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Mrs. Theresa Villiers (Chipping Barnet) (Con):
I, too, support the amendments. The key issue is real estate investment trusts, as mentioned by a number of hon. Members. As we heard, the industry and experts have for some time called for the required structures to be introduced. They have emphasised the importance of enabling and facilitating investment in a REIT-type structure. The Government have made positive noises and have said the right things, but, sadly, they simply have not delivered in this area, as in so many others. If we are to be competitive and successful in establishing REITs for our savers and investors, we need a proper tax and regulatory framework to facilitate the new structures. The amendments are designed to give more certainty and to make it easier for REITs to go ahead successfully.
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Mrs. Villiers: I do not think that REITs would have a significant impact on land values. It is not easy to predict exactly what would happen, but the amendments would not cause spiralling asset prices and inflation. Indeed, I would not support them if I thought that that would be the consequence. We have to be cautious about new measures that have an impact on the property market and property prices. I am confident that the amendments would make modest changes that would allow REITs to be established with greater ease, but they would not have the inflationary effect that worries the hon. Gentleman.
Rob Marris: It was mentioned that France set up REITs in 2002I hope the Committee forgives me if I misremember the date. Land values in France in the past three yearsthis may or may not be coincidentalhave increased by something like 50 per cent.
Mrs. Villiers: I am not aware of the statistics, but other factors are likely to be in play. I can see no evidence for the existence of a REIT framework facilitating such an increase in land values. Many other factors could have caused that increase. We heard about the great success of REITs in the United States, where they have been used for many years. It does not seem to have a huge problem with spiralling land values.
It is important to provide ease of access to different types of investment. It is a basic investment in economic terms to encourage people to diversify their investments as much as possible. REITs have the benefit of allowing people an easier alternative to equities and are an easier way to buy into a portfolio of property because they do not have to invest everything in a single property. They have a significant value in terms of diversification of people's investments, with the consequent reduction in risk. That is one of their great values and it is why, once a proper tax and regulatory framework is in operation, I would expect REITs to go from strength to strength and to become much more common.
I said that I support some of the Government's statements on REITs, but we need changes to ensure that the tax framework becomes more certain. I hope that they will consider supporting the amendments as a route towards clarifying the tax position on REITs. Uncertainty is one of the greatest vices in terms of investment and the competitiveness of a financial centre. If one discusses tax or regulatory measures with experts down the road in the City of London, they often emphasise that clarity and certainty about the rules is, in a sense, more important than the content of the rules themselves. Uncertain rules or frameworks are one of the best ways to drive away investment, and hence erode our competitive position.
As my hon. Friend the Member for West Suffolk said, people in this country have tremendous expertise in investment and financial services. Indeed, that expertise can be narrowed down to one placethe City. My constituency is on the edge of London, and I have many constituents who work in the City. It is a great economic
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asset to our country and the continent, and we must ensure that it remains competitive in the important new area of real estate investment trusts. If we do not grapple with the issues, we risk losing out on that new market or growing sector, as other hon. Members have said. It is universally acknowledged that once one loses a market it is almost impossible to regain it.
Mr. Newmark: I have been thinking about the question asked by the hon. Member for Wolverhampton, South-West (Rob Marris). I know a little about REITs, although I have never invested in them myself. The hon. Gentleman was concerned about the causal effect of REITs on property prices, but there is no evidence whatsoever of property price inflation caused specifically by REITs. There is enormous price inflation in France and other European countries that do not have REITs, so there is no evidence of cause and effect. It is important to make that point clear.
Mrs. Villiers: I am grateful to my hon. Friend the Member for Braintree (Mr. Newmark) for his well-informed contribution. It would be extremely useful if the Government produced some research and analysis, as we need to consider the issue, and that would assist our assessment of the Bill. I shall conclude on that point, and emphasise the fact that the amendments are simple measures that would create a great deal more tax certainty for a valuable new form of investment. They would encourage investment and savings, and they would offer considerable assistance in ensuring that our global financial centre in the City of London remains as competitive and successful as possible.
Mr. Ivan Lewis: This has been an important and interesting debate. The hon. Member for West Suffolk (Mr. Spring) began in his usual bullish way. He used the phrase "better late than never" and accused the Treasury of functional incompetence. How the Conservative Government would love to have been accused of the relative functional incompetence that the Treasury and my right hon. Friend the Chancellor have displayed under this Government! The lowest inflation, interest rates and unemployment in living memory would not be described by most objective observers as functional incompetence. As for the charge of better late than never, we are consulting industry representatives, as we want to be quite sure before we introduce regulations that we get them right.
The hon. Member for West Suffolk raised a number of perfectly reasonable issues, which I shall try to address one by one. He was understandably concerned about the fact that funds would need to rebuild all their systems from scratch. We do not accept that, as the change is built on to the existing mechanisms operated by funds. It should therefore be a case of adapting the system rather than redesigning it wholesale. He was also concerned about the major cost of system changes and the way in which the funds will benefit from them. The powers that allow us to make regulations are enabling powers, and funds can still elect to make only dividend
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distributions. The changes allow funds to reduce their administration costs by offering a wider range of investments within an individual fund and to consolidate and streamline the number of funds on offer. That could lead to administrative savings for fund managers, and savings could be passed on to investors through lower fees. Fund managers will save substantial costs by no longer having to comply with the daily bond fund test. The hon. Gentleman raised the benefit for authorised investment funds. We would argue that the proposal is more attractive to investors, because more diverse investments can be offered. There would be a cost saving, and dividends and interest could be issued to reflect the nature of the funds.
I shall try to address hon. Members' concerns about the important issue of real estate investment trusts. The hon. Member for Eastleigh (Chris Huhne) was concerned about the use of secondary legislation. It is important to make it clear that clause 19 requires affirmative procedures to be followed when powers are used for the first time to introduce regulation. In those circumstances, the full detail of the measures will be scrutinised and debated by the House before they come into force. The hon. Gentleman raised the basic charging provisionthe rate of taxwhich is included in clause 16 and is subject to scrutiny by the House. The proposals provide for the rate of taxation to be applied to open-ended investment companies and would make that subject to primary legislation, rather than regulation. I hope that that addresses the hon. Gentleman's concerns.
The hon. Gentleman also raised the proposal to tax substantial investors in qualified investor schemes on the annual increase in the value of their units which, he said, amounted to a double taxation charge. That is not the case. The substantial investor will calculate a capital gain at a point at which the holding rule is triggered. The gain will then be held over until he disposes of the units. Each year, he will be subject to an income tax charge on any increase in the value of the holdings. The investor will not be subject to a further capital gains tax charge on income that has already been subject to an income tax charge. There is simply no double taxation in those circumstances.
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