Surely I am not the only landlord worried about new EPC requirements?9:44 AM, 17th February 2021
About A week ago 125
Is Campbell Robb, CEO of Shelter arguing in favour of the tax grab against landlords and tenants!
This following correspondence between Campbell Robb, Chief Executive of Shelter and a member of Property118. Both letters were sent and received 20th of October 2015.
Letter from Campbell Robb:
Thank you for your email. While the restriction of mortgage interest tax relief has never been a priority for Shelter we do support the change that the Chancellor announced in the Summer Budget. This is for a number of reasons.
In the first place, this change will help to level the playing field between landlords who pay the higher rate of tax and first time buyers when they’re trying to buy a property. The tax relief currently makes borrowing cheaper for landlords than for owner occupiers, giving landlords a competitive advantage over prospective first time buyers. This is part of the reason that the share of new mortgages going to buy-to-let is at an all-time high.
Given the preference of the overwhelming majority to own a home rather than to rent, we think that this advantage is unfair.
While the underlying cause of high house prices is the current shortage of homes, tax relief on buy-to-let has exacerbated this by giving an incentive to investors to take on unsustainable amounts of debt. Phasing out the tax relief should help to remove this inflationary pressure from the housing market and calm the destabilising effect it is having on prices over the long term.
Finally, we support this change because we believe that there are higher priorities for government spending. At a time when the government is committed to eliminating the deficit, our campaigns have focussed on protecting housing benefit for low income renters and the affordable homes budget. Cuts to and restrictions on housing benefit are the single biggest threat to increasing homelessness in the immediate term. And cuts to the budget for genuinely affordable homes pose the biggest threat to finding a long term solution to homelessness in England.
In the era of austerity, these are bigger priorities for spending than on tax relief for higher rate landlords.
Irrespective of our in-principle support for the policy, we fully support work to mitigate any possible unintended consequences that the government’s decision may have. Given the five and a half years before these changes come fully into effect and the 18 months before they even start to be phased in, there is time for this to happen. We would encourage any landlord who believes that they might be affected by the tax changes to take advantage of the time they have to consider their options, which include sale with sitting tenants, and discuss them with their tenants.
Reply sent to Campbell Robb.
Thank you for your detailed reply to my letter. This has been very useful as I understand your position better now. I was distinctly under the impression that Shelter had lobbied for this move to disallow landlords from offsetting the finance costs of our businesses, along with the Green Party. I stand corrected if you did not play that role.
As you will be aware, the new-style Government – which is introducing drastic economic measures across the board – has shown itself now to not be at all interested in tenants and not in first time buyers who need affordable housing, either. Within this context, I believe strongly that you are wrong to support the tax change and I will endeavour to explain why, addressing each of your points in turn.
The ‘level playing field argument’ does not hold up to scrutiny. The IFS – an impartial and independent body, which has also condemned the Government’s tax credit proposals declared this argument to be completely without logic. Paul Johnson, among many others, has pointed out how owner-occupiers in the UK enjoy a huge tax advantage over landlords, most notably with regard to owner-occupiers’ exemption from paying capital gains tax. Together with low interest rates, this made it very cheap for the current owner-occupiers to purchase and many are now sitting on massive profits. It is this which has fed house price inflation; and it is therefore current owner-occupiers who have priced out potential first time buyers.
In addition, when a home is owned by a landlord a significant amount of revenue is raised in tax which goes back to the Government (when any rental houses are sold to owner-occupiers, there will be a loss of tax revenue for the Government; their economic analysis of the effect of the measure, if it can be called that, is hugely simplistic and misleading). Landlords also pay higher mortgage interest rates and need bigger deposits. So I don’t believe you can state that the cost of borrowing is cheaper for landlords; it clearly isn’t. If you are referring to the fact that landlords can obtain interest-only mortgages, then a policy could be introduced whereby from now on, these are no longer allowed. Obviously the BTL mortgage market would come to a near standstill (as the figures don’t usually stack up with repayment mortgages), but that would not affect current landlords and their tenants; just prevent further expansion of the rental market (at a time when demand is huge, so rents will obviously skyrocket) and the field could be left largely open to first time buyers (since these are the favoured group currently in vogue).
Naturally, the challenge for these FTBs is to save enough for a deposit (this will become harder if they are renting privately as they save), to meet the strict mortgage criteria set out for them and the challenge is also to get planning for more housing to be agreed. Once again, it is not landlords who stand in their way; but rather current owner-occupiers who want to preserve the green land around them and do not want their house prices to plunge because of new developments. These should be the targets; not landlords. Attacking landlords and forcing them to sell up in a distressed sales market possibly may help some first time buyers. If first time buyers purchase these houses, it just means fewer houses for people to rent. You must know from your work that there are millions of people in this country for whom these barriers are insuperable and more related to salaries, security of job tenure and so on. Attacking landlords creates no new housing and will in fact stop private landlords from creating any new housing (which will lead to more house price and rent inflation).
The absurdity of the Clause can be seen when one takes into account the effect of inevitable interest rate rises. A colleague of mine, Dr Rosalind Beck, has offered her situation as an example, For her, if the base rate rose to 3.5%, her actual income would drop to £5,000, but HMRC would define her as having an income of £90,000 and tax her approximately £9,000 on this (it would be more, if she wasn’t being ‘gifted’ 20% ‘tax relief’), leaving her with an income of minus £4,000 with which to support herself and her two teenage children.
The submission to the Finance Bill Committee by Kathy Miller (reference below, along with some other important submissions to the Finance Bill Committee) shows the consequences for her of the same base rate increase: under the new system she would make a loss of £88,591, but face a tax bill of £23.490, with a total loss of £112,081. The new system leaves many landlords with nothing to live on and taxes them on top of this. This is in contrast to the current (normal) tax system whereby anyone who has no actual income is entitled to state aid, rather than facing tax demands.
I also have to point out that it is wrong to refer to this tax change as being about a ‘relief’ as though landlords have been given some kind of perk over the years. All businesses offset finance costs to arrive at their profit. This tax change means landlords will be taxed on their largest cost. How can a simple comparison be made between an owner-occupier and a portfolio landlord providing housing to a hundred people on low pay, benefits, students and so on? They are housing providers just as Housing Associations are. It is a false comparison, based on some weird idea that renting houses isn’t a business if done by a private landlord; but identical work by anyone else is a business….
The whole thing is bizarre; this tax change if it goes ahead as it stands will bankrupt some landlords, but in the meantime, the main effect it will have is to massively hike rents.
What’s worse, this is happening at the same time as the introduction of the cuts in tax credits which are expected to make some families over £1,000 pa worse off is greeted with great controversy; Clause 24 is meanwhile going to have a far greater impact on many of the poorest in society but is slipping through unopposed (with many MPs blinded by populist, anti-landlord prejudice). It must be borne in mind that when the Irish Government made the more modest cut of so-called ‘tax relief’ from 100% to 75%, over the next few years rents in Ireland increased by 24%.
So the additional burden which will fall on tenants will be very high. For example, a rent of £600pm (typical of a lower-income family), with a 24% rent increase would mean an extra £144 pm or £1,728 pa. This is a much bigger deal for the lowest-income families than the tax credit cuts, and will mean a double-whammy. But it is being brought in by stealth and with all-party support. Shelter needs to get some researchers working on these figures as they may be even worse than I suggest. You may baulk at the mere suggestion of speaking out against an anti-landlord proposal, but you will be doing the tenants of this country a great disservice if you do not. My colleagues and I would be only too happy to help with research etc. I also have pasted below a copy of a suggested amendment which would mitigate many of the ill-effects of this.
Moving on, you mention buy-to-let mortgages being at an all-time high. This will change very soon as many landlords were misled by the Chancellor’s false claim that Clause 24 would only affect the ‘wealthiest landlords’ (who, in fact, it won’t touch as the wealthiest landlords do not need to borrow to purchase; the main target is landlords who ‘owe’ the most – a bizarre definition of wealth). As landlords realise that their properties have been converted into massive liabilities, the slowdown in the BTL market will be rapid. Would you take out a mortgage to provide a home for someone for rent of, say £500 per month, knowing you would be taxed on the money you were paying out to the mortgage company as though it were money coming in? For portfolio landlords, many face this scenario. If they now try to sell their HMOs do you think first time buyers will be queuing up to buy them? What will be gained by other incorporated landlords buying these?
You mention the preference of the overwhelming majority to own a home rather than to rent; but as I say, how will introducing this incredible new tax regime help them to save for a deposit, meet the mortgage criteria and get current owner-occupiers to agree to the building of more homes? And how will this lead to more affordable homes being built? The lines of causation are all wrong. Added to which, I have to question the assumption that the overwhelming preference is to own and not rent; many young people and/or temporary foreign workers do not want to buy; many others couldn’t possibly afford to; these are the exact people Shelter should be protecting.
You say that allowing landlords to offset the finance costs of their businesses has exacerbated the housing shortage. I’m afraid I don’t follow the logic. Without landlords arranging finance and renovating old houses, funding new-builds and so on, which has massively plugged the gap left from the lack of sufficient building and the selling off of social housing, the housing shortage would be far more acute and therefore house prices and rents higher. Landlords do not bid up prices as they are more likely to negotiate prices down. It is owner-occupiers who ‘fall in love’ with their ‘dream home’ who are more likely to do this.
And you say landlords have taken on unsustainable levels of debt. Actually, many landlords have LTVs of around 60% or less (obviously some have higher levels) – it is this tax change that is going to make perfectly viable and successful businesses unsustainable. And phasing in a grossly unjust tax change doesn’t make the change right or reasonable. In terms of house prices, who knows which way it will go? In areas where landlords provide a lot of the ‘social’ type housing, if they have to sell or go bankrupt, it is quite likely there will be no purchasers ready and house prices could plummet. However, other forecasters think that because of the overall housing shortage prices will continue to rise. For landlords who attempt to weather the storm, the main tactic will be increasing rents to the absolute maximum, and keeping costs down to the minimum (both will be very negative for tenants). And contrary to popular belief many landlords have not increased rents for years, so there is a lot of leeway for these to go upward. We do not want to do this; we are being forced to in the face of potential infinite-rate tax bills.
You say you support the change because there are higher priorities for government spending. This has nothing to do with government spending; this is the disallowing of the main cost of private landlords’ businesses. Do you believe this is fair to only be applied to non-incorporated landlords with mortgages? If so, why? Can you point me to the evidence that wrapping your property into the legal structure of a company makes rentals more acceptable or professional? And why are holiday lets exempt, when they provide non-essential accommodation to people who already have a home? Why are hotels exempt? Why aren’t other sole traders, for example, car hire companies who make money out of ‘rentals’ included?
It is only a matter of time before people see through the smoke and mirrors. It would be better if you could come to this conclusion sooner rather than later and get back to supporting the tenants who I believed your organisation championed. Or has Shelter now switched allegiances to only support potential first time buyers (there may sometimes be an overlap between these; more often, there isn’t). Has Shelter made such a massive shift in policy direction? I haven’t read anything about that in the news.
You also mention protecting the position of those on benefits. These are the ones who will suffer most from this policy. As rental demand will surge with any contraction in the PRS, landlords remaining in the market will give notice to those on benefits and favour those in work. However, some landlords could be made bankrupt if they do not sell their properties. Kathy Miller, the landlord I mentioned earlier, has now given notice to 6 families who are low-paid and/or on benefits that they must now leave, as she is going to have to sell their homes. None of these tenants are likely to ever be in a position to purchase and they have been with her for many years. Where will they go now? If the policy were reversed, she could allow them to stay.
This change is going to have a far bigger effect than the cuts to housing benefit you mention and also to the cuts in tax credits, as I mentioned in my comments about rent increases. Homelessness will also grow massively as this policy bites.
With reference to the issue of higher-rate taxpayers; the RLA has found 60% of lower-rate landlords will become higher rate taxpayers as a direct result of this change, with no change in their actual income whatsoever. Do you agree with that?
I also don’t see what is achieved by selling to other landlords with sitting tenants.
Finally, and most importantly, as you fully support work to mitigate what I have demonstrated to be catastrophic ‘unintended’ consequences, I am hopeful that you will seriously consider supporting the amendment below, that we would like adopted. Perhaps you could let me know if you feel able to pursue this suggestion. It would be a marvellous thing if you could.
Thanks once more for having got back to me in such detail and I hope my email hasn’t appeared too argumentative. I just wanted you to see this issue from the perspective of landlords and tenants, who are all going to suffer if it goes ahead.
Below is a copy of the amendment which was suggested to the Finance Bill Committee:
If this amendment were accepted, the Chancellor would achieve what he has stated were his aims, without causing devastation in the private rented sector in the process:
At 272A, Delete subsections (1) to (6) and replace with
“272A Restricting deductions for finance costs related to residential property
(1) in calculating the profits of a property business for income tax purposes for the tax year 2017-18 or any subsequent tax year, no deduction is allowed for costs of a dwelling-related loan where the loan was written after 5 April 2017.
(2) Subsection (1) does not apply in relation to a property business carried on by a company otherwise than in a fiduciary or representative capacity
(3) Subsection (1) does not apply to dwelling-related loans where a remortgage has been carried out after 5 April 2017 and the amount borrowed does not exceed the amount of the dwelling related loan outstanding before 6 April 2017.
(4) For the meaning of “costs of a dwelling-related loan” see section 272B.
1. The submission by the Institute of Chartered Accountants of England and Wales is impartial, independent and scathing of the proposal. It is a dispassionate review of many of the reasons why the tax is a bad idea (the contents were reported in the Telegraph by Richard Dyson last week):
2. The submission by Connie Cheuk which thoroughly refutes the Government’s claims: http://www.publications.parliament.uk/pa/cm201516/cmpublic/finance/memo/fb58.htm
This submission points out, at paragraph 5.2, that some basic rate taxpayers will be pushed into the higher rate; something which Rob Marris was concerned about in the “debate”. David Gauke blinded the Committee with meaningless figures because he has no idea of the number, as a Freedom Of Information request elicited.
3. The submission by Kathy Miller demonstrates the kinds of consequences this will have on her personally as a landlord and her tenants (in their own words) and the reason why evictions and sales will be the inevitable consequence of the clause if implemented:
4. The submissions by Ben Hardaker gives an indication of the effect this will have on tenants claiming benefits (he also grew up in a family dependent on benefits so he knows what he is talking about):
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