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7.45 pm
The main scope for stamp duty mitigation, which is not clearly caught by the mere introduction of SDLT, is therefore the use of rent averaging—for example, providing under a lease for between 99 and 999 years that the rent after, say, the first 20 or 35 years should be the greater of market value or £1,000, thus reducing the average rent over the term of the lease by reference to which the stamp duty was calculated. However, that was
often used in situations in which the current stamp duty regime would, without such a device, have resulted in an inequitable charge arising.For example, where two investors decide jointly to buy a property, one way to structure the transaction is for one joint venturer to acquire a freehold property and the other to acquire a leasehold property in respect of that property. In the case of property that costs £20 million, and assuming a rental return of 8 per cent. per annum, which is £1.6 million, the first purchaser could acquire the freehold interest for £10 million plus VAT and, at the same time, the vendor would grant a leasehold interest to the other purchaser for another £10 million plus VAT, under which amount, equal to half the overall rent, each freehold and leasehold interest would, in general, be equally valuable. One would therefore expect the same amount of stamp duty to be payable in both cases. However, that is not the case. Under the current stamp duty regime, it should be assumed that the acquirer of the freehold would pay stamp duty of 4 per cent. on £11.75 million, which is half the value plus VAT. The amount payable would be £470,000. The acquirer of the leasehold interest would pay the same amount on the premium paid on the grant of the lease, but would also pay stamp duty of 12 per cent. on the rent payable in the case of a lease of less than 99 years, and of 24 per cent. in the case of a lease of more than 99 years. For example, 12 per cent. on £940,000 would be £112,200 and 24 per cent. would be £224,000. That amount could be reduced by drafting the lease so that after the first 35 years, the lease would be reviewed to the greater of market value or £1,000. That, in itself, would significantly reduce the average rent on which duty would be calculated, and there would appear to be no good policy reason why such high stamp duty should be payable in those circumstances.
I do not deny that these are complicated provisions or, to be frank, that the calculations can be made beyond looking at them on paper. However, from all that I can make out from my own work and from what businesses and professionals tell us, the tax is unfair, the Government have not consulted adequately and the consultation that was carried out has only put up the industry's back. I shall certainly support the amendment.
Mr. Simmonds: I draw attention to my entry in the Register of Members' Interests, particularly my chairmanship of two surveying practices that provide advice to tenants and landlords in the property market, mainly in the United Kingdom.
I rise primarily to speak in support of the amendments tabled by my hon. Friends on the Front Bench. The provisions would remove clause 56 and schedule 5 and suggest that implementation should be delayed until December 2004, although I do not have the same confidence as my Front-Bench colleagues that the Government will be ready to put the measure into operation by that time. If the consultation process that ended in January is anything to go by, as well as the lack of discussion and responsible answers to the pertinent and appropriate questions and probing amendments put by my hon. Friends in the Standing Committee, I have no confidence that the Government will be ready by December 2004. Indeed, the fact that the Government have tabled 46 new clauses and
amendments demonstrates to Members and to people outside the House what a shambles and a mess this part of the Bill is.On Second Reading, I spoke about the stamp duty proposals in some detail. At the time, knowing that I had not been fortunate enough to be selected to serve on the Standing Committee, I hoped that I could illuminate some of the problems emanating from the Bill. I hoped that the Government would take that opportunity to explain the methodology, and that they would close some of the obvious apertures and deal with the discrepancies in the Standing Committee. Needless to say, owing to the Government's apparent disingenuousness and to the inevitable programme motion, few of the issues that I raised were clarified. In fact, the inverse is true: the more time elapses, the greater the confusion, uncertainty and bewilderment.
I do not want to repeat the Second Reading debate, but the House should note that, in my view, commercial property should be decoupled from residential property. Indeed, the Red Book states that
- "the Government will be able to differentiate between the commercial and residential markets. in order to take into account significant differences in the economic circumstances of the two sectors".
Commercial property is an investment vehicle; it is an investment sector, alongside stocks, shares, gilts and bonds and its stamp duty treatment should be the same as for other investment vehicles. It is generally accepted—at least by everybody except Ministers—that not decoupling residential and commercial property has nothing to do with economic benefit or slowing down the commercial property market; it is purely a revenue-raising and revenue-generating exercise.
There is another more suspicious, bigger picture. As the Government are taking us—some would say slowly, others would say too quickly—towards possible entry to the European currency, where we would lose control over our economy and our monetary and fiscal policy, one of the few levers remaining in the Chancellor's control is the power to control the taxation of property in its various guises. I suspect that that is one of the main arguments that will be forthcoming as the euro entry discussions heat up and we get closer to that possible—but unacceptable—event. The danger is that a precedent will be created for a retrospective view of property transactions and property taxation, hailing a return to the disastrous 1970s, with such things as purchase tax and development land tax, which ruined the development market.
I have some specific points about the leasehold stamp duty taxation proposals. It is debatable whether rental can be capitalised as if the lease were an asset. Admittedly, some leases carry values: long leases of up to 99 years, some of the ground leases that underlie many residential tenancy arrangements, and some prime retail leases in our main shopping thoroughfares. Although I support the Chief Secretary in his efforts to close the abuse of tax loopholes, most companies lease premises from occupational necessity. Office tenants require space for workers. Industrial tenants require space for plant and machinery. Retailers require an outlet, or outlets, to sell their products. They do not sign
leases to avoid paying stamp duty on the alternative freehold purchase. In my experience, that has never happened. The reverse is true for those occupants; they do not want to tie up capital in property but to release it for investment in their business and in job-generating expansion.The Chief Secretary said in his introduction that decisions should be business-led, not tax-led. That is right and it is exactly what happens at present, but it will not happen if the proposals reach the statute book.
Tenants, whether they are industrial, office or retail, want flexibility to react to the market at a particular time. The retail sector, in particular, is constantly changing and evolving. The proposals would stifle innovation and entrepreneurial dynamism. Indeed, I understand that Marks and Spencer might not have initiated the roll-out of its latest small food stores to compete with Sainsbury Local and Tesco Metro if the stamp duty proposals had been in force at the time of that decision.
Mr. Prisk: My hon. Friend eloquently highlights the dangers in the commercial market. Does he share my concern that the Government seem to be ignorant that, in the real world, the reason retailers are leasing and not buying is that 40 per cent. of them lack an alternative, as is shown in a British Retail Consortium survey published today? Is not that the case?
Mr. Simmonds: I am grateful to my hon. Friend for that information. He makes an extremely good point; it is indeed the case. From my experience of involvement in that marketplace before I entered the House—something to which I shall refer later—trends over the past 15 years show that retailers who for historical reasons had many freeholds in their portfolios have engaged in sale and leaseback, released capital to invest in new plant and machinery, new shopfitting and new employment, and have opened new branches. Unless the Chief Secretary can clarify exactly what will happen, such activities will be much less economically advantageous.
Mr. Djanogly: The problems that my hon. Friend describes are dramatic and he gives useful examples. An article in the Estates Gazette states:
- "Possibly what will evolve is a more liberal association between landlord and tenant, such as a form of partnership or franchise rather than a lease."
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