Housing

Part of the debate – in the House of Lords at 3:37 pm on 27 February 2002.

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Photo of The Earl of Caithness The Earl of Caithness Conservative 3:37, 27 February 2002

My Lords, I am extremely grateful that the noble Lord, Lord Best, succeeded in the ballot because this is a debate that this House needed to hold. Although there are not many speakers, it will be a high-quality debate because those who do speak, such as the noble Lord, are highly qualified and well respected within the profession.

Like the noble Lord, I declare an interest. I am a surveyor. I am a consultant to a firm of residential agents in Chelsea. Therefore, I advise clients and have friends who are directly affected by the current law.

As the noble Lord, Lord Best, has said, the UK has only a small, by international standards, PRS with a large number of owners with small portfolios. Fifty per cent of all landlords in England let seven or fewer homes. Over a quarter of landlords have only one letting, and many are "accidental" landlords; for example, as a result of inheriting a property, or having difficulty in selling one or needing to move abroad for employment reasons. These landlords have little chance of becoming expert property managers and turn to letting agents for help, whose standards of competence and probity vary greatly. Others have entered the sector as an investment, but have done so only very recently as mortgages for the acquisition of properties to let have become available on attractive terms through "buy to let" schemes. They are still very inexperienced.

As the noble Lord, Lord Best, said, something like £10 billion of new investment has come into the sector in the last six years. That is very welcome. But we need to be very careful that we do not increase a raft of amateur landlords to the market. We do not want to go back to that state of affairs. Managing property is not like managing stocks and shares or having a broker to manage stocks and shares. Property is a much more complicated exercise. Only by continued training of landlords and agents will one get the standards that are sadly missing at the moment.

I know that the noble and learned Lord, Lord Falconer, would be very upset if I did not once again remind him that it is high time that agents were licensed on a proper basis and were trained on a regular basis. That, too, must apply to landlords.

About 60 per cent of the private rented sector comprises lettings to people under the age of 30, many of those being corporate lets. At the other end of the spectrum, in poorer areas, many tenants are on housing benefit. In some areas, investment values are sustained exclusively by the availability of housing benefit at levels that bear little or no relationship to housing supply and demand.

The Royal Institution of Chartered Surveyors recently highlighted the issue of the 760,000 homes currently empty in England. That is a greater number of homes than the population of Leeds, which is England's third largest city. That is a disgraceful and unwarranted state of affairs, which has three effects. First, there is a strong body of evidence to suggest that areas that include significant pockets of empty homes suffer from higher than average levels of crime and associated problems. Secondly, during the period 1991 to 2016, we need to accommodate 3.8 million households within the UK. Empty homes could fulfil a percentage of that. Thirdly, by allowing 50 per cent council tax relief to owners of empty homes, the Treasury loses an annual income of the order of £75 million. Those empty homes represent a considerable wasted asset to the UK in terms of the investment already made in constructing them, the on-going maintenance and security cost of keeping them empty and the cost of bringing them back into use.

First, will the Minister consider extending the role of the Empty Property Advisory Group and making it accountable to a specific Minister? Secondly, will the Government formulate a strategy setting out targets to reduce the number of empty homes and establish a benchmark against which government agencies and local authorities can be required to act?

What have the Government done? They published a housing policy statement, The Way Forward for Housing, on 13th December 2000. It was one of a linked series of policy statements on regeneration and social exclusion, including the urban and rural White Papers, the National Strategy for Neighbourhood Renewal and the planning policy guidance for housing published that year. Sadly, that did not convince anyone that the Government understood the private rented sector. Furthermore, it gave the impression that they do not have the time or resources to acquire such an understanding or to think deeply about the matter. As a result, they fall back on gut instincts, political preconceptions, and token gestures. The only point on which I differ from the noble Lord, Lord Best, is that I do not believe that the political risk from government is all but dead. I say firmly that it is alive and kicking and is a major deterrent to investors—not only in the private rented sector.

Let us consider the Homes Bill, which many of the your Lordships will remember. At a recent meeting of the National Association of Estate Agents, the Government official responsible for the Bill was given a severe grilling. On a show of hands, three quarters of those present voted against the proposed seller's pack and people left the meeting with the distinct feeling that the Government do not understand the housing market at all.

I shall now consider in a little detail the problems that prevent the private rented sector from playing the role that it should in this country. The private rented sector is possibly the only sector of the economy in which the tax and regulatory systems work to prevent the growth of small and medium-sized enterprises into larger businesses. That is the consequence of several discriminatory anomalies within the tax system in how private landlords are treated compared with other businesses.

First, let us take the anomaly of trading status. Property letting is one of the few business activities that is not treated as a trade for tax purposes. Income from property is taxed under Schedule A as investment income, regardless of whether the income is generated from pure investment or from a property ownership and management business.

Then there is the question of management costs. Because this form of business is not regarded as a trade, a landlord managing his own property is unable to claim the costs of managing his property and lettings business against tax. However, he would be able to claim those costs if he were using the services of a managing agent. As I said at the outset, the high percentage of landlords who have a small number of dwellings to let do not want to employ managing agents. The tax position is discriminatory.

Then there is the question of capital gains tax roll-over relief. Unlike other businesses, because they are not regarded as a trade, lettings businesses are unable to claim roll-over relief from capital gains tax when they sell a capital asset with the intention of reinvesting the funds realised in their business. I am sure that your Lordships would agree that that severely limits the flexibility, mobility and above all the efficiency of investment, particularly among smaller investors, as the decision to sell to reinvest carries with it the same tax penalty as the decision to sell to take the profit.

Then there is the anomaly of earned income. Full-time landlords, whose sole activity is managing their property and lettings business and who have no other source of income cannot contribute to personal pension schemes because tax relief on contributions is permitted only on earned income and excludes investment income. That is provided by Sections 639(1) and 644 of the Income and Corporation Taxes Act 1988. It may be argued that the property holdings offer a more than adequate substitute for a pension fund. However, the snag is that that implies that the owner will sell the portfolio on retiring, thus preventing business passing from one generation to the next. Even if the portfolio is sold, the landlord will still face a substantial capital gains tax liability on the proceeds.

I turn to self-investment personal pension schemes. Some landlords have generated Schedule D income, usually through trading properties, and have used that to contribute to SIPPS. The SIPPS rules allow investment in commercial property and allow it to be let, but expressly forbid direct investment in residential property or land connected with such an investment, except where commercial property includes a residential element that is either occupied by an employee as part of the job or is an integral part of the business premises and is occupied by a person who has no family connection with the owner.

The result of that has been that professional residential landlords have bought commercial properties, often shops with flats above them, and have been compelled to leave the flats vacant, despite their having a residential lettings business, because of the potential adverse impact on their pension arrangements. That restriction is equally frustrating the other way round, because some small pension fund investors who are looking principally to invest in commercial property are frustrated from making the most effective use of their funds because the flat above a prospective investment is tenanted. So people are caught both ways.

I am sure that the noble and learned Lord would expect me to raise the anomaly of value added tax. Residential rented property is an exempt supply for VAT purposes, so any payments of VAT made to suppliers of goods or services—for example, building contractors or managing agents—are irrecoverable. That increases the cost to the landlord and, when combined with the tight margins under which smaller landlords operate, can act as a disincentive to repair.

I turn, as did the noble Lord, Lord Best, to stamp duty. Stamp duty has quadrupled from 1 per cent to 4 per cent. Perhaps I can give an example to illustrate the point made by the noble Lord. If, as an investor, I wanted to buy 20 flats, I could buy all 20 individually and pay no stamp duty if the flats were valued below the threshold—say at £50,000 each. If I bought all 20 flats as an investment, I would have to pay £40,000 in stamp duty, which is a windfall to the Government that practically equates to the value of one of the flats. So, I am deterred right from the beginning from making the purchase.

Then there is the problem with developers, which was touched on by the noble Lord, Lord Best. There is no incentive for developers to develop a property for investment purposes. They are likely to get more profit from selling partly to investment people and partly to owner-occupiers. There is a great opportunity being blighted at birth, and, as a result, no developers have taken it up.

It is clear that housing investment trusts, which were introduced in 1995, will not work. The structure that was put in place is too complex. No trust has been launched successfully to date, and no one seriously believes that one will be introduced in the future. However, there is a need for a tax-transparent securitised vehicle for indirect property investment, following the 2000 Budget.

The industry has spoken to the Government about it, and the Government said, "No" to the industry's proposals. It is no good the industry trying to come up with another set of proposals and trying to second-guess what the Government really want: it is time for the Government to identify the areas in which the industry has something to offer, specify the help that they will give and recognise that the private rented sector can play a significant part not only in reducing the number of empty properties but in reducing the shortages in the South East and providing better accommodation in the North, as the noble Lord, Lord Best, said. The Government must say, "This is what we want you to do to help us. We are the enablers; you are the professionals. Get on and do it". Sadly, under current legislation, with the current anomalies, that will never happen.

I hope that the noble and learned Lord, Lord Falconer of Thoroton, will, as a result of the debate, grasp the opportunity to do something revolutionary and take a major step forward for everybody.