Chris Huhne (Eastleigh) (LD): We have had a salutary reminder from the hon. Member for Newcastle upon Tyne, North (Mr. Henderson) that the great thing about economics and finance is that everything affects everything else. I will try to be a little more focused on the Finance Bill itself but, since he has given us the invitation to talk about macro-economics, I should pay tribute to the Government, as there is no doubt that their track record on macro-economic stability is a very good one. We are all in favour of macro-economic stability, which has been the happy result of the Chancellor's granting of independence to the Bank of England and of the framework for fiscal policy that has been pursued, including the golden rule.
As for the economic record, it is worth pointing out, before Ministers allow hyperbole to get the better of them, that their record is good but not as stellar as is usually claimed. In fact, no fewer than six of the other old European Union countries have grown on average more rapidly since 1997. Embarrassingly for the Conservative party, perhaps, five of those countries are in the euro areaFinland, Ireland, Spain Greece and Luxembourg.
Unemployment is far too high across the continent and particularly in the big three economies of Germany, France and Italy. However, unemployment is primarily the result of national labour market policies, which is why its pattern varies so much from one country to another. Those countries such as our own that have embarked on the process of structural reform and have made their economies more flexible have been rewarded with a good growth record and a good fall in unemployment; a third in the case of Spain, a quarter in the case of Finland and a half in the case of Ireland since 1997.
If a little more modesty is in order on macro-economics, a good deal more modesty on micro-economics is in order. In the period since I started looking at the British economy, the boom and bust in the housing market has repeatedly been the ghost at the feast. Yet what have the Government done on the housing market? Ministers disparaged my hon. Friend the Member for Twickenham (Dr. Cable) when he first warned of the consequences of another house price ramp at the end of 2002. I hope that the unwinding of that boom will be less painful than the unwinding of the last one under the previous Conservative Administration, as it should be given the more stable macro-economic environment.
However, our household liabilities are now exceptionally high both by our own standards and by those of other countries; we are a nation in hock to our homes. That is lovely and warming when house prices are rising, because the effect of making tax-free capital gains with other people's money is highly gratifying. However, it is much less comforting when prices stagnate or fall, as they are now doing. That may be one explanation for the sluggishness of retail sales that has been widely reported and which may begin to have an impact on the underlying finances that we are addressing in this Bill.
Perhaps concern about the end of the feel-good boom in house prices and on the high street is one reason why the Finance Bill signally fails to correct a taxation error
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that will come into effect on 6 April 2006 and on which the Paymaster General has provided a partial defence to criticisms. Under the provisions of self-invested personal pensions, anybody can invest their personal pension pot in a buy-to-let home and benefit from full tax relief on the money put in, up to a limit of £215,000 a year. Indeed, people can benefit from full tax relief on assets such as vintage cars, wine collections, flats purchased so that children may live in them while at university, and even what my noble Friend Lord Oakeshott of Seagrove Bay pithily described in another place as the occasional jet-to-let property in St. Jean Cap Ferrat.
Let us take the example of a successful professional person who decides to buy a £215,000 flat as part of his or her SIPP for a child to live in while at university. No less than £86,000 of the purchase price will be paid by all other taxpayers. The purchasers will be able to sell the flat on in three or four years and pay no capital gains tax because the property is held within a tax-free fund. Those provisions are a serious and imminent threat to the public finances. We will argue in Committee that there must be an amendment if there is not to be an important loss of revenue. I hear what the Paymaster General saidindeed, we should bear in mind the invitation extended by the hon. Member for Normanton (Ed Balls)that that will not necessarily happen because of other examples of capital gains tax taper relief not coming home to roost.
Mr. Quentin Davies (Grantham and Stamford) (Con): The hon. Gentleman criticises an important element of the Bill. Is he against the tax break for people who invest in real estate in their pension funds, as introduced in the last Finance Bill? Presumably it is retained in this Bill, which is why we are discussing it, and I think that the provision comes into force next year. Is he against tax breaks for pension investment altogether, or does he think that there should be no tax incentive if the asset acquired in the pension fund happens to be real estate rather than some other investment?
Chris Huhne: Let me come to that. The hon. Gentleman anticipates the obvious solution that I was going to suggest at the end of my remarks on this section. Although the Paymaster General reassured us on the matter, I remind her that when my party raised similar concerns about the disadvantaged areas provision, the Treasury rapidly decided to close the loophole.
Danny Alexander (Inverness, Nairn, Badenoch and Strathspey) (LD): Does my hon. Friend share the view that a further worrying aspect of SIPPs is the likely increase in demand for a second home, particularly in rural areas, thereby fuelling the rapidly rising house prices in areas such as my constituency and pricing houses beyond the means of people on local average wages?
That will be a problem and I am not reassured by the Paymaster General's response that the Inland Revenue will make substantial checks to ensure that that does not happen. Under existing provisions,
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people could buy a second homeI see the hon. Member for Grantham and Stamford (Mr. Davies) perk up at this prospecton the Côte d'Azur or somewhere in Croatia, for example. It beggars belief to imagine that Inland Revenue inspectors are going to be hopping on easyJet to check out whether people have used those homes themselves or are letting them out properly, which is the purpose of the exemption.
The obvious solution is not to undermine the principle of a SIPP, but to exclude the more exotic assets and to postpone the inclusion of residential property until properly constituted and regulated real estate investment trusts are available. That would allow pension funds to continue to invest in residential property, but on a similar basis to the way in which most institutional investors invest in residential property, which it is rare for them to do directly because of management issues. That is a way to close the loophole.
Mr. Davies: The hon. Gentleman is wrong about institutional investors: sometimes they decide to take a direct stake in a property. By denying them the right to do so, he will both distort the market and ensure that, to get the benefit of the pension investment, people have to pass through intermediaries, who will presumably deduct fees, commission, management charges and so on. Does he really believe that it is a good idea to distort the investment market in that fashion and to tell people that, if they want a tax break, they will have to give up some of the benefit to an intermediary? We have been through that before and found it foolish, since it diverts resources from the taxpayer to financial intermediaries, rather than encouraging the taxpayer to save more, which is what we want.
Chris Huhne: I know of no institutional investors who directly manage residential property: they may own it directly, but they have an intermediary managing the property for them. However, I shall enter into correspondence with the hon. Gentleman on the subject. My understanding is that relatively little, if any, investment goes into residential property directly, as opposed to via other investment funds, so I doubt that a distortion such as he describes would be created.
Rob Marris: I understood the Paymaster General to say that the assets would be owned by the pension fund, rather than by the individual. Therefore, in the example the hon. Gentleman gives of a person who invests in a property for children at university, to fulfil their statutory obligations, the trustees of that SIPP fund would have to set the rent at the market rate. There would be no gain for the family, because the children at university would not be getting a cheap rent, but would have to pay a market rent. Where is the gain?
Chris Huhne: To be frank, the real potential is in abuse. I am not persuaded that the Inland Revenue is in a position to check, in particular because, as I understand it, the provision is open to investments in property both inside the UK and outside it, certainly throughout the European Union.
On other occasions, the Treasury's desire to tackle tax avoidance proves altogether too blunt, as seen in the provisions on authorised investment funds. The fund management industry is a small jewel in the crown of
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British financial services, with some £2 trillion in assets under management in this country, third only to the United States and Japan. Moreover, it is a branch of the industry that does not need to cluster in the great financial centres, which is why there are thriving asset managements in Edinburgh as well as in London and other centres across the UK. In Committee, we will voice detailed concerns about the possible reintroduction of double taxation for some types of qualifying investor scheme, which might prove unhelpful to the objective of ensuring that Britain remains a highly competitive centre of fund management.
Wider principles are raised in the provisions on authorised investment funds. In general, it might be sensible to delegate the technical regulatory powers to the Treasury, as clause 17. At present, the AIF tax code details are mainly in primary legislation, which can be changed only annually, as the hon. Member for Runnymede and Weybridge (Mr. Hammond) said. The delegation of those enabling powers seems as sensible for us in the UK as the similar delegation of enabling powers at European level under the Lamfalussy proposals, which all the parties welcomed. However, we find in the Government's proposals none of the safeguards that became normal in European financial services legislation. There is no obligation on officials to proceed with openness and through drafts for consultation, nor any mechanism whereby Parliament can satisfy itself that such commitments to openness and consultation have been honoured.
In all European financial services legislation since the Lamfalussy report, the European Liberal Democrats have proposedwith the support of all the other parties represented in this placea sunset clause on delegated powers, which removes them after four years. I hope that Treasury Ministers, if not their officials, can see the value of inserting such a provision in respect of the newly delegated powers. At present, there is a simple approval of new regulations by the House when they are first introduced; thereafter, revisions are subject only to the negative resolution procedure. There is no trigger point at which a general assessment of the operation of delegated powers can be undertaken, but it seems to us that there should be.
Another issue that is always a matter of concern in any Bill, and certainly in any Finance Bill, is the inclusion of retrospective provisions such as those in clause 12. I recognise that there is a hue and cry about retrospection every year, and also that retrospective tax provisions are less of an intrusion into the personal freedom of the individual than, say, retrospective criminal offences. However, retrospection is surely a sign of failure of foresight. It is representative of Treasury officials recognising that a particular tax avoidance scheme is so serious that it must be dealt with retrospectively. Surely it is better to anticipate problems than to tackle them after they have occurred. It is also surprising, given the Treasury's new powers to insist on the disclosure of schemes marketed to clients for tax avoidance, that these retrospective measures are still deemed necessary. Perhaps the Paymaster General will give some thought to encouraging her officials to keep their ears to the ground.