HC Deb 17 June 2003 vol 407 cc61-8WH

4 pm

John Barrett (Edinburgh, West)

I welcome the opportunity to discuss the impact that stamp duty is having not just on my constituents but on those seeking to enter or move up the property market throughout Edinburgh. I hope to be positive and constructive, and I am very pleased to see the Minister in his place. I am grateful that he has taken the time to come to respond to the debate. While he might not be able to answer all my points, I would appreciate it if he could write to me with the answers to some of my more detailed questions.

I must declare an interest in that I am in the process of selling my house. However, I hope to show that it is the impact that the duty has on younger people and the less well-off that causes me concern, and not the fact I will shortly be contributing to the Minister's Department. Some might he surprised about this debate. Many do not see Edinburgh as a city in particular need—in fact, most people see it as a booming city, with a thriving tourism industry and a strong local economy. For the most part, that assessment is true. Having said that, I remember sitting in this very Chamber last week during a debate on the impact of the London Olympic bid on the rest of the country. Hon. Members from the north of England complained strongly that a rich and prosperous London would benefit from the Olympics at the expense of a poorer and more needy north, while hon. Members from London rightly pointed out that, within the overall affluence of London and the south-east, there are pockets of real deprivation. The same is true of Edinburgh, as is shown by its eight areas that are included in the national index of deprivation.

Stamp duty was first introduced by the Government in 1694 and was always intended to be a tax on the wealthy, or at least on wealthy property transactions. In the past few decades, there have been many changes to it, most of them positive. In 1958, the threshold at which stamp duty rates applied was £3,500. That was increased in 1972, 1980, 1982, and most recently in 1993, when the threshold for paying 1 per cent. stamp duty was doubled from £30,000 to £60,000. The 10 years since that change have seen dramatic changes in house prices in the UK, and in Edinburgh specifically.

To put it in perspective, the average house price in Edinburgh in 1988 was just over £47,000. The most recent figures from the Edinburgh Solicitors Property Centre show that the current average house price in the city is more than £130,000, an increase of 176 per cent. The increase last year in Edinburgh was 17 per cent. and, contrary to some predictions, the price boom shows little sign of abating.

Edinburgh is far and away the most expensive place in Scotland in which to buy a house—on average it is more than £25,000 more expensive than its nearest rival in Stirling. The price increases have had a major impact on the ability of a huge section of people, particularly first-time buyers who are trying to get on to the first rung of the property ladder, to purchase a house. Most of those people, when they do move, face an additional and quite considerable charge by way of stamp duty, because it is almost impossible to find a property costing less than £60,000 in Edinburgh. The ESPC tells me that when the £60,000 threshold was introduced in 1993, only 32 per cent. of the properties sold in Edinburgh were subject to stamp duty. This year, 92 per cent. of properties were sold for more than £60,000.

The figures are clear. Massively more people in Edinburgh have to pay stamp duty than was ever previously the case. It is no longer a tax on the wealthy; in my city, stamp duty has become a basic tax on moving, and many people, especially those involved in the property market, are amazed that, despite the dramatic increases in house prices over the past few years, the Government have chosen not to review the threshold, as has been done on nine occasions since 1958. That has had a particular impact on some of my constituents, who have been forced to move because of redundancy—there have been major redundancies on the west side of Edinburgh in recent years; the large employer Ethicon is in the process of scaling down and, prior to that, Grampian Foods and Continental Tyres laid people off.

The chief executive of the National Association of Estate Agents, Julie Westby, has said that £60,000 is no longer a realistic figure. She has advocated a threshold of £120,000—the current average house price across the UK. Halifax Bank of Scotland and the Council of Mortgage Lenders have advocated a similar increase.

Serious implications also arise from the Chancellor's refusal to raise the £250,000 threshold at which stamp duty jumps from 1 to 3 per cent. When the higher rate was introduced, he promised that only 2 per cent. of property sales would be affected. However, I can tell the Minister that in Edinburgh today, the figure stands at 20 per cent. The Government must recognise that paying £250,000 for a house no longer represents a transaction carried out only by the wealthy, as it once did. Ordinary families are now hit with massive costs of £7,500 or more for average properties in the city.

My other major concern relates to the operation of the disadvantaged areas relief, which the Chancellor introduced three years ago. I stress at the outset that I very much support that initiative and appreciate the good intentions that the Chancellor and the rest of the Government had when they pursued the introduction of the scheme through the House and the European Union. Although 1 was not a Member of Parliament at the time, I recall from the Library note that the initiative met with little opposition or controversy.

As the Minister will know, many people have benefited from that relief. One who has benefited recently is a constituent of mine, Louise Lang, who is in the process of making one of the biggest investments that she will ever make in purchasing her first property. She is buying a flat in the constituency of the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz), which comes under the EH6 disadvantaged area. The stamp duty relief more than halved her estimated moving costs, which had stood at £2,000. She told me that the relief had made a major and positive difference to her move.

However, the disadvantaged areas relief system is far from perfect. Three years after its introduction, the Government would do well to reconsider whether it is having the desired impact. I strongly believe that the way in which the relief operates has thrown up a range of anomalies. That is illustrated by the scheme's operation in the city of Edinburgh.

As the Minister will be aware, Scotland is unique when it comes to the relief, because the areas included in the scheme are determined by postcode rather than council ward. That brings a set of disadvantages and advantages. It is clear that council ward boundaries do not always respect boundaries of deprivation, although the boundary commission is always alert to the idea of keeping natural communities together.

When I learned that postcodes were used to determine deprived areas, I thought that that was a better system and would allow for more detailed and specific targeting of the relief. However, I quickly discovered that only the first three or four characters of the postcode are taken into account—for example, EH4 4 or EH11 3. In Edinburgh, eight such districts are included under the relief system. Roughly speaking, those correspond to Muirhouse in my constituency, Granton, Leithharbour, Wester Hailes, Craigmillar, Holyrood and Fountainbridge.

Broadly speaking, inclusion of those areas in the disadvantaged areas relief system is right and has had a positive impact. However, the decision to operate the scheme according to broad postcode districts brings with it a series of anomalies. One property in Muirhouse Green in my constituency is included in the EH4 4 disadvantaged district, so a person purchasing a house there for some £82,000 will not have to pay stamp duty. However, a person purchasing a flat just up the road in Wester Drylaw place, which is five minutes away and could be described as equally disadvantaged, will not be eligible for the relief and will be landed with a stamp duty bill of some £700. That is because, for postcode purposes, Drylaw is lumped in with leafy Craigleith, Blackhall and even part of Fettes village, which includes Prime Minister's old private school. I simply do not understand why my constituents in Drylaw, for whom an upfront payment of £700 is a lot of money, should be further disadvantaged in relation to their neighbours living just across the road.

In an even worse example, postcode districts EH3 8 and EH8 8, which the ESPC mentions as including parts of Holyrood and the West End which are now among the city's biggest development hotspots are included in disadvantaged areas. That means that while someone buying a small flat in Alan Breck in Clermiston in my constituency for around £70,000 has to pay stamp duty of around £700, someone purchasing one of the plush Georgian apartments near Gardners crescent at the West End might not have to pay a penny.

I do not know how the Minister can justify those disparities. Surely there could be a better system and some improvement to take more detailed account of local considerations. If the first three or four digits of a postcode can be considered, why not the fifth digit, which would help other areas in Edinburgh, especially those such as Drylaw, Clermiston, and even Ratho Station and Kirkliston, which I believe should benefit from disadvantaged area relief schemes? Those areas are left out because they have the same postcodes as other, more affluent areas.

Mr. Mark Lazarowicz (Edinburgh, North and Leith)

The hon. Gentleman has made valuable points about the way in which the boundaries of stamp duty relief are drawn. Does he agree that that illustrates the necessity for a fundamental review of the way in which we finance housing and encourage housing to be built through the tax system and through the financial services industry, which the Chancellor has announced he is investigating? Does he accept that that is what we need if we are to address some of the fundamental difficulties for people on low incomes and first-time buyers buying houses in places such as Edinburgh? The problems that he mentioned are probably even worse in my constituency, where there have been even more substantial house price increases in some areas, and where it is now extremely difficult for anyone not just on an average income but on anything other than a high income to buy a house.

John Barrett

The hon. Gentleman makes some valid points, on access to low-cost housing and by first-time buyers. I urge all hon. Members to pressure the Chancellor, if possible, to consider stamp duty relief for first-time buyers. That would be a great change for the better.

I will make a few more general comments about stamp duty to raise some additional concerns. I make no apology for saying that in my view stamp duty should be abolished in the long term. Certainly I would like to see the Government work towards that aim. However, to be fair to the Government and the Minister, I also recognise that, because of the boom in property prices, the duty now raises a significant amount of money for the Treasury. The figures that I have—the Minister may be able to provide us with more up-to-date figures—show that some £3 billion is raised every year from stamp duty, compared with just £600 million when the Government first came to office in 1997.

Scotland contributed more than £235 million in stamp duty last year, so I accept that abolition of the duty would have a major knock-on effect in terms of the money available for spending on public services. However, there are a number of ways in which the Government can reform stamp duty to make it more simple and progressive. The structure of the duty makes it unusual compared with other taxes in the way that the different bands increase with the level of transaction, yet the tax applies to the entire transaction. There are major incentives for property to be sold at just under the three different levels at which stamp duty increases. For example, selling a house at £59,999 rather than £60,000 would save £600 in stamp duty. Selling a house at £249,999 rather than for £1 more saves £5,000. As a result, there is a strong incentive for people to sell fixtures and fittings at an increased price, while decreasing the price of the property to try to avoid stamp duty.

The director of the Council of Mortgage Lenders has conceded that fact. Research carried out by my hon. Friend the Member for Truro and St. Austell (Matthew Taylor) has shown that, as stamp duty has increased, the number of properties sold at just below the threshold has also increased. The cost of that practice to the Treasury has been estimated at around the £10 million mark. If the Minister has any more up-to-date figures, I would be keen to hear them.

What consideration have the Government given to measures that would tackle this blatant tax avoidance? Why are the Government so attached to the current structure of stamp duty? What particular advantages does it have, and why can there not be a more progressive system, whereby duty could be paid on the sale price over a particular threshold? There is evidence to suggest that that could be done on a cost-neutral basis. Could there be an exemption for first-time buyers, to allow people to get on to the first rung of the property ladder?

Finally, I have been very concerned about reports of recent Treasury discussion papers, which suggest that the Government are considering varying stamp duty with the economic cycle, on the premise that housing is relatively lightly taxed. I do not understand why the Government wish to tax and financially penalise people simply for moving home. I do not understand why that is something that the Government would wish to discourage.

I hope that I have spelled out the problems of the system as it stands, and why it has been affecting some of my constituents in such an adverse fashion. I do not wish to be too negative—I repeat my praise for the Government for some of the reforms that they have pushed through—but there is still some way to go. I look forward to hearing the Minister's comments.

4.15 pm
The Economic Secretary to the Treasury (John Healey)

I congratulate the hon. Member for Edinburgh, West (John Barrett) on securing the debate, and on the constructive and measured way in which he put his arguments. I also welcome the interest shown by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz).

As a result of the macro-economic changes and policies that the Government put in place from 1997, base rates are now at their lowest level since 1955. Economic stability is delivering rising prosperity and record employment. Real household disposable incomes have also continued to improve and consumer confidence is rising. Net household wealth in the UK has increased by more than 40 per cent. since 1997. Employment is at a record high and unemployment is at its lowest since the 1970s. It is partly because of continuing high employment that demand for houses in cities such as Edinburgh is so strong.

Continuing stability through the Government's policies, and in particular, continuing low interest rates, have more than anything else helped people to be able to afford to buy their first home. Furthermore, continuing low, stable inflation means that there is less of an artificial incentive to use property purchase as an inflation hedge. Continuing economic stability means that households are better able to judge their long-term commitments, such as mortgage debt.

Of course, there are more affordable houses in some areas than in others. That is true across the UK. I recognise that Edinburgh—as the hon. Member for Edinburgh, West has explained—has experienced especially marked increases in house prices in the past year. He said that house prices had increased by 17 per cent.; that figure comes from a Halifax Bank of Scotland survey. He might be interested to know that the comparator is a UK average house price increase over the same period of 23.4 per cent. In Leeds, which is close to my constituency, the increase has been 29 per cent. In Bristol, the figure is 28 per cent. In Brighton, which is comparable to Edinburgh, there has been a 19 per cent. rise.

I emphasise that it is buyers and sellers, not the Government, who set prices in the housing market, and consequently the amount of stamp duty that is payable. In the end, the market is determined by what people are willing and able to pay. Stamp duty is a very small factor in that. The hon. Gentleman, and my hon. Friend the Member for Edinburgh, North and Leith may have read in The Economist last week that the UK has extremely low costs for buying a home: around 4 to 5 per cent. goes to estate agents, solicitors and duty, while in most of Europe and in America those costs are at least 10 per cent.

I turn to the specific concerns that the hon. Gentleman raised about stamp duty. He cited figures for Edinburgh and the slightly wider area of Midlothian. In 2002, just under 30 per cent. of residential purchases were for property valued at less than £60,000. As he said, purchasers pay no stamp duty when the purchase price is £60,000 or less. Therefore, well over a quarter of residential purchases, which would include many first-time buys, pay no stamp duty in Midlothian.

For purchases where the purchase price is between £60,000 and £250,000, stamp duty is charged at 1 per cent. of the purchase price. In 2002, 64 per cent. of residential purchases in Midlothian were within that bracket. The average price paid by a first-time buyer in Edinburgh in the fourth quarter of 2002 was just over £75,000. That results in a stamp duty charge of only £750. In the traditional entry areas—including some in the hon. Gentleman's constituency—the average price paid by a first-time buyer was about £65,000, so many such purchases would have been below the £60,000 threshold and most of those who did pay stamp duty will have paid less than £700. There must be more significant factors for first-time buyers than that.

Stamp duty is a one-off charge, and it is often much lower than other charges that house purchasers face. The hon. Gentleman asked about the Government's policies and principles in relation to stamp duty. We are committed, with stamp duty as with other taxes, to target relief where it is most needed. We are not convinced that an increase in thresholds, which takes no account of the circumstances of individual buyers, is the best way to assist those on the bottom rung of the housing ladder. Indeed, an increase in thresholds might actually fuel house price inflation and make property less affordable for first-time buyers, as would removing stamp duty for first- time buyers, as he proposes.

John Barrett

Will the Minister outline any proposals that the Government have to assist first-time house buyers who are normally up against people who have a property to sell, and who find themselves at a disadvantage? Can they be helped?

John Healey

I said a moment ago that our policies are informed by wanting to target relief where it is most needed. I shall explain where we are targeting that relief and why we believe that that is where it is needed. The definition is not necessarily based on those who are buying property for the first time.

The housing market has been prone to boom and bust, and that has too often contributed to the UK's unhappy history of macro-economic instability. Indeed, the hon. Gentleman will recognise, as my hon. Friend the Member for Edinburgh, North and Leith does, the importance of stability in housing markets in increasing convergence between the UK's economy and that of the eurozone. A tax such as stamp duty, which progressively takes more yield out of a rising housing market, can help to dampen housing market fluctuations. Any moves to uprate stamp duty thresholds in line with rising house prices would undermine that valuable stabilising property of the tax.

The hon. Gentleman cited some of the advocates for a higher threshold and referred to a suggestion of £120,000. If we increased the stamp duty threshold to £100,000, the cost to the Exchequer would be £300 million. That loss of yield would have to be made up elsewhere, or balanced by cuts in public services.

Instead of an across-the-board increase in thresholds, the Government will continue to consider reliefs targeted at those in most need, and the hon. Gentleman has mentioned one of the most significant: the introduction in 2001 of exemption from stamp duty for purchases in disadvantaged areas where the purchase price is £150,000 or less. He described the policy as one informed by good intentions. I welcome that, and I am glad that it has helped his constituent, Louise Lang. She is one of 400 in Edinburgh who have been assisted by that stamp duty relief. However, as he expressed some concerns, let me dwell on them.

When the relief was implemented on 30 November 2001, it provided for an exemption from stamp duty in respect of all property in designated disadvantaged areas where the consideration, or premium, for a lease does not exceed £150,000. In this year's Budget, the Chancellor announced the implementation of an extension of the relief. That removed the £150,000 limit for non-residential property, effectively affording unlimited relief in those areas.

Mr. Lazarowicz

In my constituency, the public sector partnership leading the redevelopment of West Shore road, Granton—a major development—estimates that it will gain hundreds of thousands of pounds, or possibly millions, from the relief granted for commercial elements. It can already use the benefit of the scheme to redevelop an area in great need of regeneration. If my hon. Friend the Minister passes through Edinburgh, I invite him to visit the area to see what good work the scheme has already done.

John Healey

I am delighted that the relief appears to be working well in my hon. Friend's constituency. It is designed to stimulate greater business and economic activity in areas that for too long have had less economic activity, fewer firms and fewer jobs.

In addition to the announcement about the removal of the £150,000 limit for non-residential property, the Chancellor also provided for relief from duty in the rental element of new leases executed on or after the Budget on 10 April 2003. The areas were selected using the indices of deprivation produced in each of the four parts of the United Kingdom. In each case, the index ranks areas according to an overall score achieved by measuring a range of factors relevant to deprivation. They include income, employment, health, education, poverty and access to services.

The national indices of deprivation provide the best available evidence of disadvantage, thereby allowing the Government to meet their objective of targeting the relief at the most deprived areas of the UK. In some areas, there may be pockets of prosperity. Similarly, some wealthy areas in Scotland and in England will contain pockets of deprivation, but are not deprived overall. I must say to the hon. Member for Edinburgh, West that the indices of deprivation are the best method of ensuring that the relief goes to those who most need it.

Some 135 of the qualifying areas are in Scotland, nine of which are in Edinburgh. The indices for Wales, England and Northern Ireland define an area as an electoral ward. The index applied in Scotland uses postcode areas, not wards, as the hon. Gentleman said. The Scottish Executive recently published an updated index of deprivation and will deliver final measures of deprivation in 2004. That programme of work uses wards, which he might find encouraging. We will consider the implications of this work in conjunction with the work being undertaken in England.

The Government will continue with policies that lead to low and stable inflation and will continue to target tax reliefs at those most in need of them. Increasing the stamp duty threshold could reduce the stabilising role of the tax. It would certainly reduce the revenue to the public finances, which would have to be recovered by tax rises or public service cuts elsewhere.

Question put and agreed to.

Adjourned accordingly at twenty-eight minutes past Four o'clock.