. In the neighbourhood from which I come a good many houses are built on lease, and that has been a convenience to the builder for financial reasons, because he was unable to buy the land. It has been urged that the period of five years is too limited. I quite agree with that. I hope the Government will consider the matter in a broad-minded spirit and do something to remove the check on building operations which, unfortunately, this Clause and Clauses in the principal Act impose in relation to the making of better provision for the working-classes. By making this alteration we will somewhat remove that difficulty, and afford encouragement to speculators to go on building with the knowledge that they will not be penalised on their own expenditure, but rather encouraged to become freeholders when the opportunity occurs.
§ Mr. WATSON RUTHERFORD
I make no apology for saying a few additional words on this very important point. It was felt, when the Reversion Duty was passed, that it was dealing a very serious blow at leasehold enfranchisement. I am one of those who have always considered that leasehold enfranchisement is one of the most important matters with regard to the housing of the poor. The object of the tax, so far as I can ascertain, was to make the landlord disgorge a considerable amount of profit at a time when the 1487 improvements which the tenant had made fell into the landlord's hands. I wish to give an illustration of what happens. Take the case of a piece of land for which £1,000 has been given; £40 a year is the ground rent. The tenant has got a right to buy the property for a certain period of the lease on paying £1,000 down. It is not a question of the improvement as regards that particular bargain, but the lessee has got the property, and is enabled to build houses upon it because he is willing to pay the ground rent, and he has the right to become the freeholder on paying the purchase money of the property at the value at which it stood when the lease was entered into. That is the point. What happens in this case in Lancashire? Reference has been made to Bournemouth and to Wales. But all round Manchester, and all through the manufacturing districts around Liverpool, the practice is something like this: Upon this piece of land at £40 a year, worth £1,000 to start with, no fewer than twenty small houses are built at a cost of about £200 apiece. The position is that the piece of land that was worth £1,000, for which £40 a year ground rent is being paid, is now worth £5,000. That is the value of the land plus the £4,000 for the buildings. And the tenants have got the right to come and buy the landlord out for £1,000, the amount which is the value of the land. They have to pay, in case they buy, 10 per cent. duty on £4,000 the increased value of the property. That is to say £400 duty would require to be paid in the course of two or three years upon a piece of property worth £1,000. The effect of that duty falling, as it would, upon the people who have to pay for the property, is one of those things which prevent that property from ever becoming enfranchised because the transaction would not stand.
I am exceedingly grateful to the Government for being good enough to say that they will consider this question. I assure the right hon. Gentleman in charge of the Bill that we are not approaching this subject in any controversial or party spirit whatever. We have got this Reversion Duty to face. We have admitted the principle of it. Now that the Government are offering something in the way of concession upon it we must try to wipe out the difficulty arising from leasehold enfranchisement, and I beg to join the hon. Member for Kingston (Mr. Cave) who appealed to the Government that in dealing with this question they should endeavour 1488 to do so thoroughly, and should make it clear that in all cases of bonâ fide leasehold enfranchisement no duty whatever would be paid. I may add this further argument on that point. There is no use in declining and in saying that the duty will be very small, and that you have got all the rest of the years to make up that £400, and you can deduct from it at the rate of 4 per cent. for goodness knows how many years. I dare say possibly you could whittle it down to £3 or £4; but the difficulty is that if everyone of these twenty people, who have the right to buy these twenty pieces of land and become freeholders, had to go through the process, at the time of enfranchising the piece of property, of having the duty assessed, they would be discouraged by the trouble and the annoyance and the difficulty of going into the calculations. I admit it would not be £400 to pay down. It would be £400 reducible by compound interest, and all kinds of calculations. By the way, I am told, on the very best authority—I got into communication with the Liverpool Law Society and also the Surveyors on the question—that it is practically impossible to foresee these duties for the number of years owing to the way the Clause is worded. We appeal, and I believe all sides of the House appeal, to the right hon. Gentleman to make a clean sweep of the duty which stops leasehold enfranchisement. Tax the landlord, when his lease drops in, and he becomes entitled to what have been called the allotted gains. That was the object of the tax as laid down. But the object of the tax never was to stop leasehold enfranchisement, and I do think that the right hon. Gentleman ought to take his pledge a little bit further than he has done, and tell us what he will try to put in the Bill on report in order to have a clean riddance of all questions of Reversion Duty where bonâ fide enfranchisement of leasehold takes place.
§ Mr. HOBHOUSE
May I plead with the Committee. We have had nearly two hours on this Amendment. I have endeavoured to meet the views expressed. All I ask is that we may now pass on to the next Amendment.
§ Mr. BUTCHER
I wish to present one further consideration. The question of facilitating leasehold enfranchisement I take it is considered vitally important on both sides of the House. I fully recognise the spirit in which the Government approach the difficulties that have been 1489 pointed out which arise from the operation of this Bill. What I want to ask of the Financial Secretary is will he consider this question in the Clause he is going to bring up on Report from this point that whenever a lessee buys his reversion and in that way enfranchises the leasehold no Reversion Duty will be paid? I have written down a form of words, which I will hand to the right hon. Gentleman for his consideration:—
"On the purchase by a lessee whose lease has not more than five years to run of the reversion expectant on the, determination of his lease no Reversion Duty shall be payable."
They would meet all cases of hardship, and would meet, in the first place, the case referred to by the hon. Gentleman, where the lessee exercises the option of purchase, and where there are two or three lessees, each desirous of buying up his lease in turn and becoming a freeholder—a very important thing indeed. It will also meet the case which is raised by the Amendment on the Paper in the name of the Member for St. Austell. I have drafted the clause roughly for the right hon. Gentleman, and I hope he will kindly give it consideration. I do not ask him to accept the words now, but to give them consideration.
§ Mr. W. R. PEEL
I think that this is really a special case, and I am very glad to hear that the right hon. Gentleman will look into it. So far as I appreciate the point, I think the concession really goes further and cuts far deeper into the tax than perhaps is imagined. I recommend hon. Members opposite, who are very anxious to keep the tax, to look into the question, and they will see that the concession goes very much further than they think. This matter has been very largely exploited by Scotchmen and by the Lord Advocate, but Scotchmen should not interfere in English affairs more than is absolutely necessary. In Scotland they have not got the system which is carried out here, and which suits England, especially the South of England, of which I happen to be one of the representatives. We want the Lord Advocate to keep off British soil with his condemnations of our system, which we understand perhaps better than he does, and certainly it works far better than he imagines.
§ Amendment negatived.
§ Mr. CAVE
moved, in Sub-section (2) after the word "duty" ["of the full 1490 duty"], to add the words:—"Provided that if on such determination a term derived out of the original lease shall remain outstanding and by reason thereof the lessor shall not come into receipt of the rack-rent, then Reversion Duty shall be paid only on the actual value of the benefit accruing to the lessor on such determination, and Sub-section 2 of Section 13 of the principal Act shall not apply."
I think the Clause is a great improvement on the Section of the Finance Act of 1909. The Government are now getting rid of Sub-section (3) of Section 14, and are putting this Section in its place. As we understand it, its operation is this: A lease of land is granted, say at £50 a year. The lessee sublets at a profit rental, say at £70 a year. Then, when the owner buys-up the original lease, of course the sublease remains, and the sub-lease itself may have a value, as if the rack-rent is something like £80 or £90 a year. When the lease is bought by the landlord he pays duty on the basis not of the rental to his lessee, but of the rack-rental and of the total value of the land when the original lease was granted, so that he is really paying duty on something that he does not get. That is a point of practice which has been brought before me more than once by business men, and which ought to receive careful consideration.
§ Sir JOHN SIMON
I am sure the Committee are much obliged to the hon. and learned Gentleman for having put this complicated matter with such clearness. He puts it forward, from a business point of view, as a matter which requires careful consideration, and, so far, I entirely agree with him. As I understand the point it is this: The freeholder A grants a lease to B for 99 years at a rent; and B in his turn grants a sub-lease to others for a shorter period. Then, if there is an increase in annual value in a few years, when the landlord buys up the head lease, the merger is the determination of the lease for the purpose of the Reversion Duty, which is payable by the landlord. The hon. and learned Gentleman has candidly said that the Clause in which he seeks to make an Amendment effects a real improvement in the existing law, because it is based on the principle that if a man is called upon to pay the Reversion Duty owing to the lease coming to an end prematurely, he shall not pay the same sum of money that he would pay if the lease went on to its termination; he would only pay the present value calculated on a 1491 4 per cent. table. The hon. Gentleman puts the point. Supposing the determination takes place, and A, the landlord, acquires the head lessee's lease, there is outstanding the sub-lease, so that in that case the landlord gets still an encumbered freehold. The hon. and learned Gentleman suggests that something should be done to meet that ease. It is really one of importance, and the question is what is the right thing to do. If in this case the landlord is being dealt with on some unfair and disproportionate principle, then it seems to me a very proper case for providing suitable words. It is not absolutely clear to me, at any rate at this moment, that this difference will be found to exist when one takes into account some other factors in the transaction. I am not quite clear how the balance-sheet would stand, but the matter shall receive the careful consideration of the Government, and I hope the hon. Member will give us an opportunity of consulting him on the matter. I certainly shall be very glad to have the benefit of his practical experience as to the wording of this Clause. That being so, I hope the hon. and learned Gentleman will allow us to proceed. It is not a matter which calls for discussion here if it is clearly understood on cases of hardship being shown that hardship shall be met.
§ Sir JOHN SIMON
Quite right. Amendment, by leave, withdrawn. Question, "That the Clause stand part of the Bill," put, and agreed to.