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The measure will have two effects specifically in respect of business property. The first relates to property as a tool or as a piece of working capital in the operation of a business. The Bill will place an additional tax burden on all businesses using property, including factories, shops, offices and warehouses. Estimates show that75 per cent. of the yield of the increase in stamp duty will come from business--raising £350 million in 1999-2000. That represents a significant additional burden on business. In cash flow terms, the burden will fall on a business purchasing a new property, expanding or building a new factory--just when its cash flow is strained most, as it seeks to expand and to answer the Government's exhortation to invest and create jobs.

The second effect of the measure will be on property as an investment. Property is already by far the most illiquid of the assets held by investment funds, and the Bill will dramatically decrease the liquidity of property. If a fund owns a building that would be expected to sell for £100 million, it must consider that any buyer will have to pay 3 per cent. tax on that transaction--a not

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insignificant sum. The measure, if passed, must have an effect on the value of existing property assets held in funds, including pension funds that have already been hit by the Government's change in the treatment of ACT credits last year.

As my right hon. Friend the Member for Wells suggested, there are a number of ways in which more sophisticated operators can seek to avoid the impact of the increase in stamp duty. They include the use of the single-asset property company as a vehicle for the transmission of a property--or perhaps multiple transmissions--avoiding the payment of significant stamp duty on each occasion. The Paymaster General would probably agree that, in general terms, it is undesirable for the tax tail to wag the investment or business decision dog. We are in danger of a multiplicity of methods being employed to avoid the full impact of the measure on business properties, including an increase in the use of single-asset companies and the development of different funding methods for property development to avoid the transmission of ownership and, therefore, a charge to stamp duty.

Any measure that fragments the market into different qualities of assets because of different tax status attaching to them must be negative, as it will damage liquidity in the market and create distortions, adding to the distortions that will already be created by the arbitrary cut-off points at £250,000 and £500,000. The cut-off points are particularly important. They are far too low to affect the behaviour of large property investors and sophisticated developers building in the City of London, but they will affect and determine the behaviour of smaller companies building investment properties, and public authorities building starter industrial units up and down the country.

The Government should not object to the Opposition amendment if their real purpose is to introduce a new regulator into the housing market, as the Chancellor suggested. However, I have my own concerns about the possibility that stamp duty is being ratcheted up from a nominal 1 per cent. to become a significant tax. My concerns lie not so much with the issue of harmonisation of business taxes in Europe, but with the Government's projected preparations for our possible entry into the single currency.

The United Kingdom has a distinctive housing market which is different from that of many of our European Union partner countries. When my right hon. Friend read out a list of countries in the European Union with high rates of property transfer tax, although he was dealing specifically with business property, it occurred to me that there may be a correlation between the high rates of property transfer tax and the relatively low percentage of home ownership in many countries. We would not wish to discourage home ownership in the United Kingdom.

As the Government look towards preparing the United Kingdom for possible entry into a single European currency, the Treasury must be concerned about the peculiar nature of our housing market and the absence in a single currency union of any distinctively British regulator of housing market activity. The Government would not control interest rates. They could find themselves facing a housing market boom in the United Kingdom while overall economic conditions in the European Union indicated relatively lax monetary conditions. In those circumstances, the British Government would find it extremely difficult to control

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the housing market in the United Kingdom and certainly would not be able to use the conventional means that have been employed in the past.

I wonder whether the Government are looking at stamp duty as the future method to regulate house price inflation. If so, the British people should be told. We should understand now that the Government propose to increase stamp duty, perhaps to 6 or 7 per cent. as applies in other European Union countries, as their preferred method of regulating the housing market as the United Kingdom prepares for entry into the single currency. If that is the case, the British people should be told.

Mr. St. Aubyn: I share the concern of my hon.Friend the Member for Runnymede and Weybridge(Mr. Hammond) that there is a hidden agenda in the rise in stamp duty imposed by the Government. It is absolutely right that, in considering the amendment, we ask ourselves whether it goes far enough. Should it not also include an exemption for the housing sector?

At this point, I declare an interest as someone who is affected by both clause 147 and the amendment.

The problem with stamp duty is that, as a regulator of economic activity, it is for any Government what one might term counter-intuitive. Often when a recession looms, the Government's borrowing requirement goes up and it is intuitive and in their interest to cut interest rates. That is easy. But if in such a situation they consider a cut in stamp duty as part of regulating the economy, there will be howls of anguish from some members of any Cabinet. They will ask, "Why are we giving money back to this relatively affluent sector?" and to be told that it is part of the Government's long-term plan to regulate the housing market will not wash with them.

Stamp duty is a one-way street for this Government. They will happily raise it in the good times that they inherited from the previous Conservative Government. However, it will go against all their instincts to contemplate reducing it again if and when--I fear that under this Government, it will be when--a recession hits not only manufacturing, as is happening now, but the property and housing sectors.

The trouble with a tax that is aimed at what we are told is 2 per cent. of residential housing purchases is that it sounds as if it hits only the rich. But in the London economy and, indeed, in the wider economy, there are many businesses and craftsmen who work for those rich clients. A business in which I am much involved often works for clients who own substantial properties. If those properties are hit by a higher rate of stamp duty, not only will their rich owners have less money to spend, but they will be less inclined to move. If they do move, they will probably decide to economise on some of the costs of moving, which would include the more craft-based, refined products that they would otherwise purchase. The Government's policy--their stated policy and their hidden agenda--will hit a specific sector of craftsmen.

We are considering an amendment which would change only the rate on commercial property. As my hon. Friend the Member for Runnymede and Weybridge said, the liquidity of the property market is almost certainly at risk as a result of the proposal. Over the years, there have been attempts to develop a derivative market in commercial property. The threat of the higher rate of stamp duty may act as a spur to such a market. I hope that the Paymaster

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General will at least assure us tonight that if such a derivative market in commercial property were to develop, he would regard it not as a tax avoidance device, but rather as a healthy development for efficient investment in this country. If we have taxes that distort investment, we shall have a less efficient economy.

I know that the Paymaster General's own investments relate more to intellectual than to commercial property. Nevertheless, he should recognise that old-fashioned bricks and mortar have their role to play in the running of businesses.

Another aspect of the issue is brown-field sites. We have heard much back-treading by the Government on brown-field sites. Initially, they set modest, unsatisfactory targets for the number of brown-field sites to be developed for residential use. They now want to achieve a target of 60 per cent. That is not enough for an area in Surrey such as I represent, but it is a welcome improvement on their earlier target. Have the Government considered how the rise in stamp duty will affect the attractiveness of brown-field site development? Following the logic of the argument of my hon. Friend the Member for Runnymede and Weybridge, for some businesses, it will be a marginal decision whether they give up their inner-city brown-field site for a residential housing proposal and then have to buy a new commercial site in another part of the town. They may be discouraged by higher stamp duty.

That brings me to the crux of the matter: 3 per cent. stamp duty--an increase of 1 per cent.--may change the positive environment for property investment, although it may be just about bearable. In agreeing the full price, buyers and sellers may agree to suffer the rise between them. If, however, the Government intend to raise stamp duty to continental levels, as my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) mentioned, the quantity of land available for brown-field site development to meet the country's housing needs will certainly be adversely affected.

Sources suggest that the rate of stamp duty in other countries is much higher. I have heard that in Italy it is8 per cent., and that in Ireland it reaches up to 9 per cent. Stamp duty at 9 per cent. on brown-field sites in this country would almost certainly be enough to kill any prospect of change in use. That has long-term consequences. It is a good example of how stamp duty can distort the economy.


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