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Clause 113
Question proposed, That the clause stand part of the Bill.
Mr. Flight: Clause 113 introduces--if I may put it thus--a much more naked and transparent stealth tax. It will raise stamp duty by a further 0.5 per cent.--for the third year running--making tax on property sales in this country one of the highest in the developed world. The clause is in part IV, which deals with stamp duty in general. Clause 116 empowers the Treasury to change the rules merely by statutory instrument, and we shall object to that strongly as well. Other proposed changes exclude property transfers to social institutions from stamp duty, and tighten coverage in the case of companies and leases.
The Government say that they expect to derive a yield of some £290 million over the tax year to next April. In due time, we shall ask what the yield is: given the cyclical increase in property transactions, we suspect that it will be substantially above the predicted figure.
The proposed tax is mainly a stealth tax on business. We particularly object to the contradiction between the Prime Minister's entirely correct support for the flexible Anglo-Saxon system--the Anglo-Saxon economies have been successful here and in the United States--and the proposal for a tax that will damage corporate restructuring, prevent improvements in productivity and discourage investment. Members may recollect the Chancellor extolling the McKinsey report on how to improve productivity in this country and the damage done to productivity improvements by our system of taxing property and by some of our planning laws.
10.45 pm
How much will stamp duty cost in the Rover restructuring? Whatever the cost is, another 0.5 per cent. will be added as a result of the Bill. It is particularly damaging for small businesses because property is their main asset. It is the asset against which they go to banks to borrow money. The main effect of the rise in stamp duty--up some 400 per cent. since the Government came to power--for businesses is to increase the volatility of prices, particularly in down cycles. For that reason, the banking sector will be less willing to lend to small business.
I have referred to clause 116. The Government have implicitly already accepted that they have hiked the tax to the limit because they are looking to give themselves discretionary measures to try to attack the mitigation that they expect, particularly from businesses seeking to save on such a high level of tax when they want to restructure.
The tax obviously bears on individuals, too. It is both unfair and economically damaging. It hits the more enterprising in society. How often has the House heard the Chancellor say that his policies are driven by fairness and encourage entrepreneurship? Here we have something that points in the other direction.
Some Labour Members have been gloating that the tax will soak the rich, as it soaked rich people such as the Prime Minister when he sold his house in Islington, but, in reality, it is a tax on middle England. Since the last data were produced, property prices in the southern half
of England have risen by between 20 and 50 per cent. Some 25 per cent. of the property market in the south-east is represented by houses costing about £250,000--it is the average price of three and four-bedroom family houses--which will bear the new rate of stamp duty of 3 per cent.Who moves? Who wants to move? It is people who have to move because of their jobs. It is people who produce children and need larger houses. This is a tax on job mobility and yet another stealth tax on families.
The measure causes more subtle damage. There are problems with potential over-building in the southern half of the country. Senior citizens are already often reluctant to move from the houses that they have lived in to smaller accommodation. That will discourage yet more such senior citizens from vacating larger family houses.
It is the increase in volatility that we are particularly concerned about. When the downturn comes and when the Chancellor realises that he has not abolished the economic cycle, the greater volatility will increase opportunities for negative equity in two ways. First, when there is a much higher tax on buyers and when the market is bad, buyers retreat. Secondly, many families will have used up their capital in paying significant amounts of stamp duty when buying their properties.
The excuse that the Government will give is that the measures are designed to contain property overheating. When the deputy Governor of the Bank of England gave evidence to the Select Committee on Education and Employment recently, he reported that such fiscal measures were not an effective tool in determining prices, particularly domestic property prices, during up cycles. As I have said, such measures worsen the volatility in down cycles, but do not constrain upward movement in up cycles.
In summary, this is another extremely cynical stealth tax that was designed purely to raise revenue. Its economic effects will be bad. They will be particularly damaging in the very areas that the Chancellor claims that he wants to improve.
Mr. Matthew Taylor (Truro and St. Austell): I shall not detain the House long, but I wish to raise a significant issue in respect of stamp duty, which this and previous Governments have avoided tackling--one that becomes more serious as the rates increase.
If we are to have such a system, it makes sense that the Government should attempt to close any loopholes. Indeed, it is surprising that they have not gone further in tackling the use of companies as a tax shelter in respect of property transactions. Presumably, that is why they have left open the opportunity to make further changes by order. Although I do not consider that to be the appropriate mechanism, I hope that the Government will attempt to create a system whereby people pay according to the value of the transaction and not according to how much they can afford to pay specialists to help them avoid paying tax as that tends to mean that big companies avoid paying tax and small companies and individuals end up paying it.
The Government have not addressed the fact that stamp duty is an unusual tax in that different banded levels increase with the value of the transaction, yet the increases apply to the entire transaction. That leads to a simple form of avoidance in that people try to keep the price just below the relevant threshold. As the duty increases on
transactions over £250,000, a difference of just £1 in the price of a property makes a difference of £5,000 on the tax that falls on the individual or company. As a result, people try to avoid tax, not always through legitimate means, such as by selling fixtures and fittings at an inflated price while reducing the notional price of the property.Research that I have undertaken through the Land Registry shows that as stamp duty has increased, there has been a decrease in the number of properties sold at just over £250,000 and an increase in the number sold at just under £250,000. The difference widens as the tax incentive increases. The Secretary of State for Northern Ireland benefited from that by coming in just under the threshold. It cannot be right to have prices bunching just under the break levels so that purchasers avoid tax. Whatever any particular individual may have done, I have no doubt that some people are deliberately avoiding tax. That is not good for the Treasury or the tax system and it makes no proper sense.
Other taxes operate so that the increase applies only to the part of the transaction that is above the break point. It would be possible to make that reform on a revenue-neutral basis, if that were what the Government wanted to do, and it would have exactly the same effect in terms of dampening down the property boom. The tax burden would fall more fairly. Such a reform would remove the incentive to try to avoid tax. Surely, making such a reform would also be infinitely simpler than trying to use Inland Revenue checks to determine whether the fixtures and fittings have been overvalued and the property undervalued. Not only is it pretty difficult to resolve such arguments, but it could cost an awful lot to get a result.
I have tried, consulting the Library and tax experts, to research why we have our peculiar tax banding structure, but answer came there none. The answer was simply, "That's historically how it's been done." I do not think that the current Government feel particularly tied to doing things in a certain way simply because they have always been done that way. I should therefore like to hear from the Minister why that reform has not been pursued, whether it might be pursued, and whether it might not be a more sensible approach than that being pursued by the Government.
Additionally, if the Government are proposing the increases to dampen the residential property boom, why have they not considered creating a divide between commercial and residential property? Such a divide exists in many other countries and has not caused major tax avoidance problems. I think that that, too, would be a sensible measure.
I hope that the Government will consider making those simple reforms, which would help to create a more progressive tax structure and remove the incentive to cheat that the current system undoubtedly presents.
The Economic Secretary to the Treasury (Miss Melanie Johnson): In his opening remarks, the hon. Member for Arundel and South Downs (Mr. Flight) most amusingly alleged that the measure was some type
of "transparent stealth tax"--which is a new Tory contradiction in terms, to add to all the many other contradictions that they have recently offered us.
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