§ (1) Subject to the provisions of subsection (4) hereof if any claimant has borrowed money on mortgage from a local authority or building society, the principal whereof is repayable by periodical instalments extending over a term of not less than ten years, he shall be entitled upon proof of payment of any instalment to a deduction from the amount of income tax with which he is chargeable equal to tax at two-fifths of the standard rate on the amount of the instalment.
§ (2) The instalment referred to in subsection (1) of this section is any instalment of capital repaid by the claimant in respect of the said mortgage.
§ (3) Where an instalment is paid by a wife out of her separate estate in respect of money borrowed by her on mortgage, the same relief shall be given as if the instalment were an instalment paid by her husband in respect of money borrowed by him on mortgage and this section shall apply accordingly.
§ (4)Any reference to an amount, tax on which falls to be deducted under this section, hall in relation to an instalment in which by virtue of this section a deduction falls to be made at two-fifths of the standard rate, be construed as a reference to two-fifths of the amount of the instalment.
§ (5)This section shall only apply to a mortgage where it has been shown to the satisfaction of the Commissioners that the money borrowed has been or is being used by the borrower for the purchase or erection of a house for his occupation thereof.—[Mr. Erroll.]
§ Brought up, and read the First time.
§ Mr. F. J. Erroll (Altrincham and Sale)
I beg to move, "That the Clause be read a Second time."
This Clause seeks to provide a modest relief to those who are making payments to local authorities and to building societies in respect of house purchase. Many classes of home occupiers are receiving a benefit in the matter of their dwelling. Those who are fortunate enough 1070 to live in rent-restricted properties are getting all the benefits of the restriction of their rents to the pre-war level.
Those who live in council houses, particularly those council houses which were built after the war, are given the benefit not only of certain subsidies from the local rates but, of course, the equally important Treasury subsidy supplied for the construction of their houses—a subsidy which has recently been increased so as to offset the increased burden of the higher money rates.
There is one very important class of home occupier who is receiving no such benefit, namely, the would-be home owner. The person who wishes to own his own house has to carry personally the full extra burden of the increased money rates now in force. In fact, it is clearly becoming very difficult indeed for younger married couples to be able to afford to own a home of their own because the charges involved are so considerable. They alone will receive no relief at all from the Treasury or the Exchequer.
I feel that this new Clause, which is, as I shall explain in a little more detail, designed to give them a measure of relief, should be welcomed by my hon. Friends on this side of the House since we are such fanatical believers in a property-owning democracy. We should live up to our aims and help where possible those who are trying and are anxious to own homes of their own.
It is rightly accepted that all forms of transfer of income to capital shall only be out of income after it has been taxed. It might therefore be argued that the repayments of a local authority loan or a building society advance should be made wholly out of the taxed income. But there is one most important exception in this field—in the matter of assurance 1071 policies. One may get an important tax relief on endowment assurance policies, which is, in fact, a means of giving income relief to all those who wish to save a capital sum.
One even hears it said that the only possible way to save is by means of an assurance policy because of the tax relief which one gets on the insurance premiums. My Clause seeks to extend this relief to an extent equal only to the capital portions of the repayments of building society advances and local authority loans. That is putting a person who wishes to accumulate capital in the form of a home of his own on exactly the same footing as a person who wishes to accumulate a capital sum by means of an endowment assurance policy.
Each building society repayment comprises two elements—an interest payment and a portion of capital repayment. Although the annual sum may be the same throughout the period of the arrangement with the building society, the amount of the interest payment naturally diminishes each year as the amount of the capital repayment increases. The fact, however, that the proportions vary from year to year need not and, indeed, does not alter the principle behind my Clause, which is to make the capital portion of the repayments eligible for tax relief on the same basis as that at present allowed in respect of life assurance premiums.
The interest portion of the payment is, of course, already tax relieved by a system of accounting which will be familiar to my right hon. Friend or to my hon. Friend who is to reply. Indeed, in certain cases it already pays an individual to purchase a house by instalments by the purchase of an endowment assurance policy, which he pays over a period of years, the tax relief being sufficient to give him an advantage over purchasing the house in the ordinary direct way, by means of a building society advance or a local authority loan.
§ Mr. Erroll
I fully appreciate that, and while I do not propose to burden the House with detailed examples I have worked out my examples on the basis 1072 that a person is paying the standard rate or a lower rate. I am not proposing in this Clause to give any additional relief to a Surtax payer, for example, nor to give anyone a relief greater than he would get if he was putting aside each month or year the same sum to accumulate in an endowment assurance policy.
§ 7.0 p.m.
Mr. Glenvil Hall
But the hon. Gentleman's new Clause does not place that same limit on someone who gets this relief. There is no limit here, as there is in the case of endowment policies.
§ Mr. Erroll
I think it will be found that the limit is adequately covered by subsection (4). That was certainly my intention, and if it is not adequately covered, and if the new Clause is accepted by the Government, I am quite sure that the Government draftsmen will so modify the subsection as to take care of that point.
I want to refer in particular to subsection (5) because I am anxious that this Clause, if it is accepted, should not apply to other forms of building society transactions, namely, those covering commercial and industrial property. I intend the Clause to apply only to those who wish to own homes of their own and who seek to do so by taking advantage of local authority loans or building society advances.
I hope that my hon. Friend can accept the Clause and thus afford a real measure of relief to those who wish to own their own homes, and so help to bring about a further stage in the property-owning democracy which we all so much desire.
§ Mr. Black
I beg to second the Motion.
I want at the outset to declare an interest in as much as I am a director of a building society and also a director of an insurance company. As my hon. Friend the Member for Altrincham and Sale (Mr. Erroll) has pointed out, the purpose of this Clause is to provide an incentive for saving and for the specialised form of saving which I suggest is a type which the House ought to encourage— namely, the saving which is represented by the purchase of a home by a family for its own occupation.
It is not my intention to develop the general argument, because my hon. Friend has done that admirably already, and I 1073 want to detain the House for only a few minutes to give two examples to illustrate the extraordinary results which arise from the fact that, under the present law, this tax concession is granted in the case of insurance company premiums but no similar or corresponding concession is made in the case of capital sums repaid on building society or local authority loans.
I assume, for the purpose of the example which I shall give to the House, what I think would be agreed is a typical case—that of a man, 30 years of age, who wishes to borrow £2,000 for the purchase of a home. The current rate of interest is 4½ per cent., and he has to choose between taking out a mortgage repayable by an endowment policy on his life or, alternatively, taking out a normal building society mortgage with repayments periodically of capital and interest. In each case I assume the life of the mortgage as being 20 years.
In the case of a mortgage which is to be repaid by means of an endowment policy on the purchaser's life, in the circumstances which I have indicated the total payments that he would make over the life of the mortgage, both as interest on the principal money and the insurance premiums which he would pay, would amount to £3,615, but the Income Tax relief on the interest factor is £855 and the Income Tax relief on the insurance premium factor is £345, making a total Income Tax relief of £1,200. If that is deducted from the gross payments of £3,615 it leaves a net cost of £2,415. That is the net cost in the case of an endowment mortgage.
If he chooses the other alternative of a normal building society mortgage, repayable by instalments which include interest and capital, these are the corresponding figures. The total gross payments which he makes are £3,080—a smaller amount than in the case of the first example. The tax relief which he is allowed on the interest content of the repayments is £514, so that his net payments, after tax relief is allowed, amount to £2,566.
Thus we have what I seriously suggest is the ludicrous position that a man who forgoes the advantage of life insurance in connection with his mortgage, and who repays his mortgage over a period of 20 years by the conventional building 1074 society or local authority method, pays, over the period of 20 years, £2,566, or exactly £151 more than the man who buys the next door house through an endowment policy and who has all the advantages of the first man, with the additional advantage that if he dies after the first instalment has been paid the whole debt is cleared by means of the insurance policy and the property, unencumbered and freed from debt, remains for the benefit of his wife and family.
§ Mr. Houghton
In that case, perhaps the hon. Gentleman will tell us how his building society gets any business.
§ Mr. Black
I think it would be wholly inappropriate to endeavour to answer that intervention, although I should be very glad to see the hon. Member, for Sowerby (Mr. Houghton) on another occasion elsewhere, when I will endeavour to enlighten him about it.
Quite seriously, if I may return to the argument which I was developing—and I am about to conclude—it is ludicrous that the operation of the present system, whereby a tax concession is granted in the case of the endowment mortgage on the life insurance premiums, but no tax concession is granted in the case of the repayments of capital on a normal mortgage, should bring about the result that the man who insures his life, in connection with the purchase of his home, has the benefit of the life insurance and, in addition, pays a very much smaller sum in order to have that benefit.
§ Mr. Sydney Silverman (Nelson and Colne)
I think the hon. Gentleman is making a very attractive case indeed, but there are two questions I want to ask. Could not the matter be put right without legislation if only the people who borrowed money from building societies took out endowment policies as well? Secondly, and while I am on my feet, if the Government were to accept his proposal would not the effect be to discourage people from taking out endowment policies?
§ Mr. Black
The answer, quite briefly, is that there are a great many people who, on account of age or ill-health, cannot secure life cover, so that the penalty for their ill-health is the fact that not only can they not get life cover, and not only do they forgo the benefit of the life cover, 1075 but, in the illustration I have given, it costs them £151 more to buy their home than in the case of the other man.
§ Mr. Silverman
The hon. Gentleman took as his illustration a young man aged 30. Age and infirmity would not prevent him from paying life cover.
§ Mr. Black
There are a great many men of 30 who cannot get cover for life purposes because of some incapacity, perhaps arising from war service. I submit that the main theme which I am putting before the House remains unshaken, that it is ludicrous that there should be this disadvantage to a man who buys his home by one method which does not pertain in the case of a similar and corresponding transaction carried out by means of an endowment policy. The only way in which this obvious justice— as I contend it is—can be rectified is by acceptance of the formula contained in the new Clause, or some similar formula —namely, to extend to the case of the other type of mortgage the tax concession which is extended in the case of the endowment mortgage.
§ Mr. Boyd-Carpenter
My hon. Friend the Member for Altrincham and Sale (Mr. Erroll) put down this proposal on the Committee stage when he did not have the good fortune, on which I congratulate him today, of having to find favour in the eyes of the Chair. He has also been good enough to write to my right hon. Friend the Chancellor and give him the advantage of his views upon this somewhat difficult subject. Thanks, therefore, to that concatenation of events, my right hon. Friend has had rather more opportunity than is sometimes the case with these Clauses to go carefully into the merits of what I think most hon. Members will agree is a matter that is not wholly free from difficulty.
With the general purposes of this Clause I hope I do not need to say that I am wholly in accord. It is desirable, on the highest social grounds, that no undue difficulty should be put in the way of those who desire to have a house of their own. That is a purpose which certainly appeals to hon. Members on this side of the House. However, the matter goes a good deal further than that, and some of the proposals of my hon. Friends give rise to considerable practical difficulties.
1076 The hon. Member for Wimbledon (Mr. Black), in an agreeable speech, drew an analogy between the position in respect of mortgages and in respect of life insurance premiums. It is the case I think, from a study of the terms of this Clause, that my hon. Friends have attempted to model the draft of it upon, mutatis mutandis, the life insurance provisions.
It is true that there is some degree of anomaly where an attempt is made to purchase a house through the machinery of life insurance. However, I do not know that the analogy between the two forms of saving is, in general, quite as close as my hon. Friends were suggesting. In the first place, there is the fact that the life insurance provision is a very old one. I am inclined to think 'that in strict principle it is probably anomalous to attach a particular kind of tax concession to a particular kind of saving. Be that as it may, it is the fact that insurance in this context is a permanent form of saving. Indeed, there must be, to attract the concession at all, some provision in the policy for a payment to be made on death.
Therefore, though it may sound paradoxical to describe as permanent something which comes to an end with the end of life, there is an element of long duration about life insurance which is quite clearly not to the same extent true in the case of mortgage payments. Though I am not inclined to argue that there is not, where life insurance machinery is used to finance the purchase of a house, some degree of anomaly, I do not think that my hon. Friends can push the argument quite as far as they did, and suggest that there is a very strong case for putting those two forms of saving upon all fours.
Now I come to the precise provisions of the Clause. My hon. Friends have attempted, most laudably, by subsection (5) to prevent this concession going beyond the actual cost of purchase of a house. But I am advised that, neither as they have drafted it nor as it would be possible with expert assistance to draft it, is it possible along these lines so to limit the advantage of the concession which they seek to give. In practice, it would not be easy to ensure that a taxpayer did not borrow more than he really needed for the purpose of the construction of a house. He would be 1077 able then to use the balance for the purchase of such agreeable items as, shall we say, a television set.
Both this evening, and in the letter which my hon. Friend the Member for Altrincham and Sale was good enough to send to my right hon. Friend, an argument was adduced in favour of this concession on the grounds of the increased subsidies in respect of council houses. Again, that is a superficially attractive argument, but if one looks at it, it is subject to two or three difficulties. In the first place, if this House decides that there is to be a subsidy to private house building, it would not be in accordance with what is well understood tax practice to give it by way of Income Tax concession. If there were to be any question of such subsidy it would be much more in accordance with the general custom followed in this country to make it an overt subsidy.
However, it is subject to far more difficulty than that. This would assist the person who buys a house on mortgage, but it would give no assistance to the equally admirable citizen who buys a house by realising his savings. I am glad to say that there are still quite a number in this country who save through National Savings, or in any other way, a sufficient sum to buy a house. Those persons would receive no advantage.
Therefore, in remedying some degree of anomaly to which my hon. Friend has referred, as between those who buy on mortgage and those who buy through the machinery of life insurance, he would be creating an even more severe anomaly between those who buy on mortgage and those who first save and then buy a house out of the produce of their savings. That is a serious difficulty and it would create a serious discrimination between citizens who buy their houses. It would of itself be an overwhelming objection to the proposal in this Clause.
Then there is the effect that this Clause would have in the present economic situation. Clearly, it would have an inflationary tendency. We would be giving a very strong inducement to almost anybody who contemplated buying a house to borrow for that purpose the maximum sum he could get on mortgage instead of using other forms of finance. That is inflationary in tendency, and the House 1078 will appreciate that in our present economic situation it is a serious objection.
§ Mr. Boyd-Carpenter
Because it involves the release of some degree of further credit and, therefore, the manufacture of further purchasing power. I do not wish to enter into an argument with the hon. Gentleman on this point, nor indeed to encourage the realisation of savings, but the manufacture of additional purchasing power in this way is distinctly more inflationary in effect than the realisation of savings.
For that reason it would be difficult to take the action recommended in this Clause at a time when my right hon. Friend is anxious not to set loose excessive inflationary pressures. I am sure hon. Members on both sides of the House will realise that that is an aspect of the matter which again requires to be approached with a good deal of caution.
I cannot tell the House what would be the cost of this new Clause. It is clear from what I have submitted that the effect of its adoption would be greatly to increase new mortgage business. To the extent that the process developed, so much greater would be the loss in taxation. However, I can tell the House that the amount involved would be substantial. That is a further difficulty which we see in accepting this proposal. In the present economic position of the country, it is, unfortunately, the gloomy duty of the Member to whom it falls to speak from this Box to urge again and again upon the House the undesirability of proposals which, however attractive in themselves, would involve appreciable reductions in revenue.
Therefore, although, I hope, I do not need to emphasise my sympathy and the sympathy of the Government with the intentions which have moved my hon. Friends to put forward this proposal, we are far from happy about the difficulties which face those who desire to set out on a course of home ownership. We realise that there are difficulties in their way, and we should very much like to help them, but for the reasons I have given, if they are to be helped, we are convinced that this is not the right way, that it would create more anomalies, 1079 perhaps, than it would remedy, and that it would be a substantial cost to the Revenue and inflationary in effect.
Nothing that I have said indicates any lack of understanding of the problem and of a desire to assist home ownership. It may well be that more effective methods than an Income Tax concession of this sort might be possible to be evolved, but after detailed consideration, which my hon. Friend's courtesy has enabled us to make of his proposals, I am sorry to have to say that I shall have to ask the House not to accept this proposal, which has been put forward with so much care and moderation.
§ Mr. S. Silverman
The Financial Secretary has made a most astonishing speech. I did not think that there was a great deal of positive merit in the new Clause, because it seemed to me that the anomaly it was sought to cure could, in the great majority of cases, have been cured by the taking out of an endowment policy, which would meet the situation and cure most of the evil that was aimed at—not all of it, because I appreciate that there was some force in the hon. Gentleman's reply to my intervention that there were cases in which even a younger man might not be able to get the appropriate cover.
But I do not think that if that were the only evil to be cured the hon. Gentlemen opposite would have put down the Clause. Most of the mischief could be cured by individuals being properly advised how to raise the finance to make the purchase of small or medium sized dwelling houses.
What brought me to my feet was the extraordinary lengths to which the Government have gone in giving away a large part of the rest of their case in order to meet this very small case that was put to them for curing an obviously anomaly. I gather now that the Government are saying, through the mouth of the Financial Secretary to the Treasury, that they are not in favour at the moment of encouraging people to buy houses on mortgage.
§ Mr. Silverman
Then I have not understood the hon. Gentleman. Let me say what was the foundation of my misapprehension. I thought that the 1080 Financial Secretary was saying that if we were to adopt this proposal, we would be encouraging people to borrow oftener than they now do, on mortgage, moneys with which to buy houses and that that was inflationary; and that since that would encourage them to do an inflationary thing, the Government ought not to do it.
§ Mr. Horobin
My hon. Friend did not say that they would borrow more often, but that they would borrow larger sums than they would otherwise need.
§ Mr. Silverman
No; that is a separate point, and I am coming to it. The Financial Secretary said that, but not in this connection. What he said, quite clearly, was that it would be anomalous to encourage people to borrow on mortgage rather than to sell their savings and to buy houses that way, which is another part of the same argument.
Both those arguments only make sense if the Government are saying that it is an inflationary thing, to be discouraged, that people should borrow money to buy their houses. I gather that the Financial Secretary is as surprised as I am at the implications of his argument, but it was his argument and not mine. It does not make any sense unless that is what he means. All that part of his argument was directed to saying that if we did this we would encourage people to borrow money on mortgage to buy houses, but that we do not want them to do that because it would be inflationary.
How, then, would the hon. Gentleman defend the proposals to sell council houses? To whom does he propose to sell them? To people who have savings that they can liquidate in order to buy them, or to people who have enough ready cash to buy them and who do not need to go to building societies to raise money on mortgage which they would have to repay by instalments?
It is most curious how the Treasury, in order to resist a very small point, give away, without even knowing that they have given it, so large a part of the policy which my right hon. and hon. Friends on this side have been opposing ever since the Chancellor of the Exchequer made his statement at the beginning of this Parliament after the last General Election.
§ Mr. Boyd-Carpenter
The hon. Member appears clearly to have misapprehended my argument. On the point to which, I think, he has been trying to refer, my argument was that it was unfair and anomalous to confer a substantial benefit on the person who used one method of financing the purchase of his house—to wit, mortgage—while no compensating provision gave equal assistance to the person who financed it in the other way by the realisation of savings. My argument was no more than that.
§ Mr. Silverman
It is quite true that the Financial Secretary said what he has just intervened to say, but when he adds "no more than that" I beg him to read HANSARD tomorrow morning, when he will find that he said a great deal more than that; and it was that great deal more that prompted me to make this intervention.
The only other point that he made was that this would encourage people to borrow more than they need. I do not know what experience he has, either himself or through friends or clients, of borrowing money from building societies with which to buy small dwelling houses. It would be difficult to persuade building societies to lend more than the security was worth. I know that that is not what was said; what was said was "more than was needed." My experience, I think, is the experience of everybody who has ever advised people in the handling of these matters: that the difficulty of the ordinary middle-class and lower-class people is that their security is usually worth very much less than they need, rather than the other way round.
§ Mr. Erroll
We have had the benefit of a most closely reasoned and courteous reply from my hon. Friend the Financial Secretary, for which I thank him. As I should like to have the opportunity of studying his reply in greater detail, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.