HC Deb 30 June 1998 vol 315 cc224-33 '.—Where a transfer of land to a dealer or developer of land takes place and the instrument effecting that transfer is liable to stamp duty at the rate specified in either subsection (1)(d) or subsection(1)(e) of section 55 of the Finance Act 1963 and the dealer in or developer of land intends either:—
  1. (a) to transfer to an unconnected third party the same parcel of land within six months without improvement or,
  2. (b) to develop the land and transfer to third parties or dedicate to the highway every part of the land within a period of two years from the date of transfer
he may indicate such intention by notice in writing to the Inland Revenue and provided that in the case of (a) above the land is so transferred within six months and the instrument effecting the transfer is duly stamped within the time allowed by statute for such purpose and evidence of such is produced by him to the Inland Revenue, or in the case of (b) above the land is developed (within the meaning of the Town and Country Planning Act 1947) and every part of the land is so transferred or dedicated to the highway within two years of the date of transfer and the instrument or instruments effecting such transfer or transfers are duly stamped within the time allowed by statute for such purpose and evidence of such is produced by him to the Inland Revenue, then the Inland Revenue shall repay to him the full amount of the stamp duty paid by him on transfer of the land to him.'.—[Mr. Whittingdale.]

Brought up, and read the First time.

Mr. John Whittingdale (Maldon and East Chelmsford)

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

Mr. Deputy Speaker (Sir Alan Haselhurst)

With this, it will be convenient to discuss the following amendments: No. 45, in clause 147, page 137, line 14, after '£500,000', insert 'in the case of a transfer of a dwelling house or £5,000,000 in the case of any other transfer'. No. 70, in page 137, line 15, leave out 'for "£1.50" there shall be substituted "£2"' and insert—

  1. '(a) for "£1.50" there shall be substituted "£1 for every £100 or part of £100 of the consideration up to £250,000, and at a rate of £2" and
  2. (b) after "consideration" there shall be inserted "in excess of £250,000".'.
No. 71, in page 137, line 16, leave out 'for "£2" there shall be substituted' "£3"' and insert— '(a) for "the rate of £2" there shall be substituted—
  1. "(i) the rate of £1 for every £100 or part of £100 of the consideration up to £250,000.
  2. (ii) the rate of £2 for every £100 or part of £100 of the consideration over £250,000 but below £500,000, and
  3. (iii) the rate of £3" and
(b) after "consideration" there shall be inserted "over £500,000".'. No. 46, in page 137, line 17, at end insert 'and after "£500,000", insert "in the case of a transfer of a dwelling house or £5,000,000 in the case of any other transfer".'.

Mr. Whittingdale

I realise that this is perhaps not the most opportune moment at which to be moving a new clause. I accept that there are other distractions, and I hope that the attendance in the Chamber does not denote the fact that hon. Members do not regard this as an important matter—it is an important matter on which we should spend a little time.

The purpose of the new clause is to provide a measure of relief to dealers or developers of land who will be worst hit by the Government's swingeing increase in stamp duty. It is worth remembering that this is the second substantial increase in stamp duty since the Government came to power. The last Conservative Government significantly reduced the impact of stamp duty by abolishing it on the transaction of shares, and by substantially raising the value of properties on which it became payable.

Within a few months of the election of the Government, the Chancellor chose to increase stamp duty by 50 per cent., from 1 per cent. to 1.5 per cent. on property sales above £250,000, and by 100 per cent., to 2 per cent., on property sales above £500,000. At that time, the Chancellor said that the measure was necessary to reduce volatility in the housing market. He said in his Budget statement last year: I will not allow house prices to get out of control and put at risk the sustainability of the recovery. I have therefore decided that it is right to take measures aimed at stability in the housing market."—[Official Report, 2 July 1997; Vol. 297, c. 313.] As we said at the time, that had little to do with stability in the housing market. It was a spurious excuse for what was, plain and simple, a tax rise.

Mr. Swayne

Has my hon. Friend considered the possibility of a wider agenda, in that the Chancellor may be seeking to attack our fondness for owning properties—particularly housing—because that is one of the principal causes of our economic cycle being out of sync with the rest of the European norm?

8.30 pm
Mr. Whittingdale

My hon. Friend makes a good point. There is a real concern that this is not the last such increase that we shall see. The levels of stamp duty elsewhere in Europe are considerably above those in this country, and that may not be unconnected with the fact that we have much higher levels of house ownership.

Nine months later, in the second Budget of this Administration, the Chancellor abandoned his previous attempts to justify rises in stamp duty on economic grounds. In the Budget in April, the Chancellor increased stamp duty again to 2 per cent. on property sales above £250,000, and to 3 per cent. on property sales of more than £500,000. At that time, he made no mention of the need for stability in the housing market. The only justification that the Chancellor was prepared to offer was that 98 per cent. of house transactions would be unaffected.

The implication of that statement was clear—this would be a tax increase affecting only the rich living in expensive houses. The truth, as we have sought to show, is different. The real burden of the tax rise does not fall on a few rich house owners who, it might be argued, can afford to pay. The real burden falls on the commercial sector of businesses and on those who invest in properties. It is hardly surprising that the Institute of Directors said: We deplore the increases in stamp duty on high-value properties. While very few house purchases will be affected, a far higher proportion of purchases of business premises (and of goodwill and patents) will be affected. Insurance companies, pension funds and property unit trusts will bear the brunt of the direct impact of increases in stamp duty, because most commercial properties are owned by such investors and then leased. The millions of people who invest in insurance, pensions and unit trusts will therefore suffer. it is to meet that concern that we have tabled amendment no. 45, which deals with that point by restricting the £500,000 limit to the transfer of a dwelling house, and applying a £5 million limit to other transfers.

Moreover, the effect of the increase in stamp duty is likely to be highly distorting. As my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) has pointed out, stamp duty is imposed on a slab system, not a slice system. As a result, if a property sells for £249,999, stamp duty is payable at the lower rate of 1 per cent. However, if its price increases by £1, stamp duty becomes payable on the entire amount. As the Chartered Institute of Taxation has pointed out, at the £250,000 limit the duty on an additional £1 of consideration will lead to an additional amount due of £2,502—thus giving a marginal rate of duty of 2,502 per cent. At the £500,000 limit, the marginal rate for the extra pound of consideration is 5,003 per cent.

For all those reasons, we would much rather that the increases in duty did not take place. The purpose of new clause 8 is to seek to provide at least some protection for those who will be among the hardest hit. The Chancellor attempted to claim that 98 per cent. of house transactions would be unaffected by the increase, but that is simply not the case. Like many hon. Members, I suspect, I have seen substantial developments of new estates in my constituency in recent years. A large proportion of house sales are conducted by those buying new houses from builders and developers.

Although few of those individual transactions may amount to more than £250,000, the original purchase by the developer of the land almost certainly does amount to more than that. In most cases, developers will buy land for building in parcels worth considerably more than £500,000, and the additional cost to the developer of the increase in stamp duty is simply likely to be passed on in higher prices of the homes which he then goes on to sell. The result is that the tax increase will hit far more than 2 per cent. of house transactions.

The measure is likely to fuel house price inflation and will add to the cost of many first-time buyers and those starting a family who wish to move to a bigger home. In many cases, the value of the purchase will be far less than £250,000, but nevertheless the buyers are likely to be paying more as a direct result of the measure imposed by the Chancellor.

On top of that, developers and those who buy houses from them will have to pay stamp duty twice. It will be charged on the original purchase of land by the developer and it will then be paid again by those who come to buy properties from the developer. In Committee, the Paymaster General moved new clause 10, which was to provide for relief from double stamp duties. That measure was made necessary by the repeal of the Government of Ireland Act 1920, and was a sensible measure to ensure that people did not have to pay stamp duty twice as a result of the repeal of that Act.

In this instance, the consequence may well be that people will have to pay stamp duty twice. They will pay it indirectly through the increased cost of their homes, because the developer has had to pay it. They will then pay it again, directly, on the cost of the house that they purchase. That is serious enough at the present rates, but our fear is that it will become more serious if stamp duty increases again. In his two Budgets so far, we have seen the Chancellor's willingness to use stamp duty as a means of increasing tax and revenue.

As my hon. Friend the Member for New Forest, West (Mr. Swayne) pointed out, we have a far higher level of home ownership and far lower levels of stamp duty than exist on the continent. I should be interested to know whether it is the Government's intention to have further increases in stamp duty in coining Budgets, and whether there might be an agenda to move towards a harmonisation of stamp duty levels across Europe. I am glad to see the Financial Secretary in her place. She has a particular interest in harmonisation, and I should be interested to hear whether that future harmonisation is under consideration.

As I said, the effect of the amendments is not to remove the increase—although, ideally, that is what we should like—but to remove the increased cost of stamp duty from developers and restrict it to the sale of houses worth over £250,000. It is the Chancellor's declared intention that people selling such properties should have to pay it. If the Paymaster General wants to ensure that the measure applies only to those people, who were specifically mentioned by the Chancellor when he introduced the measure in the Budget, he should accept our amendments.

Mr. Hammond

I declare an interest in this matter, which is included in the Register of Members' Interests, in that I am a director of a small house-building and development company. I speak to the new clause not because I expect personally to benefit from the proposed change. As my hon. Friend the Member for Maldon and East Chelmsford (Mr. Whittingdale) ably pointed out, the developer or dealer will not ultimately bear the incidence of this potential double taxation; the end purchaser will inevitably pay this tax.

Until the two Budgets under this Government, stamp duty was largely an irritant to people in the property development business and those buying and selling houses. At 1 per cent. on properties over £60,000, it had to be paid, but was not likely to be a determinant of people's behaviour in their transactions. Stamp duty on transfers of land valued at above £500,000 is now levied at 3 per cent. and, as my hon. Friend the Member for Maldon and East Chelmsford has pointed out—I know that the Paymaster General has acknowledged this problem—we have the slab, rather than the slice, system. That produces ludicrously high marginal rates of taxation, which create artificial distortions in the property market and effectively make it certain that no house will ever be sold for £249,000 or £499,000. Anything that introduces artificial distortions into the market is greatly to be deplored.

As my hon. Friend said, when the measure was announced in the Budget speech, the Chancellor led the public to believe that it applied only to houses and then only to the houses of the few. The purpose of the new clause is to draw attention to the fact that land at every stage in the cycle of transactions will be subject to the stamp duty. To describe the effect at its simplest, a £1 million parcel of land that is sold to a developer will attract stamp duty at 3 per cent., which is a levy of £30,000. That land might be used to build low-cost housing units, which would sell for less than £60,000. People who bought those houses might think that they had escaped the Chancellor's attack on the tax-paying public because they were paying no stamp duty. However, the price of the house that they bought, as determined by the developer, would inevitably include the cost of the 3 per cent. stamp duty on the land which he had been obliged to bear.

Typically across the UK, land makes up something like a third of the price of new houses. The measure will be unequal in its impact because in certain parts of the UK, such as London—which is the most extreme example—and the south-east, high land values mean that land can represent a much higher percentage of the price of a property. In London, land could represent as much as three quarters of the value of a property. It does not take a mathematician to work out that if land is bought subject to a 3 per cent. stamp duty and dwellings are built on it which are then sold for over £500,000 each, which is not unusual in central London, the ultimate incidence of stamp duty in the final purchase price could easily amount to 5 per cent. We must ask the Government openly to acknowledge that, with stamp duty being charged on every step of the transaction, multiple tiers of stamp duty will be included in the end price.

As I said earlier, at 1 per cent., stamp duty was an irritant and did not cause major concern, but at 3 per cent. it becomes a significant factor. As my hon. Friend the Member for Maldon and East Chelmsford made clear, it has an impact not only on houses but on factories, shops, offices and any kind of development or property that is bought and sold in the marketplace. Where land is purchased and then developed, our new clause would reduce the phenomenon of double dipping.

8.45 pm

The Chancellor said in his 1997 Budget speech that he had increased stamp duty to control inflation in the housing market. As my hon. Friend noted, he did not make a similar comment in the 1998 Budget speech when he increased stamp duty on larger transactions. Will the Paymaster General tell the House whether the Government intend to reduce stamp duty if the housing market, or the property market in general, shows a marked downturn, suggesting that it is need of such a counter-balancing stimulus?

It would also be interesting to know whether the Government's longer-term intentions are to use stamp duty as a means of applying a hand on the tiller of the housing market. We hear that the Government are determined to ensure convergence with the economies of our European partners, as a prerequisite to joining economic and monetary union. We have not so far seen very much in the way of convergence on interest rates. Indeed, the trend under this Government has been entirely in the opposite direction.

The Government have lost direct control of interest rates and have an avowed policy of seeking convergence with the economies of our European partners, although they know full well that the structure of the UK housing market is very different from that prevailing in all other European economies. Short-term interest rates have a much greater impact on individuals—that is to say, not to put it too cynically, on voters—in the UK than they do in any other country in the European Union. Do the Government intend to use stamp duty as a method of regulating the housing market, in the absence of any other controls being available to them within economic and monetary union, if and when the UK joined? In that case, what sort of rates of stamp duty might the British public expect to be imposed?

Mr. Love

The hon. Gentleman referred to convergence in Europe. I attended a conference yesterday organised by the Council of Mortgage Lenders, at which a speaker made European comparisons. First, unlike what Opposition Members are saying, the UK is not at the top—[Interruption.]

Mr. Deputy Speaker (Mr. Michael Lord)

Order. When hon. Members enter the Chamber, they must be aware of what is occurring. At the moment, the hon. Member for South Derbyshire (Mr. Todd) is making an intervention.

Mr. Love

I am Mr. Andrew Love, Mr. Deputy Speaker. However, like my hon. Friend the Member for South Derbyshire, I have a moustache, so I accept that mistakes can be made.

As I was saying, the first comparison revealed that, unlike what Opposition Members are saying, the UK is not at the top of the owner-occupier league in Europe, although it is close to the top. The more interesting comparison revealed that countries that have a higher rate of owner-occupation are the least wealthy countries in the European Community. Is that the kind of convergence that the hon. Member for Runnymede and Weybridge (Mr. Hammond) wants?

Mr. Hammond

It is not simply the percentage of owner-occupation that is important, but the way in which it is financed. I suggest to the hon. Gentleman that the United Kingdom has the greatest vulnerability to short-term interest rates as an influence on the housing market.

The Paymaster General knows of my concern with this issue; we have discussed it before. I end by asking him whether, as part of the single currency package that the Government are putting together, the people of Britain are to look forward to stamp duty approaching or reaching continental rates, and being used regularly by the Government, in a downward or upward direction, to regulate fluctuations in the housing market, thereby controlling that important element of demand in the economy.

Mr. Clifton-Brown

This measure is expected to yield £390 million in 1998–99, £470 million in 1999–2000 and more than £520 million in 2001. This is no longer a minor tax: it is a severe tax.

I declare an interest, as one of only two chartered surveyors in the House.

Pension funds have been raided by the withdrawal of advance corporation tax, and now they are being raided still further, because their property assets will have to be devalued in the Royal Institution of Chartered Surveyors' red book valuation. Until one has proper market comparatives, properties will have to be devalued. Property is always compared with equities, which retain a stamp duty rate of 0.5 per cent; property now faces a savage 100 per cent. increase in respect of values of more than £500,000—hence it will become an unattractive investment class.

It has been estimated by the well-known property consultants BTZ that there was £417 million-worth of overseas property investment in the UK in 1997, double that of 1996. The concern in the property industry is that if these swingeing increases in stamp duty continue, they will reduce the attractiveness of the UK property industry as an inward tax haven of the kind that was so successful in the golden years of Conservative economic management.

My hon. Friends have already commented on the unprogressive nature of stamp duty—it is a lumpy tax. In future Budgets, the Government might like to consider making the tax more evenly progressive. A property currently sold for £499,000 would attract stamp duty, at 2 per cent., of £9,980; whereas a similar property negotiated for sale at £1,000 more, or £500,000, attracts the 3 per cent. rate—a staggering £15,000. That amounts to a marginal rate of tax of around 5,000 per cent.

It would be interesting to know the Government's intentions for this tax. It is all very well increasing taxes in a bull market, but the property market is beginning to stagnate—house prices in London and commercial property prices throughout the UK are slowing down. On behalf of the property industry, I urge the Paymaster General to shed light on the Government's thinking.

Mr. Geoffrey Robinson

I must begin by explaining to the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale) that the Government measure debated in Committee referred to double taxation on the same transaction only—a different set of considerations altogether.

I can tell the hon. Member for Cotswold (Mr. Clifton-Brown) that I am perfectly happy to consider slicing instead of slabbing—one can see the attractions of that, although the current system is well established. I should add that the change could be effective—given sound reasons for making it—only if the overall tax take did not diminish. Even with a more progressive system, there will be bunching and other anomalies. That is why we cannot accept the new clause's attempt in that direction.

The cost of the proposals contained in amendments Nos. 70 and 71 would be £250 million in a full year—perhaps rather more than Conservative Members intended, although the amendments may be purely illustrative. At the £60,000 and above threshold, the amendments would cost about £700 million. These are orders of magnitude that we could not contemplate.

If Opposition Members would prefer a progressive, slicing system, I should be prepared to consider it; but I certainly cannot deal with that at this stage of a Finance Bill's progress.

The new clause aims to provide relief from stamp duty for land dealers and developers. If they have paid duty of 2 or 3 per cent. on a purchase of land, they would get the duty repaid if they sold the land without improvement within six months, or developed and sold it within two years. The new clause gives no relief where the dealer or developer has paid duty at the 1 per cent. rate.

The proposed relief would have a revenue cost; other things being equal, the rates of duty proposed in the Budget would have to be increased to make up the lost yield. More specifically, that would involve making some arbitrary distinctions between cases qualifying for relief and cases that would not. The same sort of bunching problem would recur.

For example, a dealer selling unimproved land after five months would qualify, but one selling after seven months would not. If the land passed through the hands of a number of dealers in succession, the clause would appear to allow each in turn to claim repayment of duty on his purchase when the land was sold on to the next dealer. A whole series of transactions could result in only one stamp duty charge ultimately being payable.

Similarly, the proposed relief for developers would have arbitrary limits. A development that took longer than two years to complete would not qualify; that would impose arbitrary constraints and distort commercial decisions—not in the best tradition of Tory free-market thinking: more like old Labour. It is much better to impose general rates of duty that apply across the board.

Mr. Hammond

Can the Minister see any really good reason, apart from revenue raising, why a piece of land that changes hands three or four times in a year should be subject to stamp duty at 3 per cent. on each transaction?

Mr. Robinson

There must be a very good reason for the land to pass through three pairs of hands in six months; a profit must be made on it in each case, and, if that is the case, the tax should be levied. That is how markets work. In case the hon. Gentleman does not understand, that is what market economics is: each transaction is taxed, even if there are three or six transactions in a given period. It is much better to let a market work in that way. I accept that we may have differences about the level of tax, but it is not sensible arbitrarily to interfere with markets.

Regrettably, I cannot accept new clause 9, amendments Nos. 70 and 71 or, for that matter, amendments Nos. 45 and 46. The latter two amendments would alter the application of the new top rate of 3 per cent. for stamp duty on transfers of land and buildings. There would be no change for residential property, but, for commercial property, the 3 per cent. would apply only to transfers over £5 million instead of £500,000. The implication is clear that the Opposition believe that the 3 per cent. rate is damaging the commercial property market, but no hon. Member made a convincing case for that in the debate.

I say to the hon. Member for Runnymede and Weybridge (Mr. Hammond)—the subject was also raised in earlier debates—that there is no hidden European agenda to bring our stamp duty rates up to the European level. The equivalent taxes in other European countries are a great deal higher—I gave the figures in the previous debate. Some of them are extraordinarily high. In Belgium, there is a 12.5 per cent. registration tax; in France, registration duty is 8.6 per cent; in Germany, the rate is 3.5 per cent. of purchase price across the board, as far as I can see—no graduation there. In Greece, the rates are 9.3 and 11.3 per cent. In Italy, the rate is 8 per cent; in Luxembourg, 5 per cent. of sales price; in the Netherlands, 6 per cent. of market value of property.

Traditionally, those countries have very high levels of such taxes—higher than ours, and their markets are differently structured. We have no agenda to move to those levels, but—I again address my remarks to the hon. Member for Runnymede and Weybridge—I would not prejudge the Budget judgment that the Chancellor of the Exchequer might wish to reach in any year about the level of stamp duty, given the condition of the property market and the overall state of the economy, and the hon. Gentleman could not realistically expect me to do so.

One thing that we do want to prejudge and avoid, however, is boom-bust in the property market. We had the saddest, most disheartening boom and bust, when young people—especially young couples—were caught in awful negative equity traps as a result of such mismanagement. We certainly want to get away from that. That is why all that we do is geared toward stability, and the taxes that we are debating are part of that.

Amendments Nos. 45 and 46 would cost us £130 million, and, for that reason alone, we cannot accept them. I am sorry that it is no on all counts. I hope that there is no need to press the amendments to a Division, but that decision rests with the Opposition.

9 pm

Mr. Whittingdale

We should be grateful for small mercies. The Paymaster General has conceded that the present system of the slab operation of stamp duty has the absurd effect of giving rise to incredibly high marginal rates, and he has suggested that he might be prepared to consider that. I hope that we may return to that subject when we debate future Finance Bills; we look forward to debating it then.

The Paymaster General has given us several reasons why he considers our amendments to be deficient, and I understand those reasons. The amendments did not constitute our ideal solution. We should have preferred it if the increases had not been introduced. Our preferred option was that the Paymaster General would tell us that he would not be proceeding with them, but obviously he is not prepared to do so.

The Paymaster General has not entirely reassured us about his future intentions. He has told that us that there is no European agenda to move toward the harmonisation of stamp duty rates, and I suppose that we should be grateful for that, but he has obviously not told us that there will be no intention in future to make further increases in stamp duty. My hon. Friends and I retain a considerable suspicion that the Chancellor now views that as an easy way to increase taxes and raise money.

We have sought to show that, although the Chancellor may try to suggest that the measure hits the rich and affluent—the owners of large houses—exactly the reverse is the case. It will have an impact throughout the housing market, and many of those young first-time buyers, whom the Paymaster General mentioned, may end up paying more as an indirect result of the measure.

However, as I have suggested, I do not believe that this is the occasion on which to press new clause 8 to a Division, so I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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