HC Deb 23 June 1976 vol 913 cc1716-25

'Nothing in section 39 or Schedule 7 below shall authorise a body described in paragraphs (a) or (b) of subsection (1) of section 39 when acquiring an interest in land in which a person is entitled to a security or to the benefit of a charge or incumbrance affecting that land to deduct from the amount payable by way of consideration upon that acquisition any sum in excess of the amount (if any) by which that consideration exceeds the principal, interest and costs payable to such person in order to discharge his security, charge or incumbrance; and this section shall apply to acquisitions of such land either from the owner of an interest therein or from a person who is dealing with that interest for the purpose of enforcing or giving effect to his security, charge or in-cumbrance'.—[Mr. Graham Page]

Brought up, and read the First time.

Mr. Graham Page

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

With New Clause 14 we may take the following amendments:

No. 94, in Clause 39, page 62, line 31, at end insert— 'Provided that no deduction shall be made in respect of such part of the consideration as is paid to a mortgagee'.

No. 182, in Schedule 7, page 149, line 14, leave out 'entered into on or before 12th September 1974'.

Government Amendment No. 183.

No. 184, in page 149, line 24, leave out 'be' and insert 'not exceed'.

No. 185, in page 149, line 41, leave out 'entered into on or before 12th September 1974'.

Government Amendment No. 186.

No. 187, in page 150, line 6, leave out sub-paragraph (4).

No. 189, in page 150, line 21, leave out from 'Act' to end of line 31.

Government Amendment Nos. 190 and 191.

Mr. Page

The new clause deals with the disposal of property to exempt bodies by the mortgagee. Perhaps I may put on record some matters which are familiar to those who were in Committee but which may be a little difficult to understand for those who were not involved in our deliberations at that stage.

When property is disposed of—namely, sold—to an exempt body, including a local authority, the exempt body, in paying the purchase price of the property, can deduct the development land tax from the purchase price and pay over the balance, taking for itself the development land tax. There are formulae as to the amount to be deducted, but if the realised development value is substantial, so also may be the 80 per cent of that which will represent the tax. It may be quite a large sum. It may be a small sum which can be deducted from the purchase price by the local authority or other exempt body.

Let us suppose that the property is mortgaged and that the mortgagor is in default. The mortgagee therefore exercises his power of sale and sells the property again to an exempt body. When the Bill emerged from Committee, there was a provision that the local authority could deduct tax which might exceed the amount of the mortgage, so that the mortgagee, exercising his power of sale and exercising the security which he had for the loan of money, might find that he was paying the tax, or Dart of the tax, of the owner of the land.

That would have placed the local authorities in a preferential position as against secured creditors, and even the normal tax inspector does not claim to do that. Indeed, on other taxes they are preferred claims, ranking in priority over other creditors. The one who holds a security, such as a mortgage over land, is entitled to stand back from that situation and say "No, I rely on my security. I will dispose of my security, take my mortgage money out of that and pay over the balance"—where there is no bankruptcy—"to the individual owner himself", or perhaps to a second mortgagee. In the case of a bankruptcy, it would be paid over into the bankrupt's estate.

Under the Bill as it came from Committee, the local authority could take its development land tax out of the purchase money, that is to say out of the money it had to pay—it might be paying it to a mortgagee who was selling—in priority without regard to the amount secured on the property. This did not apply, as the formula was devised previously, to a mortgage which had been entered into prior to 12th September 1974, the date of the White Paper. In that case the local authority could not deduct so much from the purchase price that it would be taking some of the money needed to pay off the mortgage.

Strangely enough, the local authority is directed in that case to take the whole of the balance of the purchase price over the mortgage as the deduction of tax. I cannot really think that that was the intention, but that is how it appears in an amendment in the group which we are discussing with the clause.

The purpose of the clause is to say that the local authority shall never deduct more in tax than the difference between the amount which is needed to pay off the mortgage and the total amount of the purchase price—that is to say, it can only look to the amount of the equity over and above the mortgage for the recovery of tax. This would restore the traditional legal position of a secured creditor—a mortgagee who had his security in the property—and make it quite certain that he would get back the amount which he had lent on the security of the property.

9.30 p.m.

I appreciate that, if that is the case, it is quite possible for an owner of property to mortgage his property up to the hilt and then default—the mortgagee sells, takes his mortgage out of the property secured, and leaves nothing for the local authority to deduct by way of tax. That is just too bad. This is the position in the case of any tax which is owed by a defaulter—which is owed by some profligate person who has borrowed up to the hilt on his securities.

It is our contention that, although this is an extraordinary tax—a levy and not a tax, perhaps—it should not be given priority over and above the secured creditors. If this were a sale to a private individual—if the mortgagee was selling not to a local authority but to a private individual—there would be no question about it. The mortgagee would be entitled to take his whole mortgage money, costs and interest out of the proceeds of the sale. But, merely because of this system of purchase net of tax, to which we object strongly, the mortgagee is quite likely to lose part of his security when he comes to sell.

Until now, I have been dealing with the end of the transaction—with the mortgagor defaulting and the mortgagee selling. But those who are about to lend money on the security of property will have realised that this might happen and that they might find, if their borrower defaulted, that their security might be worthless in the case of a large realised development value.

It seems to me that by these provisions we are putting the normal process of financing in grave jeopardy. What bank will lend to its customer on the security of property if it feels that at some future time. if it has to resort to the sale of that property as a mortgagee, it might not get back the amount lent? It might be all right if it is a fully developed property. I imagine that in most cases of loans on dwelling-houses, perhaps by building societies, it is unlikely that that will happen. It means, however, that loans on farms, for example, will be put in very severe jeopardy, ase will loans on commercial or industrial property where there is a possibility of development. Therefore, if the property is sold, there might be quite substantial tax to be paid out of the realised development value. I feel that there is grave danger of disorganising and disrupting the whole business of finance to the individual borrower if this provision is allowed to remain as it stands.

In the Government's amendments which are grouped with the new clause, the Minister has conceded a little bit. As Schedule 7 stood when it was introduced to us in Committee, what I have been describing as the possible loss of the mortgagee could not happen if the mortgage had been taken out before 12th September 1974. In the amendments now on the Notice Paper, the Minister has changed that date to the date on which we had the Committee discussions. That is the date on which this could have been known to members of the public had they taken the trouble to listen to our Committee debates.

I pity any member of the public who has the unfortunate job of doing that. Even so, it means that from that date last month any mortgagee is at risk with his security if he is lending money on a property which may have a development value. This is extremely dangerous to the financing of development and to any matters of finance.

Mr. Clegg

I support what my right hon. Friend said in moving the new clause. He is a practising solicitor, like myself, and he knows the vast changes that this Bill, if it goes through unamended, will bring to those lending money on land. It is clear that at the moment it is much better that the mortgagee who has a power of sale should sell to exempted bodies and leave the Revenue to recover the tax. It is the peculiar format of this Bill, being so closely linked with the Community Land Act, that has led to the apparent anomaly.

I accept that this will not apply to building society mortgages on private houses. I am not raising a scare on that issue. Where it will be felt—I have had these fears expressed to me by merchant bankers—is in the area of support for financing development. Bankers are very worried about the effects of the Bill and feel that it will inhibit finance coming forward in the future.

I am thinking particularly of the case in which a builder has a land bank and is buying land, and the mortgage comes after 11th May—the date in the Government amendment. The fear is that the finance company or the merchant bank will not lend the whole amount secured on several plots of land with development value. In future, if the Bill remains unamended, the mortgagee must look at the situation and see that the amount that he can lend on a particular piece of land is the current use value plus 20 per cent. of the development value. That will be the absolute limit of his lending. The difficulty of this figure is that at the time of the lending transaction it is not always easy to calculate how this is going to be done. As a result, there will be a degree of uncertainty and doubt in lending transactions which is not there now. The one thing that bankers and finance companies dislike is uncertainty.

Unless the clause is accepted we shall have a hiatus in money coming forward for development—money that is badly needed, especially in industry and house-building, as the Minister pointed out.

If we disrupt the confidence of those who lend money and lead them to believe that they are not going to get their money back, or that the State will grab their money before they do get it back, they will not lend at all. I would have thought that this was not in the Government's interest or, indeed, in the country's interest. The flow of funds should not be slowed down or put at risk by the provisions in the Bill.

Such a hiatus could well interfere with the Government's plans for industrial expansion. It is wrong that those who lend money should find the State stepping in ahead of them and taking first grab. The State should do what it does in every normal transaction and take its place in the queue. If this had been a Department of the Environment Bill and not a Treasury Bill that is what it would have done.

Mr. Ian Stewart

I support the clause. I do not wish to add anything of substance to what I said in Committee. The more thought that is given to the problem of mortgagees in this situation, the better. I have had discussions with fellow members of the banking profession and with those who are concerned with lending money against the security of property. They are experiencing increasing anxiety.

Whatever the Government's reaction to our proposal, and whatever form the Bill eventually takes, I hope they will realise that if the situation remains as it is the amount of money available for lending against the security of property will be significantly reduced. That applies not only in the development of property but to lending for other purposes where property is the security involved. I hope that the Minister is fully apprised of the seriousness of the situation.

Mr. Denzil Davies

The right hon. Member for Crosby (Mr. Page) so ably moved the new clause and explained it and the Government's amendments that I shall not have to spend long on explanation. The Government's amendments substitute the date of 11th May 1976 for 12th September 1974 as the cut-off date for the limitation of the DLT deduction. Any money lent before that cut-off date will not come within the new régime but will be dealt with in the way the right hon. Gentleman would wish all mort- gagees to be dealt with in relation to local authorities.

The date of 11th May 1976 was not the date on which we discussed this matter in Committee. It was the date when the Government's amendments dealing with the tax scheme first appeared on the Notice Paper. It was felt that on that date those who watched these matters—professional advisers, for example—would know whether the net-of-tax arrangements would affect the repayment by a mortgagee of money in respect of his security. We have therefore moved the date forward.

The right hon. Gentleman said that because of the net-of-tax arrangements we were giving a local authority priority to collect tax before the mortgagee got his money from his security. We will not be giving it to the Inland Revenue. The Inland Revenue has to go along afterwards to get its tax from the mortgagor if he sells on the open market in a private deal. If the sale is to a local authority, a curious by-product of the arrangements is that the authority acquires a right of priority in respect of tax. It gets the tax before the mortgagee gets his money if there is not enough money to pay the mortgagee.

I recognised that this might be a problem when I dealt with the matter in Committee. We have considered it fully, and obviously we do not want to inhibit commercial lending in this area. There might be problems in using the property as a security for other loans, but beyond that I do not think that there will be great difficulties. I do not think there is a problem in borrowing money to buy land. If a farmer wants to buy a farm with a current use value and no development value, he will get a mortgage for 85 to 90 per cent. of that current use value. If a person pays a high price for land with development value and seeks to mortgage that land to secure the purchase money, he will get 80 or 90 per cent.—or whatever the percentage is—against the purchase price. Therefore, he will be getting less than the full value of the land. Again, I do not think that there will be a problem.

9.45 p.m.

The point made by Opposition Members is that a loan may be sought on the security of a piece of property, with hope or development value but without planning permission, in order to use the money for some other purpose. They say that if the local authority acquired the land and deducted 80 per cent. tax it might inhibit that kind of transaction. But is it always very sensible for transactions to be financed in this way? Perhaps this is not a very sensible or prudent way.

I accept that in future, banks and institutions which lend money will have to take account of the fact that land which is the security of the mortgagor may be purchased by a local authority, with the danger that the mortgagee will not get his full security because the local authority will deduct tax. However, banks and financial institutions will no doubt adjust their lending to take account of this fact, which is now well known.

We shall keep the matter under review, and if there appear to be difficulties we shall look at it again. We do not wish to inhibit commercial lending or to create problems. However, it is extremely difficult to devise wording to cover these circumstances without opening the door to the creation of artificial mortgages which would prevent local authorities acquiring net of tax. I know that the Opposition do not like the net-of-tax provisions, but this is a problem which we have to take into account. We shall keep the matter under review and reconsider it if we receive representations about problems or difficulties. At present, I can go no further than the Government's amendments and I cannot recommend the House to accept the new clause.

Mr. Graham Page

The Minister referred to a curious by-product of the net-of-tax purchases by exempted bodies. We are getting an increasing number of by-products, and they are becoming curiouser and curiouser. We are becoming increasingly convinced that the net-of-tax procedure for purchases is wrong. There has to be an assessment of the person liable for the tax that is paid to the Inland Revenue, which accounts to local authorities for the amount that the Government think they should have out of the tax.

If the new clause is not accepted, every institution that lends money on the security of property will lend only at current use value plus 20 per cent. It will take into account the fact that 80 per cent. of the realised development value may be taken from it by a local authority if there is a sale to that authority.

When the second appointed day under the Community Land Act arrives, 100 per cent. of realised development value will be paid into the pockets of local authorities. Prospective lenders will have to value a property at current use value. Only that value will be the security for the mortgage. Anything else may go to the local authority.

Mr. Denzil Davies

Current use value could be very high. It could be development value. It might reflect the granting of planning permission and could therefore be a high base value.

Mr. Page

The Minister has forestalled me. I was using the shorthand term "current use value". I was going on to say that the lender not only has to do that if he intends to lend money; he must also look up Clause 5 to understand what is meant by "base value". He then has to decide whether the base value is likely to fall within paragraphs (a), (b) or (c). The owner makes that decision in the end. He must then work out what will be the base value over the period when a tax rate of 80 per cent. will be imposed on realised development value. It puts a mortgagee who is prepared to lend money on anything other than a fully developed property in a difficult position, and will disorganise the financing of the development of the property.

Also included for discussion with the clause was Amendment No. 184. Since the Minister did not mention that amendment, I must deal with it. That amendment relates to paragraph 8 of Schedule 7, on page 149 of the Bill, and says that in the case of a mortgage where the mortgagee is selling and the local authority is entitled to deduct tax—I quote from lines 24 to 26— the DLT deduction relevant to the material disposal shall be the amount (if any) by which the consideration for that disposal exceeds the cost of redemption of the mortgage or charge. That means that the local authority is to tax the whole of the balance, and indeed is ordered to take the development land tax as a deduction to be made.

Amendment No. 184 seeks to delete the word "be" and to insert the words "not exceed". Therefore, the provision would read: the DLT deduction relevant to the material disposal shall not exceed the amount (if any) by which the consideration for that disposal exceeds the cost of redemption of mortgage or charge". That must have been what was meant. The tax may not amount to anything like the equity or the mortgage money in the sale price. It cannot mean that the local authority is entitled to pocket the whole of that balance, regardless of the proper tax, or what the tax may be according to a formula in another part of the schedule. This must be an error in drafting, and the Minister would do no harm by accepting Amendment No. 184.

Even with the addition of the amendment, the whole procedure is extremely damaging. I wish that the Government could accept new Clause 14, which would remove this damaging provision from the Bill.

Question put and negatived.

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