[John Cummings in the Chair]
I am delighted to have secured this debate on property taxation. As I shall make clear, I will not cover the whole subject as I am not qualified to do so. I shall focus on two specific aspects—second homes and holiday lets—and the problems that arise as a result of how property taxation applies to those sectors. Some may wish to comment on other aspects of property taxation, such as stamp duty or income tax, as they relate to rental income. I take this opportunity to thank Antony Seely and others working in the House of Commons Library, who have been most helpful in digging out material and information for me.
I start with an apology. If at all possible I try to avoid debates or inquiries on Treasury and taxation matters, as I find the subject deeply esoteric. Indeed, as with the present subject, I often find myself parachuted into the depths of a forest of tax regulations without a map, let alone a sat-nav. When dealing with the issue of property taxation, I find myself in an undergrowth, an impenetrable tangle of inter-related matters on domestic and residential property taxation. If I lose my way this afternoon, I appeal to the House not to be too hard on me. I know that other Members are always keen to engage in the thousands of hours of debate that take place on the Finance Bill every year, but I always avert my eyes, or make sure that I am not in the room when willing victims are selected for that particular torture.
My primary motivation in speaking on second homes is to address the question of meeting local housing needs. In my part of the world, which is shared by my hon. Friends the Members for Falmouth and Camborne (Julia Goldsworthy) and for North Cornwall (Dan Rogerson)—I am pleased to see them here this afternoon—that is the biggest and most chronic of the social problems that we face. It is not as if there is a problem on the supply side. Cornwall has done as the Government said every area should do. We have been prepared to build, and not be nimbys and resist development. We have more than doubled our housing stock during the past 40 years, which has grown faster than pretty much everywhere else, yet housing problems for local people have become significantly worse.
At the macro level, I acknowledge that the Government have identified housing needs for the next 10 years, saying that it requires an extra 3 million properties by 2020. However, areas such as ours must be careful to ensure that properties that are built supply our needs rather than contribute to the still growing demand for second homes. At the micro level, surveys that I have undertaken of estate agents in west Cornwall over the last three years have shown that in any year between three and five times as many properties are sold to second home buyers as to first-time buyers. That is what estate agents have been telling me over recent years.
I congratulate my hon. Friend on securing this debate. I apologise, but I will not be able to stay for the whole debate as I have another appointment.
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.
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.
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?
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 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.
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.
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 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.
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.
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 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:
“Tax policy changes are considered through the Budget process in the usual way. The Government consider a range of factors when formulating tax policy and keep all aspects of the taxation system under review.”—[Official Report, 3 December 2009; Vol. 501, c. 947W.]
On 25 January 2010, I asked the Financial Secretary
“what recent assessment his Department has made of the extent of the practice of re-designating property ownership to avoid tax liability on the sale of second homes; and what estimate he has made of the likely effect on revenue of such practices in the last 12 months.”
The Financial Secretary responded:
“No such assessment has been made, as it is not possible to distinguish between the cost of private residence relief attributable to nominations of main residences for avoidance and non-avoidance purposes. HMRC apply a risk-based approach to investigating any cases where they suspect an individual has nominated a property as the main residence on a spurious basis.”—[Official Report, 25 January 2010; Vol. 504, c. 608W.]
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.
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.
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.
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 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?
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.
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?
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.
In view of the time, I will not give the background. I am sure I do not have to explain to the Minister and other hon. Members the impact of the Government’s changes in relation to furnished holiday lettings on a genuine business sector. I wrote to the Financial Secretary about the announcement in the 2009 Budget of the change to the arrangements introduced in 1983 under the Conservatives. Those arrangements were welcome and appropriate for people who work hard to ensure that this country has a vibrant holiday letting sector.
I will give the example of one business, which is not untypical of the kind of holiday letting business that exists in my part of the country. I am talking about not single second homes that may occasionally be made available through an agent to the holiday trade, but large holiday letting businesses. I will not name the business in my constituency, although it is one of those that I have discussed with the Financial Secretary. It is a large holiday park not far from where I live which offers a whole holiday experience. Every week, 200 families use the chalets in the park and 9,000 people visit it every summer. Its facilities include a swimming pool, entertainment, catering establishments, security, cleaning, linen, and an information and reception area that opens at 8 am and closes at midnight. Other than its being made up of chalets and not contained in one building, it is similar to a hotel.
The business has asked the Inland Revenue for a decision on whether it receives a trading income or an investment income. The regulations the Government intend to introduce in April rely on the difference between investment income and trading income. The Revenue has so far refused to give that clarification. I wrote to the Financial Secretary on this issue last month and emphasised that since the publication of the HMRC technical note of 9 December 2009, which explained to businesses how the change would apply to them, there has been increasing alarm throughout the legitimate holiday letting sector, in that the rules will have a serious and detrimental impact on it. Worse than just seeking compliance with the European tax rules on furnished holiday businesses, HMRC appears to be going further and has made clear its intention to treat such businesses as investment companies rather than trading companies.
The impact of the changes will be far-reaching in areas such my constituency and the rest of Cornwall and the Isles of Scilly, where many businesses are demonstrably not investment companies because they operate as holiday parks that provide whole holiday experiences, rather than property lettings. Properties that are fundamental to purpose-built holiday complexes, such as chalets, cannot be sold separately as part of investment activity. Of course, the rules will not apply to bed and breakfasts and hotels, even though they clearly compete in the same environment. As a result of the rules, there will be no encouragement for holiday businesses to invest in improving and modernising their facilities.
I understand that the Government thought this was simply a matter of tidying up an area of regulation, but I hope the Minister realises the far-reaching impact there will be on genuine holiday letting businesses, as distinct from second homes, which I described earlier.
I apologise for missing the first few minutes of the hon. Gentleman’s excellent speech—I was being lobbied by homeopaths. I do not know if he mentioned this before I arrived, but his namesake Henry George would have said that the answer to this issue was to have land value taxation in this country. I know that the Liberal Democrats are not unsympathetic to that argument. Does the hon. Gentleman agree with me that we can sort these problems out by moving to a form of land value taxation?
That opens up a much wider area of debate. Perhaps we should reserve some time for a further debate on that. I have much sympathy for that argument, having kept in touch with my namesake through the Henry George Foundation, which regularly debates pushing this issue.
I welcome the Government’s introduction of the community infrastructure levy. When a field worth £3,000 is allowed to be turned into unfettered domestic property worth, say, £1 million an acre, that is the gift of society through creating the planning rules and of the local community through the assent of the local authority. It is not unreasonable to ask for a proportion of that money, although the impact on the agricultural sector is a separate issue. That relates to the point made by my hon. Friend the Member for Stroud (Mr. Drew)—I call him my hon. Friend deliberately.
I apologise for taking up so much time, Mr. Cummings, but this is a complex issue and I have covered a wide range of areas. I apologise to other Back Benchers who wish to contribute to the debate. I look forward to the winding-up speeches.
It is a privilege to serve under your chairmanship, Mr. Cummings, and to be speaking so soon, although I cannot promise to go on for the required length of time.
I congratulate my hon. Friend the Member for St. Ives (Andrew George) on securing the debate, although I should point out that he has seriously undersold himself. I believe that he is a legend in Cornwall, where he is seen as the scourge of the effete, opulent metropolitan elite who distort his local economy and housing market. I know from his activities in the House that he has been most assiduous in pursuing this topic. Far from being financially illiterate or challenged, he has shown a detailed, encyclopaedic knowledge, which might, in part, exceed the command of these issues shown by those on the Treasury Benches. My hon. Friend did, however, make one small error, although he can be forgiven for that because it was in connection with Liberal Democrat policy on local income tax.
My hon. Friend dealt with a very difficult subject—property taxation—and he acknowledged that it is complex. Taxation is never a popular proposition, but in the case of property taxation we are trying to use a variety of fiscal tools—council tax, the small business rate, capital gains, capital allowances, trading loss relief, roll-over benefits and so on—to bring about certain desirable effects. That is exactly what the furnished holiday lettings rules endeavoured to do; they were there to encourage greater tourism and the development of the tourism economy. That is to be approved of in most of the areas that we represent, including Southport, which is a seaside resort.
My hon. Friend wants the appropriate use of said tools to have certain clearly beneficial effects. The first is to discourage second home purchases and thereby increase the local housing supply, although he indicated that the local authority has done a fair amount through planning measures to increase local supply. The second is to encourage local rentals. I understand, although this has not been mentioned, that there is a fair drive under way to get farmers to diversify and to use their property to supplement their incomes in one way or another.
The third is to discourage non-occupancy, which means that property is not used at all, but is simply dead, vacant and locked up, despite the clear need for property in the area. That can, and in fact does, mean that home owners occasionally become holiday-letting people. Second-home owners will also become holiday-letting people, which means, paradoxically, that they will be more likely to be able to afford another home. To some extent, that shows how complex it is to use fiscal tools appropriately to achieve the right effect.
In any case, it is hard to distinguish between a metropolitan absentee, whom we might regard as bad, and a small landlord working with a short season which, unfortunately, is what people in the UK will mostly be working with. In fact, those two people may be the same person, which illustrates the complexity of the issue and the fact that tilting the rules in favour of the desirable case could also indirectly advantage the other case. A metropolitan absentee, if I can use that expression, might endeavour to rent at a price that is slightly above the commercial rent, but which does not look too bad, to secure certain benefits to make their property more affordable, essentially using tax devices that were put in place for other purposes to defray their own costs. That was discussed very effectively by my hon. Friend, who noted that clamping down on such practices was a matter of vigorous compliance. However, we would all acknowledge that compliance and catching people who are up to such tricks are complex matters, that they are not easy and that they often do not repay the energy involved.
The rental market is the one that most interests me and it is probably the one that most affects the housing economy. Treasury figures on tax and profit show that it appears to be expanding, and the figures in the debate pack indicate that profits from furnished lettings more than doubled between 1997 and 2007. What is not apparent, however, although it was discussed in the Finance Bill Committee, is what effect the Government’s recent changes to the rules will have.
No Minister worth his salt would go anywhere without a proper impact assessment for any legislation that he introduced, and that is certainly true in this case. The Treasury impact assessment seems to indicate that the change to the FHL rules will not damage business and will in fact eventually increase Government tax revenues by £20 million, which is a tidy sum. On the other hand, the Tourism Alliance has a completely different take on the matter, and estimates that the Government’s changes to the rules will cost £110 million and more than 2,400 jobs. That is a conservative estimate, and the alliance suggests a larger estimate if other things are factored in. I am not quite sure what its estimate is based on, but it is pretty grim when presented in those terms.
Generally, we would be happier and more comfortable about how the fiscal tools are playing out and about their effects if we knew more and if the Treasury’s impact assessment was more broadly based—Treasury impact assessments can sometimes be somewhat narrow. Anything that encourages tourism and that encourages people to rent property in this country is a huge social good at the moment, and tourism is one of the few genuinely effective exports that we have. It reduces payments made outside this country and increases those made in it; it also has wholly healthy consequences for employment, benefits and taxation.
I therefore wonder whether the Treasury impact assessment on the recent change in the FHL rules is sufficiently broadly based or whether it is not in fact too narrow in its overall view of the pluses and minuses. The benefits to Cornwall, Southport and Northern Ireland of growth in the tourism market are appreciable. A more active tourism market would bring more property into use and, in doing so, presumably bring prices down. We could perhaps challenge Spain some day in terms of cheap accommodation, if not in terms of the sun.
The Minister will reply that any worries about changes to the fiscal regime, particularly with regard to holiday lettings, will have to be put aside, because the Government have no option. This is an endeavour to bring British legislation into line with European legislation, and these things are dictated by the single market and by the demand for tax unification. However, as the Financial Times noted on 25 April 2009, when it looked at this issue, the Government are inconsistent in their consistency. In some cases, they can, for good reason, be tardy in bringing our regime into line with the one that exists throughout Europe.
All that makes the case for a broad review, which is precisely what the Liberal Democrats called for during the passage of the Finance Bill. However, we probably also need to look specifically at the south-west. Although we talk about fiscal effects, they are set against the background of other changes in the market, particularly in supply. In that respect, the south-west must be an extremely interesting area to study, because it has valiantly endeavoured to increase supply; it is not just relying on fiscal tools to solve its problem. As my hon. Friend highlighted, it has also tried to be creative with the council tax regime. In a sense, therefore, it has pulled most of the levers necessary to resolve the problem. It now wants to know what the Government can do to make its endeavours more successful and to help it achieve the social effects that I described and which my hon. Friend and most people in the room wish to see.
It is a great pleasure to serve under your chairmanship, Mr. Cummings. I congratulate the hon. Member for St. Ives (Andrew George) on securing the debate. When I saw the title was “Property Taxation”, I thought that that could cover a multitude of areas, so I am also grateful for his kindness and courtesy in indicating what he wanted to cover. I will focus the majority of my remarks on those specific points. He set out two key aspects: first, second homes, both within his constituency and the south-west as a whole, which is an issue that he has spent considerable time focusing on since 1997, and, secondly, furnished holiday lettings.
What lies behind the second homes issue is the significant concern that local people are unable to find local homes. In the south-west as a whole, figures suggest that house prices are typically eight times the local average salary. Those numbers are particularly significant in the south-west because it is hugely popular and the sort of place where people want to buy second homes. There is no doubt that that demand has played a considerable part in the housing problems. The hon. Gentleman is right to say that the south-west is not an area where there has been no house building; there has been an expansion of supply.
It is difficult to use the tax system, and specifically the council tax system, to address that issue. I take the point that there was originally a discount, but I am not sure how effectively the council tax system could be used, and whether the hon. Gentleman was getting support from his Front-Bench colleagues on whether it could be used. Given that Liberal Democrat policy is to replace council tax with a local income tax, it was interesting to note that it is not the case, as he suggested, that that would double the income tax, but I am still not sure what the answer is.
I expressed my personal view on the application of additional layers of income tax, because I think that that would be perfectly fair. The party takes a different view on that, which I did not expand on in answering the right hon. Member for Oxford, East (Mr. Smith). It would apply a locally collected business rate on second homes.
I am grateful to the hon. Gentleman for providing that clarification. The way to address the genuine concerns that he has assiduously highlighted is to do more to encourage the building of local homes for local people. In recent weeks, we have set out our proposals for local housing trusts. Individual communities could bring forward limited development in their areas outside the local planning process. If there was strong local backing, it would be possible to develop local homes that local people would want, the make-up of which could be decided locally. We anticipate that some of that housing would be held in perpetuity for local people. Therefore, although I sympathise with the hon. Gentleman’s concern, I am not convinced that the tax system is the right way to address it, but we can look at the planning system.
The second area that he highlighted was furnished holiday lettings, and I have great sympathy with his concerns. As the hon. Member for Southport (Dr. Pugh) pointed out, the Liberal Democrats requested a review when the Finance Act 2009 was being considered, as did the Conservatives on the Floor of the House. The background to that is that the regime in place since 1983 treats furnished holiday lettings as trading businesses rather than property investments. The significance of that is that it gives them a favourable tax regime through the availability of capital allowances and certain loss reliefs that would not be available if the lettings were treated as property investments.
At the moment, the regime applies to property based in the UK. The Government’s advice says that, were they to be taken to the European Court of Justice, they would have to apply exactly the same regime to properties held elsewhere within the European economic area, which would involve an additional cost. Extending it more widely would involve a cost to the Exchequer—not necessarily a huge one but certainly a cost—so they are looking at removing the regime. There are concerns that that would have a knock-on effect in particular localities.
It is better for local communities that a property is let out, rather than used as a second home. There may be an argument, although not a particularly strong one, that those properties might go on to the market for local people if they were not used as furnished holiday lettings. If that were the case, it would change the nature of the argument, but what we hear is that, largely, those properties would simply become second homes used very occasionally by people living some distance away and adding very little to the local community. There is a legitimate concern.
I was attempting to emphasise that there are large numbers of purpose-built holiday chalets and other properties, with planning restrictions on their occupancy, that are clearly run within the curtilage of a holiday park. We are primarily concerned about those businesses. They may be using the business rating option to avoid the council tax option, in the manner that I described earlier, but they are clearly on the fringes of what we are talking about as they provide a holiday experience. They are trading rather than simply collecting money for the occasional letting of the property.
The hon. Gentleman makes a good point and those cases are clear. In the one that he identified, I wondered at one point if he was going to provide the contact details as well. It sounded like a very tempting location for a holiday. I do not want to overstate the case that I was floating. Many of the properties are cottages that are likely to be bought as second homes. The likelihood is that they would not be bought by locals, but his point is fair; there are properties for which the changes are not an issue at all.
There is a lack of joined-up government on this. As I understand it, the Minister of State, Department for Culture, Media and Sport, the right hon. Member for Barking (Margaret Hodge) was first informed of the developments in the taxation regime in public and she had no idea that there was to be a change. There does not seem to have been any consultation between the Treasury and the Department for Culture, Media and Sport. Therefore, one suspects that there was no proper assessment of the impact on local communities.
The hon. Gentleman is making the case for serious research into the effects of the change in fiscal measures very well. It strikes me that the effect may not be general but may vary from area to area depending on the attractiveness of the property, its proximity to London and so on.
The hon. Gentleman is right, as he was in his earlier point about this being a particular issue for the south-west. Other parts of the country will clearly be affected, but one suspects that the problem is considerably concentrated in the south-west. If the Minister is able to shed any light on that in his remarks, it would be helpful.
We have raised the point in the past about whether there are other ways of dealing with the issue of the location of the properties. For example, the current rules require properties treated as furnished holiday lettings to be occupied for a minimum of 10 weeks and to be available for 20 weeks. By and large, we understand that—this was shown in the work produced by the Tourism Alliance—in the UK, those sorts of properties generally tend to be available for longer and occupied more than properties based elsewhere in the European economic area. Therefore, rather than scrapping the regime, if the minimum occupancy threshold was simply extended to more than 10 weeks—for example, to 15 or 20 weeks—the likelihood is that the Government could include most of the UK properties and exclude most of the EEA properties.
That would be a less disruptive change of regime than that proposed by the Government, which may have a knock-on effect on rural areas, as we have heard. I would be grateful if the Minister could say whether any work or research has been done on that matter and whether there are alternative approaches to dealing with the regime. The proposal depends on the numbers and the Treasury is well placed to do such research, but certainly the work produced by the Tourism Alliance suggests that such a system is a way of dealing with the matter.
Finally, very briefly, given the subject of the debate, I cannot resist highlighting the position of the Liberal Democrats on the broader issue of property taxation. I understand that the Liberal Democrats would scrap the council tax and replace it with a local income tax because the council tax is not based on ability to pay. That was certainly in their campaign at the last general election, and seems to be a move away from property tax per se. On the other hand, the policy of introducing a mansion tax on homes worth more than £2 million was announced at the last Liberal Democrat conference. That raises a few questions about how those properties will be valued, whether there will be distortions in the housing market, what would happen in relation to pensioners on low incomes and how improvements would be taken into account. The Liberal Democrats seem to be moving in favour of property taxes in that regard.
I recalled hearing a quote from the leader of the Liberal Democrats broadcast on “The Westminster Hour” on 29 November 2009, so I had a look for it. He stated that he has a
“very simple philosophy. I think the tax system should reward work, initiative, enterprise. And it should discriminate against vested unearned wealth. That is why we are opening, if controversially, a new front in the tax debate to say, hang on a minute, if you have been sitting on a rapidly inflating asset in an exploding property market over the last 10-15 years, maybe you should chip in a little more.”
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.
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 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.
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.
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.
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 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. 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.
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.
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 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.
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?
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 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.