This is Sir George's speech on the Second Reading of the Finance Bill. (The previous speaker spoke for an hour - hence Sir George's first sentence)
Sir George Young (North-West Hampshire) (Con): It is not so much a pleasure as a relief to follow the hon. Member for Wolverhampton, South-West (Rob Marris). The beginning of his speech was very moving, when he spoke about green issues and the environment, and he carried the House with him in his remarks at the inception of his speech. With respect, he began to lose the House, as he plodded through a rather tedious lists of regulations, but as he and I are both members of Friends of the Earth, I will spare my criticism of him. I was going to say that, as he exhibited some independence of thought, I wish that he might serve with me on the Standing Committee, but having listened to him speak for an hour, I am not quite so sure that I want to spend the next two months closeted in a Standing Committee with him. My remarks will last a small fraction of the time of the hon. Gentleman's.
It is some 10 years since I last spoke on a Finance Bill. As I was the then Financial Secretary to the Treasury, the Finance Act 1996 has my fingerprints all over it. I think that the Paymaster General served on that Standing Committee. It was the only Finance Bill that I had anything to do with. I was appalled by the complexity and the length of the Bill. For three months, I had a good understanding of what it was all about. That information has now sadly decayed. However, I recall some gentle banter from Labour Members about the size and complexity of the Bill. I revisited it: it had 408 pages. In the intervening 10 years, matters have deteriorated: the current Bill has 475 pages and the language is even less comprehensible than it was 10 years ago. I was relieved to find one clause that I could understand without turning to the explanatory notes. It was the last clause—clause 181—which states:
"This Act may be cited as the Finance Act 2006."
I want to focus my brief remarks on an area of the Bill that no one else—apart from, very briefly, the Chief Secretary—has touched on: clauses 103 to 146, which set up the real estate investment trusts or REITs. I refer to my interest in the register as a director of McCarthy and Stone, which builds retirement flats, which could end up within a REIT.
The first question that I want to ask the Government is: why has this modest reform taken so long? When we left office some 10 years ago, most of the spadework for REITs had been done. We consulted the Council of Mortgage Lenders, the British Property Federation and the City and the response was positive. There was all-party support for that sensible fiscal reform. There were models for it in other parts of the world. Indeed, this country had pioneered investment trusts and a REIT is, in effect, an investment trust for property. The transplant should have been straightforward and yet it will be nearly 10 years—1 January 2007—before we get the first REIT. I hope that whichever Minister makes the winding-up speech will have a plausible story to explain to the House why the reform has taken so long.
The second issue that I want to raise about REITs is more fundamental. There is a shortage of good housing in this country. Every constituency MP must know that there are people who need decent homes. The original thinking behind REITs was to promote investment in residential property. I remember because I was Housing Minister at the time the debate got under way in the mid-1990s. What we wanted was a vehicle to enable institutions and private investors to invest in property for rent, in the same way in which they could invest in shares through an investment trust. At that stage, the vehicle was not called a REIT; it was called a HIT—a housing investment trust.
HITs were envisaged as the last stage of a series of reforms to promote the increased supply of good quality rented housing. We introduced assured shortholds to put tenancies on a viable basis. Once we had that underpinning the private rented sector, there was going to be a new fiscal framework to get serious, respectable, long-term institutional funds into property for rent. If quoted companies invested in rented property, that would bring institutional funds into a market that needed—and still needs—more supply, and private investors could buy shares in those companies. Also, institutions that find it difficult to get exposure to residential property in their portfolio would be able to do that through REITs.
The clauses contain the necessary changes to introduce that measure and I welcome that—it avoids double taxation. However, something has happened in the intervening period that I find very worrying. Instead of housing investment trusts, they are now real estate investment trusts. As I will show in a moment, the emphasis is very much on commercial property and the original idea, if not abandoned, is certainly no longer centre stage. There was never an equivalent argument for REITs for commercial property, compared with residential property. If one wants to invest in commercial property, there are listed property companies and one can do that with great ease. There is no shortage of institutional capital to invest in shops and offices, whereas in many parts of the country, as I said, we need more good quality new accommodation for rent.
Stephen Hesford: I am somewhat confused by the point that the right hon. Gentleman is making. In terms of commercial property versus residential property, in
my constituency, there has been a five-year fight to prevent McCarthy and Stone from developing a certain plot, because it is inappropriate development. Many of my constituents see McCarthy and Stone, and other companies like it, building property simply on a speculative basis. Many of those properties are built and remain empty for years after. I am surprised that he is speaking for a vehicle that would increase development, because I understood that his party's view is that the south-east should not be concreted over.
Sir George Young: The hon. Gentleman has misunderstood the argument that I was trying to make. I believe that there is a shortage of good quality accommodation and I want to see more investment in it. I was trying to take the House through the original thinking behind housing investment trusts. The argument that I was developing was that what had been perceived initially as a vehicle for investment in residential property has now become a vehicle for investment in commercial property, where the underpinning argument of the need to increase supply is not so strong.
There was a warning signal two years ago when the then Financial Secretary, speaking about REITs, said:
"As I understand it, most of the underlying assets in the trusts will be commercial property rather than domestic housing, thus to the extent that REITS are successful and they promote the construction and development of commercial property, the impact on residential housing may be negative".
That was a rather worrying speech. She went on to refer to the comments of the British Property Federation, which said:
"The introduction of a UK REIT would provide a suitable, stable, relatively high-yielding savings and pensions orientated product enabling private investors to access the attraction of commercial property on a diversified basis".
The discussion paper on REITs, which was published a year ago, states:
"The Government is committed to reforms of the property market where they support the objective of raising productivity in the UK economy".
"Such reform would be of particular benefit to the commercial property market".
Housing hardly gets a mention in the post-Budget comment on REITs. The Deloitte's Budget report states:
"The regime now proposed is significantly more flexible than the original proposals. It is likely to mean that the major listed UK property companies will convert to REIT status".
Those are not companies that happen to invest in housing. Googling away, I came across a comment from Property Secrets, which states that the Budget was
"a mixed bag with REITS bringing some cheer to the property industry".
The article continues:
"Property companies were delivered a surprise bonus".
It states that shares in property companies soared after fresh proposals on REITs.
I want the Government to tell me that they do not see the measure as simply a vehicle for investment in commercial property, with existing companies reversing into a new vehicle. I hope that they share my hope—and that it is shared by the hon. Member for Wirral, West
(Stephen Hesford)—that the measure will unlock serious, respectable, long-term money for investment in quality accommodation for rent.
I want to make one final point on REITs. When the concept was originally considered, there was concern that it should not simply be a new vehicle for existing property. Consideration was given to a requirement that, in order to qualify for a REIT, one would have to add to supply. Within the property market, there is a real risk that if one acts solely on the demand side, without doing anything about supply, one just pushes up the prices. The removal of double interest tax relief is a good example. I would be interested to know whether the Government have thought of there being a requirement to act on the supply side, as well as introducing this new vehicle on the demand side.
I just want to touch briefly on other subjects, including inheritance tax. I suspect that we have all had e-mails from constituents who are concerned at what they have read. The Sunday Times yesterday estimated that families will be forced to spend £340 million to rewrite their wills, even though the Government will raise only £15 million. I worked out that the Government will get more money from the VAT on the solicitors' fees from the people who have found out that they do not have to change their wills, than the £15 million that they will get from those who are caught by the measure.
Most people may not be affected, but they have to check. Indeed, before speaking in this debate, I had to contact my solicitor to see whether the modest arrangements that I have made for Lady Young were affected and whether I had an interest. Talking about the change, my solicitor said:
"it was a bolt out of the blue, particularly as there had been lengthy consultations on other (minor) changes to the trust legislation. Many of the wills I have drafted will require review in the light of the law as is proposed, despite the Treasury claiming that a very small percentage of people are affected. I do not think that you are directly affected by the proposed changes."
We need to spend more time in Committee on that, but it appears to have caused a disproportionate amount of grief and ill will for a small amount of revenue. I thought that the Select Committee dealt with the matter rather tactfully in the report that came out today when it said:
"We are concerned that a legitimate measure designed to reduce tax avoidance may penalise trusts established to protect family members and consider that the issue merits further consideration."
It rightly says that the Government should provide more information.
The Chief Secretary said in his speech that it was an anomaly that 18-year-olds were not entitled to access trust money when they were 18. That might be his view, but many other people have a slightly different view about handing large sums to people when they are 18. The Government are basically saying that the Chief Secretary's interpretation of the responsibility of adolescence is that which should prevail and that anyone with a different view will be penalised for it.
Let me say a word on clause 13, which is on vehicle excise duty. The vehicle that brings me to the House each day is powered by an alternative fuel, but in
addition to my bicycle, I own a band B car that will incur a reduced VED of £30. I share an interest in cycling with the hon. Member for Wolverhampton, South-West, whom I occasionally see at the bicycle shed.
If there is to be the administrative complication of a multi-rate VED, the differentials should be wider than they are at present. Clause 13(3) sets out three new rates for band G vehicles of £200, £210 and £215. Given that the total annual cost of running a band G car is presumably a five-figure sum, it is frankly absurd to have a VED rate with calibrations of £5. The market is not that sensitive, and the calibrations should be more widely spaced to justify the complication.
There is also an issue for farmers, and I say that as a rural Member. Some farmers in my constituency have to navigate unmade roads and need a band G car not to drive their children to school in west London, but to earn a living. If we are to have multiple grades and give out signals to deter unnecessary use, we need to think about farmers.
My hon. Friend the Member for Chipping Barnet (Mrs. Villiers) made a point about complexity in her excellent speech from the Front Bench. I disagree with the hon. Member for Wolverhampton, South-West because I think that the system is now so complicated that it is unstable. It is unsustainable to go on year after year with Finance Bills such as this, and we need a simpler system. I was interested to read what the Institute for Chartered Accountants said about our system:
"The UK tax system is spiralling out of democratic control . . . This compounds the complexity of a system which has developed in such a way that even highly numerate taxpayers are struggling to understand the tax implications of their actions."
My party has a clear strategy on that. We have set up a commission to introduce not only lower taxes, hopefully, but simpler, fairer and flatter taxes.
I did not hear from the Chief Secretary any vision of how to get out of the mess that we are in. When the Paymaster General winds up the debate, I hope that she will be able to say something about where the Government are going on this. Do they see no exit route from this series of Finance Bills and a bewildering system whereby not just the very rich and devious, but ordinary people, get caught up in the machinations of the tax system? It would be helpful if she would share with the House her thinking on the long-term strategy of how we introduce into this country a more sustainable, simpler and more comprehensible tax system than that which we are debating today.