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Mr. George Osborne: While the Financial Secretary is clarifying matters, will she answer the question from the hon. Member for Chatham and Aylesford (Jonathan Shaw), who is normally an enthusiastic—indeed, over-enthusiastic—supporter of the Government? He points out that in his constituency a medical business will see its land tax bill go from £4,000 to £36,000. Does she think that that is possible?
Ruth Kelly: It is certainly the case that the contract could be restructured so that it would not have to pay that amount of money—[Interruption.] I would certainly be prepared to look at the example that has been given, to see whether we can work with Department of Health officials to ensure that there is no impact on LIFT programmes.
In addition, around 93 per cent. of residential leases will not be chargeable for duty under the new structure. The modernised structure was based on five key principles. It was designed to minimise the scope for avoidance, to adjust the distortions inherent in the current system, to better reflect modern commercial practice, to be based on clear economic principles, and to be more in line with the charge on freehold transfers. The regulations today put the final legislative provisions in place for implementation. During the extended consultation process, a number of alternative proposals were submitted to us. Many were based on average annual rent. Because of the potential for avoidance, and because average annual rent does not assess the full economic value of the tenant's interest, it could not be a suitable basis for a new structure. I believe that net present value represents a commercially and economically justifiable way of assessing the economic value of the tenant's interest.
Mr. Prisk: The Financial Secretary is generous to allow me to intervene on this important issue. The Treasury is seeking to use a discount rate in this net present value valuation methodology, which is completely detached from the real market. Can she explain why?
Ruth Kelly: I am about to refer to the discount rate if the hon. Gentleman will allow me. Before I do so, I want to explain how the net present value represents the economic interest of the tenant. First, it recognises that shorter leases are economically of less value than longer leases, which in turn tend to resemble freeholds. Secondly, we have set the rate of tax on the net present value of the rental element of a lease at a significantly lower rate than that of freehold transfers.
To turn to the discount rate, in which I know that the hon. Gentleman is interested, we have chosen a discount rate of 3.5 per cent., because that takes account of the fact that future increases in these payments will not be
included in the NPV calculation, and that the level of lease payments will already have been set taking risks into account—it is the Government's assessment of a risk-free discount rate. I am sure that the property industry would recognise that.
Mr. Prisk: I must dig into my land management class as a chartered surveyor, but the Financial Secretary seems to have just said that she will use contradictory valuation methods. On the one hand, the Treasury is seeking to provide what is known as an all-risks yield, yet in fact the valuation methodology is discounted cash flow. Why is there a contradiction?
Ruth Kelly: As I have already explained—this was also debated during the Finance Bill—this represents the risk-free level of the discount rate. Any other calculation would artificially benefit those who take out longer leases—generally larger businesses in their commercial property transactions—rather than the small business element.
Mr. Ian Liddell-Grainger (Bridgwater): Will the Financial Secretary give way?
Ruth Kelly: I must make some progress. I have taken a lot of interventions, as I am sure the hon. Gentleman understands.
Other proposals suggested raising the nil rate threshold, having a starting rate or both. We shall of course continue to keep rates and thresholds under review. However, the figures that I gave earlier on the percentage of commercial leases that would not be chargeable under the new structure suggest that the proposed thresholds would exempt a large number of leases, especially those entered into by small and medium-sized businesses and business start-ups.
During the consultation process, many commentators expressed the view that the slab structure, under which the whole amount of net present value comes into charge when the threshold has been exceeded, created distortions. I accept that and, for that reason, propose to change the structure so that only the excess over the threshold would be taxable. That will mean that every time that a lease is chargeable, the duty will be £1,500 less than it would be under the original proposals. The relief will be of particular benefit to small and medium-sized businesses and business start-ups.
Mr. Prisk: Now that the Minister is to have a slice approach on business leases, will the Government do the same for residential properties?
Ruth Kelly: We constantly keep the stamp duty system under review. The hon. Gentleman will appreciate that we have undertaken huge modernisation of the stamp duty regime, which Conservative Members avoided doing when they had the chance. I hope that he will give us credit for our action to date.
The amendment to the Finance Act 2003 to achieve the change is set out in paragraph 1 of the schedule to the regulations. Paragraph 2 of the schedule makes a technical change. Under both the current system and the new regime, a premium on the grant of a lease is charged at a rate of nil if it does not exceed the threshold.
However, the nil rate applies only if annual rent does not exceed £600, which prevents avoidance by recharacterising a premium as rent. Paragraph 2 will ensure that when assessing the annual rent, any linked transactions will be taken into account. That will prevent avoidance by splitting up a single transaction into smaller transactions. We do not believe that the change will have any effect on genuine commercial transactions.I turn to the Stamp Duty and Stamp Duty Land Tax (Variation Of The Finance Act 2003) (No. 2) Regulations 2003. The changes to the Finance Act 2003 are contained in the schedule to the regulations and I shall give a brief, non-technical description of each of them. [Interruption.] I am sure that Conservative Members are interested in what I am saying.
Paragraph 1 relates to the charge to tax when a contract is substantially performed because the purchaser takes possession. It will ensure that that includes possession by someone connected with the purchaser, such as a company in the same group. It will also clarify a potential ambiguity in the definition of taking possession.
Paragraph 2 will give partial relief for sale and lease-back transactions. It will exempt the lease-back leg of such a transaction from charge, subject to certain conditions. That reflects the fact that companies that sell and lease back their property commonly do so purely to raise finance rather than to acquire any new economic interest in the land.
Paragraph 3 introduces schedule 6A, which will give relief for a number of acquisitions of residential property, which were the subject of debate earlier this year when my right hon. Friend the Chief Secretary to the Treasury gave a commitment that relief would be considered. The schedule will replace the current limited reliefs for part exchanges and relocations, provisions for which are in sections 58 and 59 of the Finance Act. We believe that the reliefs will help to smooth the process of house buying for many people.
The transactions covered are: the acquisition of residential property, either by a house builder or a third party, when individuals buy a new house from a builder; certain acquisitions of residential property by chain-breaking companies—companies that specialise in stepping in when prospective sales fall through; the acquisition of residential property by either an employer or a third party in connection with the relocation of an employee; and acquisitions of residential property from personal representatives of people who have died by companies that specialise in that business. In each case, there are conditions to ensure that the relief is not abused and to permit withdrawal of the relief in cases of abuse.
Paragraph 4 will give relief when a unit trust is set up by seeding it with property. That will happen if the company that sets up the trust transfers property into it in exchange for units in the trust.
Paragraph 5 will make provision for a further return if additional tax becomes chargeable because of a later transaction. An example of that is the grant of an option followed by its exercise.
Paragraph 6 will permit the holder of a power of attorney to sign a return on behalf of a purchaser—we received several representations on that matter.
Paragraph 7 will ensure that transactions by the Crown will be subject to stamp duty land tax in the same way as they were to stamp duty. I should perhaps mention that existing exemptions from stamp duty for public bodies, such as Government Departments and health authorities, have been carried forward into stamp duty land tax.
Mr. Liddell-Grainger: My constituency has an enormous amount of Crown land. Three generations are covered on one lease for such land, and after the death of a lessee, the land will automatically go to the next person—there will be a family transfer. Will such a procedure still be exempt?
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