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I listened carefully to what my hon. Friend said about his survey of estate agents. That survey was made all the more necessary because it is difficult for councils to collect information about second home ownership, as many second home owners seem to be transferring their property to allow holiday lets-property that is available to let for 70 days. As a result, those properties fall off the second home register, which makes it difficult for councils to estimate the scale of the problem let alone take action to deal with it.

Andrew George: My hon. Friend is absolutely right. Indeed, I pay tribute to her for having previously raised the uncertainty about the figures, which I will deal with later. Some elect to be charged council tax, but others change because they find it financially beneficial to identify their properties as small businesses, which therefore become eligible for business rates, which they find financially more attractive.

Mr. Andrew Smith (Oxford, East) (Lab): I congratulate the hon. Gentleman on securing this debate. Further to the intervention by the hon. Member for Falmouth and Camborne (Julia Goldsworthy), I endorse the need for better and more accurate information for local councils and others. However, does that argument not cut the other way, in that the genuine holiday rental market is critical to tourism?

Andrew George: The right hon. Gentleman is absolutely right. Indeed, I shall be returning later to that very point, and the Government's intention in only a few weeks to introduce a change-a reversal-by ending tax arrangements for holiday lettings. However, that is a distinctly different sector. I am talking about people, including MPs who, through desire or necessity, have second homes and who, whatever they may claim, are not running them as holiday letting businesses.

I am not saying that west Cornwall and the Isles of Scilly is any more unique than other parts of the country, such as north Norfolk, the Lakes, south Devon and so on, that have a high number of second homes. If the taxation system fails to discourage or actually encourages a growing desire for second homes in those areas-I repeat a point that has been made many times in debates on this subject-it will have an impact on the housing market and the housing prospects for local people in those areas. The mismatch between low earnings and high house prices in west Cornwall, and especially on the Isles of Scilly, is shown in all assessments to be among the highest, if not the highest, in the country. That raises serious concerns about meeting local housing need, which is why the matter needs to be addressed.

I emphasise that this is not about the politics of envy. I know that many people say that it is part of the old class war, but it is not. Although I have made many remarks on the impact of second home ownership, many second home owners are among my friends. [Interruption.] All right, my best friends. It is not a personal issue. I am talking about the politics of social justice rather than the politics of envy. Many people who own second homes and who have a social conscience are aware of the issue and agree with many of my views.

I would like to address the issues of council tax, small business rate relief and the impact that capital gains tax has on second homes. When the Conservatives first introduced the council tax system, they brought in a 50 per cent. discount for second home owners. I strongly
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campaigned against the discount from the moment I was first elected in 1997. I saw it as unjustifiable given the circumstances of some of my constituents. Having gained the figures from the Treasury, I pointed out that in any one year, something between £150 million to £200 million of taxpayers' money was being used to subsidise the wealthy to have second homes when there were thousands of local families who could not afford their first. It had to be emphasised strongly that the treatment of one group in the housing sector was in fundamental contrast to the treatment of another group, which was being subsidised by taxpayers' money, and that it was having such a detrimental effect.

Dan Rogerson (North Cornwall) (LD): I congratulate my hon. Friend on securing this wide-ranging debate, which I believe he has undersold. Taxation is a complicated subject and he wants to cover three particular areas. One of the problems of discounting council tax was that it was based on the old idea, which may also have been behind the poll tax, that there is a simple construct between the services that a person receives and how much they should pay for them, rather than there being an issue of a wider sense of contribution to the community around them. We are coming back to the idea of a contribution, and many second home owners accept the fact-except perhaps those who are opting for small business rate relief-that they need to pay that wider contribution for the privilege of having the luxury of a second home in an area.

Andrew George: Yes indeed, and I pay tribute to my hon. Friend for all his work in this area. North Cornwall has very high levels of second home ownership in some areas. His point about the principle of applying a contribution to the local community-a contribution to the local services in general rather than a charge for the services rendered and used by the occupants or the local residents-has often underpinned this particular debate. I have pushed the issue on many occasions. In fact, after chipping away at the issue for years and banging my head against a brick wall of resistance I was delighted when, on 3 February 2000 in this Chamber, the then Minister with responsibility for local government, the hon. Member for Sunderland, South (Mr. Mullin), finally relented and agreed to look into the issue. Although such things do not happen overnight, the Local Government Act 2003 introduced the measures to remove part of the 50 per cent. council tax discount for second homes. The class B properties, which are those that are available for occupation all year round-rather than those that have an occupancy restriction on them, which are the class A properties-were then charged at a 90 per cent. rate. I am pleased to say that in places such as Cornwall those moneys have been effectively hypothecated by the local authority to be invested in affordable homes for local people.

Since 2004, when the measure was first introduced, millions of pounds have been invested in local housing need. Of course 10 per cent. is still unpaid. Those people who pay council tax rather than small business rates very often claim single person occupancy as well, which means that they are still not paying at the same level as local people. There was a strong feeling among many local authorities, that instead of paying 10 per cent. less second home owners should be paying double the council tax, but that might push them in the direction of small business rates, which an increasing number of
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people with second homes are choosing to do. I congratulate my hon. Friends the Members for North Cornwall and for Falmouth and Camborne on raising the issue in previous debates.

Mr. Andrew Smith: Before the hon. Gentleman moves on from the council tax, may I ask him a question? It is not a mischievous question, but a genuine inquiry. Under the Liberal Democrat plans for a local income tax, how would he envisage the problem being addressed?

Andrew George: I believe that it should be addressed in each area. If someone has a property, they are charged on their income within that area. If they have two addresses, they pay two lots of local income tax. That is how I would wish to see it introduced. From my point of view, a local income tax is very attractive, because many second home owners are better off than some of the people who live permanently in the area. On that basis, they can make a significant contribution to the local communities in which they have purchased their properties.

The business rating system allows second home owners the benefit of tax breaks. Owners of second homes can avoid paying council tax by claiming that the property is available to let for 70 days of the year, which therefore means that it is classed as a small business, and the owners are entitled to small business rate relief. Moreover, second home owners can avoid paying capital gains tax by claiming roll-over relief when they sell the property. The issue that arises is the loss of benefit to both local councils-in the form of income-and the local economy. Clearly those who pay council tax are contributing to the local authority; those paying business rates are contributing to the Treasury. There appears to have been a significant shift from council tax to business rates since the 50 per cent. discount was removed.

Julia Goldsworthy: Is my hon. Friend aware of the measures that are being taken in Wales to tackle the problem of people trying to demonstrate that their holiday homes have been let for 70 days to qualify for business rates and business rate relief?

Andrew George: I want to come on to that point. There is a need to tighten up some of the loopholes that have been created. That may require greater tests of the accuracy and the honesty of the claims made by those who opt to pay business rates rather than council tax.

I am very conscious of the time and I have two fairly substantial issues to cover, including that of capital gains tax. It is worthwhile emphasising the relationship between second home ownership and capital gains tax, which was brought into sharp relief as a result of the so-called MPs' expenses scandal. As far as this issue is concerned-flipping the home that one elects as one's primary private residence-there exists what appears to be a pattern of behaviour among some MPs, and therefore the assumption is that it is happening outside the Houses of Parliament too. Clearly, flipping has provided a mechanism to allow a large number of people to avoid paying capital gains tax.

Private residence relief allows an individual to be exempt from tax when they are selling their only or main residence. If the individual has more than one property, they may nominate which property is their main residence for tax purposes. That choice can be changed; however, it cannot be backdated more than
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two years. The process of nominating the property to be taken as one's main residence provides people with more than one home with an opportunity to mitigate their tax liability, flipping their designation from one home to another to ensure the gain from selling either of those houses is tax-free.

As I have mentioned, the issue of flipping arose controversially last year. Some MPs appear to have flipped the designation of their main home to mitigate the tax charge when selling one of their properties. For example, one makes a simple election, stating that one of the properties is the main home. Once the nomination has been made, it can be varied as much as the owner likes. The tax manual of Her Majesty's Revenue and Customs states that it is possible to switch the election from one property to another after just one week, and thereby claim the exemption for the last three years of ownership on both properties.

Principal private residence relief is the tax relief that allows home owners to sell their main property without incurring the tax on any rise in value that it has acquired. Potentially, people with a holiday or second home can reduce the capital gains tax bill that they would otherwise have to pay on sale.

Although it is possible to have only one main home at any one time for the purposes of the PPR relief exemption, gains attributable to the last three years of owning a property are ignored if the property has been the main residence at any time during the ownership.

On the issue of married and unmarried couples, it is currently assumed that a married couple or civil partners live in the same house and therefore have only one PPR relief between them. In contrast, an unmarried couple can each own a property, so effectively they get two allocations of PPR relief. People often choose as their main residence the property they feel they are most likely to sell first, or the one they believe will rise most in value.

What happened last year highlighted the flipping of homes for all the wrong reasons, when in fact flipping can be a legitimate way of providing oneself with a tax break. It was originally designed to protect those who had to move for work, and home owners with second properties can use it to their tax advantage.

On 3 December 2009, I asked the Financial Secretary to the Treasury, the right hon. Member for East Ham (Mr. Timms), whether he would undertake a review of these issues. He responded:

On 25 January 2010, I asked the Financial Secretary

The Financial Secretary responded:

That raises questions about how much flipping is going on outside Parliament, quite apart from the cases identified in Parliament in the way I have just described.

Dan Rogerson: I am tempted to note in passing that, as the change programme that has gone on in HMRC has probably got rid of quite a few compliance officers, it must be harder for HMRC to track these things.

However, the substance of my intervention is that we increasingly use the tax system to reward certain types of behaviour and to try to dissuade people from other types of behaviour-an approach that is being looked at in the environmental field, for example. I am sure that there are those who still argue that second home ownership has a positive effect on local areas because it brings people into those areas. However, the argument that I have always had to make-I know that my hon. Friend has also made it consistently-is that that is just not the case. Holiday lettings, as the right hon. Member for Oxford, East (Mr. Smith) pointed out, are a very different category and when they are occupied for far more of the time throughout an increasingly extended holiday season, they have a positive impact. However, empty second homes are different, and this tax system is incentivising something that is a disbenefit to a local area.

Andrew George: My hon. Friend's intervention stands in its own right, so I need not add to it; and just to make it absolutely clear, I agree with him on that point; it is not that I disagree.

The reason why I am mentioning council tax, business rates and capital gains tax is that we are looking for a solution to the housing problems in areas such as mine and in other parts of the country. There are chronic housing problems in those areas and the existence of second home ownership can only have a detrimental impact on the life chances-and, indeed, the life choices-of local families who are desperate to find a decent home of their own.

What has been proposed for many years is the introduction of a new use class order that would identify the distinction between properties that are occupied on a permanent and on a non-permanent basis-in other words, second homes. Under that system, those who wish to go for the latter category would have to apply for planning permission for the lifetime of that particular occupancy, which would give the local authority the opportunity to regulate the amount of second home ownership in any area through the planning system. However, the only problem with that system has always been how we define what is and is not a second home. The reason why this issue is relevant to the Treasury is that a range of tools is now available to help us make that definition, but they need to be more robustly used.

Mr. Gregory Campbell (East Londonderry) (DUP): I commend the hon. Gentleman for securing this timely debate. His area, like mine, is affected by second home owners, as I think many of the coastal resort areas are. However, the one issue he has not homed in on is current permanent dwellings that are the subject of intense scrutiny by possible developers. They acquire
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the homes-existing homes with families in them-but then those homes become subject to possible redevelopment as second homes. The price then subsequently rises as a result of the acquisition by developers. How would the use order address that type of activity, which is prevalent in my constituency and doubtless in others?

Andrew George: I am grateful to the hon. Gentleman for making an important point. In fact, as well as the new builds and the change of use to existing properties, there are many instances in my constituency, particularly around the coastline, of blocks of flats or former hotels being purchased and demolished, and a suite of properties being built that, invariably, is not marketed locally but in wealthier parts of the UK as holiday residences. As far as I am concerned, the use class order should apply to that change of use as well as to properties that are not otherwise changed. I hope that will happen.

The starting position must be to define what a second home is. We are looking to the Treasury to assist in creating more robust constraints, controls and regulations in this area. We can identify where second homes are through council tax records, electoral records, the business rate records, from when people elect to apply council tax on their second properties and through local knowledge, but there is a weakness in the council tax records. The council tax system needs to be more rigorously and robustly enforced. We need to find a way to enable communities in areas such as mine to differentiate between properties that are genuinely for permanent occupancy and those that are second homes.

Julia Goldsworthy: Will my hon. Friend give way?

Andrew George: Yes, but I am aware of the time. I have one further issue to cover and know that others wish to contribute.

Julia Goldsworthy: My hon. Friend is being very generous and I promise that this will be my last intervention. Does he share my concern that the Government have a tendency to work in silos? Some of these issues relate to the Department for Business, Innovation and Skills, others to the Department for Communities and Local Government and others to the Treasury. Given the lead that the Treasury has taken on Total Place, is it not ideally placed to co-ordinate the tackling of this problem?

Andrew George: I agree entirely. I believe that the Government genuinely follow the mantra of joint thinking and cross-departmental co-ordination. This is clearly an area where they can ensure that Departments work in concert. I am afraid that that has not happened over the years.

I began by saying that I find this area of taxation incredibly complex. As a novice, my intention is not to make it more complex. I hope that regulations can be brought in that simplify the systems. It is the complexity that allows for many loopholes. Greater simplicity would allow us to be more robust and rigorous in achieving the objectives I have outlined.

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