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24 Feb 2010 : Column 118WH—continued

That appears to be a move away from taxes on earnings to taxes on property, which may well be the general direction that the Liberal Democrats want to go in. We can debate whether that is right or wrong, but I am curious about how that is reconciled with a policy of moving away from a council tax system towards an income tax system. I shall leave that mysterious matter in the air. I am grateful to the hon. Member for St. Ives for raising an important issue and for initiating a helpful and informative debate.

3.34 pm

The Economic Secretary to the Treasury (Ian Pearson): It is a pleasure to serve under your chairmanship again, Mr. Cummings. I congratulate the hon. Member for St. Ives (Andrew George) on securing the debate and on the thorough and detailed way in which he presented his case.

I shall make a few introductory remarks about the importance of tourism to the UK economy and the need for affordable homes, both of which I recognise are hugely important to the hon. Gentleman and his constituents. As he will be aware, tourism is a crucial industry to the UK. I do not need to repeat some of the statistics because they are well known. However, I emphasise that the Government continue to provide support to the
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industry and have provided £130 million between 2008 and 2012 for marketing Britain overseas, and England to the British. In addition, some £3.3 million to £3.5 million is being provided annually to the regional development agencies for tourism support.

Last year, we announced significant investment in skills in the tourism industry, including an additional £210 million to the sector through Train to Gain and £350 million to help small businesses-including small and medium-sized tourism enterprises-get the training they need through the economic downturn.

It is also important that we do what we can to encourage the provision of affordable housing. The hon. Gentleman talked about the politics of social justice, and affordable housing is certainly an area where the Government want to see social justice. We remain committed to the delivery of affordable housing, including through both shared-equity and shared-ownership schemes. We want to maximise our efforts in relation to the building of new affordable homes, and our low-cost home ownership programme is being directed at schemes that support new build homes. Over this year and next, we will be investing a further £1.5 billion to build an extra 20,000 new affordable homes for rent and low-cost home ownership. I hope that a number of those will be in the hon. Gentleman's constituency.

Let me turn directly to the property taxation issues that have been raised. I acknowledge the contributions made through interventions by the hon. Members for Falmouth and Camborne (Julia Goldsworthy), for North Cornwall (Dan Rogerson) and for East Londonderry (Mr. Campbell), and by my right hon. Friend the Member for Oxford, East (Mr. Smith). They all made useful contributions to the debate, which reflects the widespread interest in the issue-from the middle of England, to Cornwall, to the north and to Northern Ireland.

As we have discussed, hon. Members are aware that principal private residence relief means that the great majority of home owners do not pay capital gains tax when they sell their main home. That ensures that home owners have the flexibility to move home without the fear of incurring a tax charge. I understand where the hon. Member for St. Ives is coming from: he faces a particular problem in his constituency and he is suggesting that we ought to look at how the tax system is used in relation to second homes as a way of solving that problem. However, although that proposal might help to ensure that we have more affordable homes, particularly in his constituency, it does not work for the country as a whole.

The Government think it only fair that those making a capital income from property other than their main home should pay a fair share of that income in taxation, in the same way they would be expected to do if they were making a capital income from other assets. That is why CGT is charged on disposals of second homes and other properties, such as buy-to-let and commercial properties. As the hon. Gentleman is aware, we also ensure that those making smaller gains do not pay any capital gains. We have set an annual exemption amount worth up to £10,100, and married couples and those in civil partnerships can transfer assets to each other without incurring a CGT charge. The annual exempt amount means that they can make gains in the tax year of up to £20,200 without having to pay any CGT.


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Given the difficulties in the market, and recognising that it might be more difficult for home owners to sell their previous homes, there is, as the hon. Gentleman is aware, an exemption from CGT for the final three years of ownership of a previous main residence, even if someone is living elsewhere. As he knows, that is the result of changes that took place in the 1980s and 1990s during previous recessions when people had difficulty selling their homes but found employment in other locations. We believe that that is fair and gives people a reasonable period in which to sell their previous property. The flexibility in the rules covers those situations in which people find alternative employment.

I understand the hon. Gentleman's points about flipping the main residence, but any change to the three-year rule would need to be considered carefully, as that could have unforeseen impacts on the housing market generally and would impose a tax charge on people who have to change their main residence for the reasons I have mentioned, and for many other valid reasons.

The hon. Gentleman also referred to the two-year period in which individuals may vary the nomination of their main home, and in response I say that people change their main residence for a wide range of reasons, and not just because of CGT impacts, although I appreciate his concern. They might not have tax at the forefront of their minds, especially if they have not disposed of any property. The period for varying the nomination of a main home gives people time to remember the CGT implications that they need to consider, and change their nomination if they want to. However, as the hon. Gentleman reported, my right hon. Friend the Financial Secretary to the Treasury will always keep those issues under close review.

Andrew George: I am grateful to the Minister for explaining the Government's thinking. Does he not accept that, as painful as it is to go back over the issue of flipping second homes for CGT purposes-perhaps for avoidance purposes-that matter is close to home for us in the House and that, for the majority of people in this country, it is unacceptable? If that has been going on with some Members, it will certainly have been going on much more widely. We are talking about a substantial income that this country is foregoing as a result of that ruse.

Ian Pearson: I want to draw a distinction between Members making a profit from their second homes, which has been the subject of much debate recently, and the wider operation of the three-year rule. That has been debated in Parliament on previous occasions, and a decision has been taken because people sometimes have to have two homes for a variety of reasons. Someone might have a job in Birmingham, for instance, and then decide to seek employment elsewhere, and because that is the only place they can work they need to have another main home there. It has been accepted for some time that flexibility is needed in that regard. We need to draw a distinction between the political situation that Members have faced-the hon. Gentleman knows that there has recently been a consultation on the principle of that, and that authorities are looking into it-and the wider issue of how CGT operates on residences other than the primary residence.

I will move on to the taxation of holiday lets. To ensure that any tax relief is targeted appropriately, and to provide a cost-effective tax system in which the tax
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relief available is suitable for the type of activity being undertaken, UK law has for a long time established a separation of property income from trading income, and many of the hon. Gentleman's comments were really derived from that distinction and how it operates in practice.

Letting out furnished holiday accommodation is normally classed as a property income business, so to allow those who let out qualifying holiday accommodation to claim specific tax reliefs available to traders, we implemented the furnished holiday letting rules. That means that those letting out holiday accommodation can obtain more flexible loss relief, additional capital allowances, certain CGT reliefs and relevant earnings treatment for pension purposes.

To address the points made by hon. Members on changes to the taxation of furnished holiday lettings, I will briefly set out why those were made, because much of that issue has been covered in the debate. It was announced in the 2009 Budget that those rules would be withdrawn from April 2010. That was a necessary change, given that the rules might not be compliant with EU law, as the hon. Member for South-West Hertfordshire (Mr. Gauke) rightly noted. After that change, furnished holiday lettings businesses will continue to calculate their business profits in much the same way as they do now. I believe that some of the issues raised, including those raised by people outside the House, are due to a misunderstanding, as many believe that this change takes away their entitlement to tax relief and their business expenses, such as mortgage interest, utility bills, the cost of repairs and employee wages. That is not true. They will still be entitled to all of those.

The withdrawal of the furnished holiday lettings rules will change the way tax relief is given for capital expenditure and for any losses incurred, but relief will still be available. It will also change the tax relief available when the property is sold. That might mean that the business will pay more tax on the sale, or that it cannot defer the tax it has to pay. However, business will not be disadvantaged when compared with others who sell properties that they rent out.

The alternative option, as has been mentioned, was to extend the special treatment to cover properties located in the European economic area but outside the UK, which would have channelled public money to businesses seeking to attract tourists outside the UK. That would not have been welcomed by the UK tourist industry. Indeed, it would have been a poor use of taxpayers' resources and would have extended the perceived unfairness in the treatment of property businesses, which might undertake similar activities differently. Instead, we have chosen to level the playing field.

I acknowledge that that change has not been universally welcomed by the tourism industry, but when we were considering the impacts of the changes, which were published in an impact assessment report, to which the hon. Member for Southport (Dr. Pugh) referred, alongside the pre-Budget report, we carefully considered the impact on the UK tourism industry. In our assessment, that will mean that many tourism businesses, including hotels, bed and breakfasts and those who let caravans or carry on material trading activities connected with the operation of the caravan site will not be affected by the changes.
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Also, those who let holiday property will still be able to make tax deductions from their profits, such as mortgage interest, costs of repairs, rates and utilities, and they will still get an allowance for capital expenditure.

The hon. Member for St. Ives referred to a meeting he had with the Financial Secretary to the Treasury on a particular case. I am not aware of the details of that case, but I will ensure that I follow it up and that he gets a speedy reply.

Andrew George: I should clarify that I have requested a meeting with the Financial Secretary to discuss that case. The primary point I was making was that at one end of the scale there are holiday parks of the type I have described, which are tantamount to a hotel dispersed around a park and therefore cannot in any way be described, as some people imply, as merely investment income. At the other end of the scale there are single properties that were originally purchases for investment or recreational purposes but that are simply used on a minimal basis in order to be able to take advantage of the business rating and other tax advantages. Surely the Government must be able to differentiate between those two types of uses to benefit genuine holiday letting establishments of the type I have described.

Ian Pearson: I understand what the hon. Gentleman says. I cannot comment on the specific example, but my understanding is that HMRC accepts that furnished holiday letting businesses that are akin to hotels are trading, and they will be taxed in the same way as other traders. However, letting businesses will be treated in the same way as other property businesses. It might be helpful if I give some examples that illustrate how the changes might work.

A is employed in the City and is a higher-rate taxpayer. He bought a property in Cornwall as an investment and intends to retire there. He lets the property as furnished holiday accommodation through an agent for 10 weeks a year and generally makes a loss. He has no other income. Currently, A can set his furnished holiday letting loss against his employment income, and so pays less tax in the year that he makes an FHL loss. After the FHL rules are withdrawn, he will be able to set his loss against future profits of his FHL business or any other rental income. Generally, there will be a timing impact: A will not be able to reduce his employment income tax bill in the year he makes the loss, but he will pay less tax once his FHL business returns to profitability. However, if his FHL business does not return to profitability, and if he does not have any other rental income in the future, he will not be able to claim tax relief on the loss.

B-let us call him Fred-is a farmer who has converted three barns on the edge of his farm into self-catered holiday accommodation. He generally makes a profit, but in one year he makes a loss. The impact would be one of timing. Instead of setting his FHL loss against his farming profits in that year or the previous year, he will set it against his FHL profits in future years. Fred will receive the same amount of tax relief, but he would get the relief earlier under the FHL rules.

Carol decides to sell her FHL property in order to buy a larger one and makes a £150,000 capital gain. Under the FHL rules, the capital gain can be rolled over into the larger FHL property, which means that the tax charge on the smaller property will be deferred until the
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larger FHL property is subsequently sold. Carol will pay no tax on the capital gain now, but she will have a larger tax bill when she sells the new FHL property. Once the FHL rules are withdrawn, roll-over relief will still be available, but it will be limited on a time basis. Periods before April 2010 will qualify for roll-over relief, but periods after April 2010 will not. That means that Carol may have to pay some capital gains tax if she sells the smaller property after April 2010, but she may be able to defer a proportion of the gain until the larger FHL property is subsequently sold. For example, if she sold the smaller FHL property in April 2011 after owning it for 10 years, she could roll over nine tenths of the £150,000 gain, which is £135,000. Only £15,000 of the gain would be immediately liable for CGT.

Dr. Pugh: To get away from the singular to the general, a claim was made that £20 million in tax privileges has gone out of the FHL industry, or out of the tourism industry in general. Henry Aubrey-Fletcher, who is the president of the Country Land and Business Association, said that the changes were a bombshell that will cost the industry millions of pounds. It may be an inevitable bombshell because European legislation is what it is and we need to comply-or the Government feel that they need to comply-but is it the case that £20 million will come out of the industry and into the Exchequer? If so, what is the Treasury's anticipation of how that will affect the market?

Ian Pearson: I refer the hon. Gentleman to the impact assessment that we produced. Overall, we think that the costs are very small indeed. Giving some specific examples helps to illustrate how the changes will be implemented. Let me give a further example that relates to capital allowances.

Jo converts a barn that she owns into self-catered holiday accommodation. She spends £60,000 on qualifying plant and machinery and receives £12,000 a year in net rents. In year five, she sells the barn at a profit, at which point the plant and machinery are valued at £50,000. Under the FHL rules, in year one, Jo's taxable profits are reduced by £50,000 under the normal annual investment allowance. In year two, her taxable profits are reduced by £2,000; in year three, by £1,600; and in year four, by £1,280. In year five, her taxable profits increase by £44,880. That represents the excess capital allowances that she has received. As a result, over the life of the business, she was entitled to £10,000 tax relief for her
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capital expenditure. Under the wear-and-tear allowance in the new regime, her taxable profits are reduced by £1,200 a year. Over the life of the business, she was entitled to £6,000 tax relief for the capital expenditure.

One brief further example is of someone who owns a house, perhaps in the Lake district, which she lets furnished to a local family. They move out and the owner decides to convert it to furnished holiday accommodation. She spends £25,000 replacing the kitchen and the bathroom and redecorates throughout. She receives £8,000 a year in net rents. This is revenue expenditure, and so taxable profits are reduced by £25,000. Therefore, she makes a £17,000 loss. Under the FHL rules, no capital allowances are due. Under the wear-and-tear allowance, taxable profits are reduced by £800 a year.

Those examples show some of the complexity of this issue, but I think that they are helpful. People who run such businesses need to understand how some of the changes will be implemented.

I shall move on and cover some of the points that the hon. Member for St. Ives raised about council tax. I understand the spirit in which he raised them: he does not think that there should be any reduction in council tax for a second home. Local authorities in many areas where there is significant tourism have reduced the second home allowance to 10 per cent. I understand that he might make the point that even the 10 per cent. reduction should not be allowed. That is a perfectly legitimate point to raise and debate. As he is aware, under current legislation, there can be a 10 per cent. discount.

Overall, we have had a good debate. I appreciate the concerns of the hon. Gentleman's constituents, many of whom may be struggling to find accommodation at an affordable price in the area where they were born and brought up. That is an important policy issue, and the Government have sought to take steps to address it. We want more affordable housing in areas with high levels of tourism and in rural areas, and increased numbers of properties need to be made available so that our young people can get roofs over their heads at a price they can afford.

I do not believe that changing the second home allowance would provide the kind of solution that the hon. Gentleman suggests it might-it could lead to many unintended consequences. However, he rightly raises an important policy issue on behalf of his constituents, and it has been useful to debate it today.


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