Previous Section Index Home Page

29 Apr 2008 : Column 205

29 Apr 2008 : Column 206

29 Apr 2008 : Column 207

Clause 90 ordered to stand part of the Bill.

29 Apr 2008 : Column 208

New Clause 1

Collective enfranchisement by leaseholders

‘(1) Section 74 of the Finance Act 2003 is amended as follows.

(2) In subsection (1) omit “by an RTE company”.

(3) Omit subsection (4)(a).

(4) In subsection (4)(b) omit “by an RTE company”.’.— [Mr. Gauke.]

Brought up, and read the First time.

Mr. David Gauke (South-West Hertfordshire) (Con): I beg to move, That the clause be read a Second time.

New clause 1 is an attempt to rectify a small but aggravating injustice in the stamp duty land tax. It is an injustice against the thousands of people who own the leasehold of their property and wish to acquire the freehold under the Leasehold Reform, Housing and Urban Development Act 1993. It is a technical problem recognised by hon. Members on both sides of the Committee, and we hope to provide a solution to it this evening.

I shall have to take a few moments to set out the technical concern; I hope that I do not empty the Chamber in doing so. The problem exists for many people. I must confess that I have tried to identify the number of people affected, but I have not succeeded. I do not know whether the Exchequer Secretary will be able to shed any light; it is a complicated matter, and I would be surprised if she could.

Let me give an example. There is a block with, say, 100 flats. The leaseholders wish to acquire the freehold, which is worth, in aggregate, £600,000. That, of course, would mean an average of £6,000 per flat—well below the stamp duty land tax threshold. However, I should say something about how such a transaction works. The freehold is acquired by one company formed by the leaseholders; the acquisition is therefore viewed as one transaction. The consideration of £600,000 would fall within the 4 per cent. band for stamp duty land tax, so 4 per cent. stamp duty would be payable. The leaseholders would be liable for an average £240 each, and the Government would collect £24,000 in stamp duty land tax.

6.15 pm

One could say, “So what? The purchasers knew that they would have to pay up, just as one would normally have to for such a transaction.” However, let us consider the issue from the individual’s point of view: they would be paying £6,000, and stamp duty is not normally payable on such a sum. To be fair, the Government recognised the issue and sought to address it in section 74 of the Finance Act 2003. The purpose of that section, as set out in the Act’s explanatory notes, was that

To return to our example, there would be 100 different transactions, each at £6,000. Not one of those would exceed the stamp duty threshold. There would not be a single transaction of £600,000 on which stamp duty would be payable, and the leaseholders acquiring their freeholds would not be paying stamp duty land tax.

29 Apr 2008 : Column 209

However, there is a problem as section 74 refers to amendments to the 1993 Act, to which I have referred, and they are set out in the Commonhold and Leasehold Reform Act 2002, which refers to a right to enfranchise, or RTE, company. Such a company is defined in section 4A of the 1993 Act, as amended by the 2002 Act. At this point, I am surprised to see a few hon. Members still in the Chamber.

The problem is that the provisions implementing section 4A had not come into effect in 2003—nor have they now, in 2008. To benefit from the provisions, the freehold would have to be acquired by an RTE company. However, strictly speaking, such an entity does not exist. That is clearly an example of a failure to provide joined-up government; presumably, the Treasury and the Office of the Deputy Prime Minister, which was responsible for the 2002 Act, should have been working together and come up with a consistent definition. When the Treasury was preparing the Finance Act 2003, one would assume that it consulted with the Office of the Deputy Prime Minister, which would have given the Treasury assurances that it could make use of the definitions in the 2002 Act and proceed on that basis. Sadly, things have not worked out that way.

There is an ambiguity. One could advance the argument that because there was a definition of an RTE—indeed, draft regulations further set out the definition—one could still fall within the definition even if it had not been enacted. Precisely those circumstances have obtained in one case. The leaseholders of Elizabeth court in Bournemouth grouped together and formed what would have been an RTE company, had such an entity existed. Their group complied with the definition in section 4A and draft regulations.

Her Majesty’s Revenue and Customs took the view that it was impossible for people to benefit from the relief contained in section 74 of the Finance Act 2003 until section 4A came into force. Presumably, HMRC need not have pursued the matter as vigorously as it did. It could have used its discretion not to pursue, but it did not do so, with the result that the case—Elizabeth Court (Bournemouth) Ltd v. HMRC—went to the special commissioner.

On 31 October 2007, the special commissioner decided that the relief was not available until the RTE provision came into effect, and it is worth noting why she came to that decision. In part, it was because an ambiguity in the statute made it necessary for her to look at Parliament’s intention. The special commissioner did that, and determined that Parliament’s intention was that the relief under section 74 would not be available until section 4A had come into force. I do not know whether any clarification in the course of this debate would lead to a change in the law, but it is worth noting that Parliament’s intention was considered.

The aggregate cost of acquiring a freehold is likely to exceed the stamp duty land tax thresholds. What progress are the Government making in addressing that problem? The hon. Member for Liverpool, Riverside (Mrs. Ellman) submitted a parliamentary question on that point, to which the Under-Secretary of State for Communities and Local Government, the hon. Member for Hartlepool (Mr. Wright), responded:

Another parliamentary question was asked by my hon. Friend the Member for Enfield, Southgate (Mr. Burrowes), who I know has pursued this matter on behalf of his constituent, Mr. Leo Athanasatos of Windsor court in Southgate, where 34 leaseholders are trying to acquire the freehold. The Under-Secretary of State stated that

The Government have had five years to resolve those practical difficulties. So far, they have not produced even a timetable for dealing with the problem: the relief remains ineffective, and there is no sign that the Government will address that. It is a significant matter for many thousands of people, as many flats are held on a leasehold basis, especially in London. I own a flat on that basis. I hasten to add that I have no intention of acquiring the freehold, and so have no interest to declare, but many people in London do want to do that. Even so, the Government do not appear to be tackling a concern that hon. Members of all parties recognise.

New clause 1 is the Opposition’s attempt to rectify the problem. It would remove the references to “an RTE company” in section 74 of the Finance Act 2003, and provide that the relief would be available where a chargeable transaction is entered into in pursuance of a right of collective enfranchisement. We do not want the present problems to drag on. Instead, we want to resolve what is an aggravating matter for many people. It is clearly unfair for people in the circumstances that I have described to be hit by stamp duty when that is not the intention of either the Government or the Opposition.

If the Government cannot accept new clause 1, we hope that they at least exhibit some urgency about bringing forward their own solution. The present legislation is defective, and HMRC appears to be pursuing relevant cases with some vigour. It is taking in revenue, even though that is not what the Government have said is their intention. The Government have promised that they will deal with the matter, but there appears to be little or no practical activity in that regard.

There is a failure in the system, and we believe that new clause 1 would deal with something that has been allowed to fester for far too long.

Mr. Colin Breed (South-East Cornwall) (LD): First, may I say that my party has considerable sympathy for new clause 1, as presented by the hon. Member for South-West Hertfordshire (Mr. Gauke)? That is principally because so much time has elapsed since the proposals were first put forward, and the case in Bournemouth to which he referred will no doubt be replicated throughout the country.

As has been made clear, the Leasehold Reform, Housing and Urban Development Act 1993 entitled qualifying tenants to bring about the enforced sale of the freehold of a building to the tenants acting together. Sections 121 to 124 of the Commonhold and Leasehold Reform Act 2002 make changes to the collective enfranchisement
29 Apr 2008 : Column 211
rules under the 1993 Act. They provide that collective enfranchisement must be carried out by an RTE company, as defined under section 4A. As we have heard, the SDLT will be calculated by dividing the amount paid for the collective purchase by the number of flats involved.

That seems fair and reasonable, and we all accept that that approach should be adopted. The Government argue that the relief rate provided by the Finance Act 2003 will ensure that RTE company members—that is, the individual tenants—fund the SDLT

That too seems entirely sensible and reasonable, so it is somewhat amazing that SDLT relief is still not available to tenants exercising their right to collective enfranchisement, even though the principle was agreed six years ago. Sections 121 to 124 of the 2002 Act have not been brought into force, which means that section 4A has not been introduced.

We have heard that several Members have raised questions with Ministers, who have indicated that there are legal and practical difficulties which need to be resolved and that work is continuing in order to determine the way forward. There is no idea of when that work will be determined, when we will get to a resolution, or what the legal and practical difficulties are that are being experienced. Perhaps the Minister will be able to inform us about that.

6.30 pm

Mr. Mark Field (Cities of London and Westminster) (Con): Many of these legal and practical difficulties also apply in my constituency, and they should have been thought through some five years ago. The relief is intended to provide an incentive for leaseholders to work together rather than individually. As the hon. Gentleman and my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) rightly point out, this anomaly should be ironed out at the earliest possible opportunity. Does the hon. Gentleman agree that these so-called legal and practical difficulties were not foreseen some five years ago?

Mr. Breed: That is exactly right; it is a shame that none of us spotted them. As was observed in the court case, the problem seems to be to do with the Government’s intention. I would have thought that we could easily have sorted that out.

Mr. Gauke: In the court case, or the special commissioner’s case, the fact that section 4A had not been brought into effect meant that it came down to intention. As the hon. Gentleman says, it has not been brought into effect because of the practical difficulties that the Government have identified.

Mr. Breed: I am grateful to the hon. Gentleman for that clarification.

New clause 1 would remove all references to RTE companies from section 74 of the Finance Act 2003 so that sections 121 and 124 of the Commonhold and Leasehold Reform Act 2002 do not need to be enacted for groups of tenants to be able to qualify for stamp duty land tax relief. That would logically lead to any group of tenants pursuing their right to collective
29 Apr 2008 : Column 212
enfranchisement becoming eligible for such relief under the 2003 Act. I am not certain whether this is a probing new clause or one that will be pressed to a vote, but it is over-simplistic in terms of the legal and practical difficulties, and it could create huge uncertainty for tenants pursuing their right to collective enfranchisement. The purpose of requiring an organisational set-up in the first place is to create that legal certainty and to allow its members clear and defensible rights. Removing RTE companies from section 74 of the 2003 Act would mean that any form of grouping could qualify for SDLT relief, and there could be all sorts of further loopholes and exploitation. We do not know what basic rights the tenants will have. The new clause would certainly not empower them in the way envisaged in the proposals, and it could even undermine their security.

A way round this might have been to introduce an amendment entitling RTE companies retrospectively to claim the relief once the Government had solved their problems with the 2002 Act so that we knew that this was going to happen or could implement a deadline for its commencement. Neither of those would be ideal, but they might be more legally defensible and give tenants some of the security that they require.

Mike Penning (Hemel Hempstead) (Con): Could the hon. Gentleman elaborate on exactly how the new clause would undermine tenants’ security? I cannot see how it would, and he has not given the Committee any guidance on that.

Mr. Breed: The whole purpose of setting up an RTE company as a legal entity would be to bring these groups of tenants together into one legal entity and to have certainty that they could then exercise basic rights under the legislation, which would include SDLT relief. Lots of groups of tenants would not necessarily be RTE companies. Removing RTEs would presumably open this out to all sorts of tenants. While that might have some relevance to SDLT, it could undermine some of their other rights and certainties. Another option would have been to introduce changes to remove an RTE company and replace it with a common definition of a company in the original legislation—the Leasehold Reform, Housing and Urban Development Act—and the 2003 Act. In that way, tenants could qualify for SDLT relief while having the legal protections and certainty afforded by being a company.

The essence of the issue—I am glad in a way that the hon. Member for South-West Hertfordshire has raised it—is that these legal and practical difficulties cannot be allowed to go on for ever. After five years, the Government must tackle them head on and decide what they are going to do so that we have some certainty this time that these reasonable and justifiable reliefs can be given to all the groups of tenants who have got themselves together in RTEs and are now waiting to get the thing done. I would be grateful if the Minister explained how the Government are going to tackle that and resolve what has been an outstanding issue for far too long.

Mike Penning: I promise not to detain the Committee too long. Not least, I will try not to go into the legal jargon that my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) had to use in order to make sense of this, and thereby clear the Chamber.

29 Apr 2008 : Column 213

The hon. Member for South-East Cornwall (Mr. Breed) accused the new clause of being too simple, but it would resolve the problem very quickly. Defective legislation is wrong. We are here to introduce legislation that supports our constituents and supports the country in moving forward. The Government admit that they have defective legislation on the statute book, yet one would have thought that in the past five years the great minds that have been in post in the Treasury might have got their act together and moved forward. This is the sort of defective legislation that an incoming Government might expect to have to resolve, but it is that of an existing Government trying to introduce measures to help people in purchasing the lease of their property.

I must admit that this would probably not affect many properties in my constituency. However, having grown up in a seaside town once I eventually got away from London in my early teens, I know that there are huge effects in seaside towns with large purpose-built leasehold blocks, as well as in many of the cities of this great country. I find it difficult to understand why over the past five years the great minds of the Treasury have not made proposals to repair defective legislation that is taxing people of this country as it was not designed to do.

I support new clause 1 and hope that my hon. Friend the Member for South-West Hertfordshire will press it to a vote.

Mr. Redwood: I rise to support my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), who has done the Committee and the nation a great service by highlighting the ridiculous position that we find ourselves in. I hope that Ministers will take this away and come up with an answer more rapidly than their predecessors have been able to over the previous five years.

As I understand it, the Labour party and the Labour Government wish people to have this exemption if they are buying the leasehold interest in their flat. Certainly, the official Opposition wish them to have that exemption. The hon. Member for South-East Cornwall (Mr. Breed) was rather more muddled. At one point he seemed to be in favour of certain people having that exemption, while at other times he seemed to worry that undesirables would be allowed in.

Mr. Breed: It is easy to understand that if one wants to ensure that people have certainty, that relates not only to their stamp duty land tax but to all the other rights that need to be protected. If people go into this as groups of tenants who do not have the protection of an RTE company, they may well lose some rights and benefits in order to gain in terms of tax.

Next Section Index Home Page