New Clause 1 — Collective enfranchisement by leaseholders

Orders of the Day – in the House of Commons at 5:45 pm on 29th April 2008.

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

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

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

(4) In subsection (4)(b) omit "by an RTE company".'.— [Mr. Gauke.]

Brought up, and read the First time.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

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

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

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

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

"the total stamp duty land tax due will be more in line with the stamp duty land tax that would have been due had each share of the freehold been bought separately."

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

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

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

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

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

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

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

"In relation to the RTE company provisions, there are a number of legal and practical difficulties which still need to be resolved and work is continuing in order to determine a way forward. Therefore no timetable has yet been set to bring these provisions into force."—[ Hansard, 29 February 2008; Vol. 472, c. 1988W.]

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

"tenants exercising their right of collective enfranchisement do not yet benefit from the SDLT relief provided for in section 74 of the Finance Act 2003, although this remains the intention once the practical difficulties have been resolved."—[ Hansard, 11 March 2008; Vol. 472, c. 238W.]

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

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

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

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

Photo of Colin Breed Colin Breed Shadow Minister, Treasury 6:15 pm, 29th April 2008

First, may I say that my party has considerable sympathy for new clause 1, as presented by Mr. Gauke? That is principally because so much time has elapsed since the proposals were first put forward, and the case in Bournemouth to which he referred will no doubt be replicated throughout the country.

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

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

"at a rate broadly appropriate to their own contribution to the purchase and do not suffer a higher rate of tax because they are acquiring the freehold under a collective arrangement."—[ Hansard, 11 March 2008; Vol. 472, c. 238W.]

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

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

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Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 6:30 pm, 29th April 2008

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

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Photo of Colin Breed Colin Breed Shadow Minister, Treasury

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

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

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

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Photo of Colin Breed Colin Breed Shadow Minister, Treasury

I am grateful to the hon. Gentleman for that clarification.

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

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

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Photo of Mike Penning Mike Penning Shadow Minister (Health)

Could the hon. Gentleman elaborate on exactly how the new clause would undermine tenants' security? I cannot see how it would, and he has not given the Committee any guidance on that.

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Photo of Colin Breed Colin Breed Shadow Minister, Treasury

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

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

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Photo of Mike Penning Mike Penning Shadow Minister (Health)

I promise not to detain the Committee too long. Not least, I will try not to go into the legal jargon that my hon. Friend Mr. Gauke had to use in order to make sense of this, and thereby clear the Chamber.

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

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

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

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Photo of John Redwood John Redwood Conservative, Wokingham

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

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

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Photo of Colin Breed Colin Breed Shadow Minister, Treasury

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

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Photo of John Redwood John Redwood Conservative, Wokingham

That just shows the muddle that the Liberal Democrats are in. On the one hand they say that they want to join the Government and the official Opposition in trying to expedite people getting this tax relief for the purpose of enfranchisement, and in his next breath the hon. Gentleman says that it might not be a good idea to let them have that freedom because they might make a mess of it. Once again, we see that the Liberal Democrats do not actually believe in freedom at all. They do not believe that people are intelligent or able to make their own decisions; they believe that they have to micromanage decisions from Parliament. It would be even better if the Liberal Democrats got out of their muddle by agreeing with the Government and the Opposition. People should have the right to enfranchise their lease and buy the freehold, and they should be able to do so free of tax. We could then say to all those seeking to interpret the will of the House that the whole House was united, not just the two major parties.

I would like to make one new point during this brief debate. While Ministers are trying to get the right legal advice and put the right form of words into the necessary provisions so that the will of the House five years ago and now can be properly enforced, they could have a word with the Revenue, which is becoming far too aggressive. Given that it is the House's intention that such transactions should be exempt, the Revenue should not be pursuing and hounding people by taking up cases at considerable expense, with much legal advice, against the clear wish of the House of Commons that such transactions should be exempt. That would give a little more time for those who wish to get on with their lives and buy their share of the freehold, while the Government's lawyers get their act together and introduce the necessary wording.

It beggars belief that it has taken more than five years to carry out something relatively straightforward such as giving the leaseholders of Britain the opportunity to buy a modest share of their freehold for a modest sum without being taxed as if they were multi-millionaires carrying out a big transaction. I hope that Ministers will soon find a way to do so.

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Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I hope that I can cast some light on what is a complex problem, as I have discovered recently. I have to thank Mr. Gauke for bringing it to my attention and causing me to look back at what has been going on during the past five years.

As far as I can tell, the issue is not defective legislation but the difficulty in putting into effect provisions that allow right-to-enfranchise legislation to be commenced. I hope that I will be able to explain at least in passing—I do not feel qualified to go into great detail as the matter is being dealt with by the Department for Communities and Local Government—at least some of the issues. I thank the hon. Gentleman for bringing the matter to the attention of the Committee; he has done the right thing.

We have considered the proposed new clause to amend section 74 of the Finance Act 2003, which deals with stamp duty land tax treatment of collective enfranchisement. The hon. Gentleman was right to set out the background, including the fact that section 4A of the Leasehold Reform, Housing and Urban Development Act 1993, which was introduced by the Commonhold and Leasehold Reform Act 2002, defined and made provision for what was known as a right-to-enfranchise company. The provisions sought to resolve a problem whereby qualifying leaseholders were being deliberately excluded from purchasing a share of the freehold by other leaseholders. Under the right-to-enfranchise provisions, leaseholders proposing an application for collective enfranchisement must first form a company, which then makes an application and becomes the new owner of the freehold. Under the RTE company provisions, all leaseholders—and this is the point, I think—must be invited to take part in the application to prevent the exclusion of qualifying leaseholders.

Section 74 of the Finance Act 2003 was designed to ensure that when an RTE company purchased a freehold, the rate of stamp duty land tax was set by the value of the aggregate consideration divided by the number of flats in respect of which the right of collective enfranchisement had been exercised. As hon. Members have said, that would bring the rate of stamp duty land tax broadly into line with the rate that would have been charged had each share of the freehold been purchased separately.

As Opposition Members have pointed out, section 74 of the 2003 Act has not yet taken effect because section 4A of the 1993 Act, on which it depends, has still to be commenced. A number of practical difficulties have emerged that require further work and consideration. The issues involved are not directly relevant to the Finance Bill, and I can outline them, and their effect on what is proposed by the new clause, only briefly. The main difficulty in implementing the provisions in section 4A of the 1993 Act has been how to resolve disputes that may arise concerning the fair apportionment of costs of acquiring the freehold and the expenses of the RTE process among participating members. Failure to resolve that practical difficulty could allow members of the RTE company to offer unfair terms to particular leaseholders in order to exclude them from participating.

It had originally been envisaged that RTE company members could agree on how such costs would be apportioned and that normal company law mechanisms would be available to enforce those agreements and determine any disputes arising. However, legal advice received indicated that there were a number of problems with that approach. First, company law mechanisms could not be used to determine the terms upon which tenants were able to participate in an enfranchisement action. Those had to be settled outside of the mechanisms and such terms should be clear to tenants at the outset of the process when they decided to become members of the company that would purchase the freehold on their behalf. That matter is currently being worked on.

Moreover, human rights issues arise because the right to enfranchise is a civil right, which means that in the event of a dispute about such rights, the person concerned would have a right to go to court if there were no mechanism under the legislation for resolving such disputes. It is a matter of attempting to work out in detail how such mechanisms can be put in place, but not by using existing company law, unfortunately; it seems that it will not be available for such use. I understand that it is work on those issues that has caused the problem. RTE commencement lies at the end of a long process, which has involved 12 consultation papers on the 2002 Act, and 18 sets of associated regulations to bring most of the rest of it into effect in phases. I suspect, although I do not know for certain, that the most difficult bit has been left until last because it is causing such difficulties. I am told that it is being worked on with commitment, and it is hoped that the matter will be resolved.

The Government believe that it would be wrong to amend section 74 of the Finance Act 2003 to break the link with the RTE company at this stage. Further investigation has been done to explore whether the RTE provisions can be made to work. If they can, that would be preferable to a different kind of fix, for the reasons hinted at by Mr. Breed.

The Government will do further work on consideration of the best way to resolve these complex issues, including whether a clause in next year's Finance Bill is necessary. The Government have received only a handful of representations on the matter, and the Treasury and HMRC have received none on section 74 of the 2003 Act. I thank the hon. Member for South-West Hertfordshire for bringing it to my attention, however. I am now more aware of the matter than I would have been. Given that I have explained some of the difficulties and said that we may be willing to consider a change to next year's Finance Bill—once we have seen how the Department for Communities and Local Government has wrestled with the problems—I hope that he will not press the motion to a vote.

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m

Angela Eagle is proposing that a beauracratic mess continue even after the admission that the legislation is causing problems. For what reason she'd prefer this state of affairs to continue I cannot guess.

As the particular law on RTE and tax liability is currently written it does seem "defective" in that it is woolly, illogical, confusing and unjust *many* years after it was supposed to be introduced. The decision not to proceed with fixing the problematic clause in good time is hugely disappointing.

That labour ministers are forced to bluster and reject simple changes that would fix a clearly broken law (which even they admit is broken) indicates how truly incompetent and base the current government has become.

Submitted by mick angel

Photo of David Gauke David Gauke Shadow Minister (Treasury) 6:45 pm, 29th April 2008

I thank the Exchequer Secretary for her thanks to me and for an informative answer, which set out the problem. I am not sure whether that was previously on the record, so it is helpful for the Committee to have a better understanding of the problem. I did not realise that the Human Rights Act 1998 was part of the reason for our inability to tackle the matter previously.

I also acknowledge that the subject has largely been a matter for the Department for Communities and Local Government. However, given that, if Departments do not work, the Treasury tends to step in and sort out the matter—that is my understanding of the way in which things work—it is right to debate the subject during consideration of the Finance Bill.

The Exchequer Secretary states that we are considering not defective legislation but practical problems. However, if legislation cannot come into force after five years, it fulfils the definition of defective. I note that the Exchequer Secretary does not rule out the possibility of breaking the link between RTE companies, a right to collective enfranchisement and section 74 of the Finance Act 2003. I am therefore not convinced that there is a difficulty with pursuing that route. The matter could have been tackled in the past five years, but that has not happened. I see no reason for waiting a sixth year and I would like to press the new clause to a Division.

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Question put, That the clause be read a Second time:—

The Committee divided: Ayes 130, Noes 321.

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Division number 159 Orders of the Day — New Clause 1 — Collective enfranchisement by leaseholders

Aye: 130 MPs

No: 321 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

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Question accordingly negatived.

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