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Written evidence submitted to The Finance Bill Committee by Councillor James Fraser, Stevenage Borough Council (FB 73)
LANDLORD TAX – THE RUINOUS EFFECTS OF CLAUSE 24
PART1: THE BACKGROUND
PART 2: WHERE’S THE MODERATE IDEOLOGY?
PART 3: LANDLORDS AS DISNEY VILLAINS
PART 4: THE ACTUAL TRUTH
PART 5: THE STRANGE MYTHS OF LANDLORDING
PART 6: THE EFFECTS OF CLAUSE 24
PART 7: SO WHAT CAN BE DONE?
1. I am an elected councillor, formerly of both Stevenage Borough Council and Hertfordshire County Council, currently with some responsibility for Planning. I hold a degree in Politics & Economics, have been a former Army officer undergraduate and for the past nineteen years have been a professional provider of private housing and trainer in the best practices for the private rented sector. I had responsibility for housing on SBC as deputy chair during my last stint in office.
2. Since this bill was announced, there has been a growing public outcry against it, as people have gradually woken up to its severe implications, and I wanted to ensure that you as a committee member are fully aware of those implications. Currently, few people are aware of the catastrophic consequences awaiting the housing sector if this goes ahead but you’ll get to hear a lot more about this from an increasing number of people once it is more widely understood what the consequences will be. So far, the National landlords Association, the Residential Landlords Association, the Council of Mortgage Lenders, the Institute for Economic Affairs, the Institute for Fiscal Studies, the Conservative think-tank Core Policy, The Telegraph and many concerned landlords, tenants, agents, economists, and academics have spoken out against this ruinous policy which is contrary to all established taxation practices, contrary to principles of natural justice, and is one of the most anti-business proposals ever considered.
WHERE’S THE CONSERVATIVE IDEOLOGY?
3. A very large number of landlords – the vast majority, I expect, of the 2.1m thought to be in operation – would have voted Conservative at the last election. We have always traditionally seen ourselves as natural bedfellows, with the private sector, business, support of the individual investor, low taxation and freedom to expand private enterprise as core Conservative ideologies. Landlords are moderate people, planning for the future – nothing in Clause 24 assists or endears them, and willingly betrays those who thought they had a fair and moderate government they could trust and believe in.
4. Clause 24 willingly and deliberately embraces the beliefs of the hard left – taxation in excess of 100% of earnings, the driving from business of an essential private service, the extreme dereliction of wealth hard-fought and legitimately earned. No politician of any colour has ever thought this is a workable or realistic policy – it was recently described as being like something ‘from a third world country with a lunatic dictator’ – so we are utterly stunned that any moderate government should be the ones to try to implement it.
LANDLORDS AS DISNEY VILLAINS
5. There are so many untruths being perpetuated about this Clause, and landlords generally. We are used to being the most hated people in society –only bankers and paedophiles seem to keep us off the top spot – yet so much of the media hysteria about the housing market is provably and factually untrue. We are consistently portrayed as some sort of Disney villain, sheltering in some rain-soaked castle on a distant mountain whilst rolling around in untold riches, laughing raucously at the poor and misery around us. The media happily perpetuate this myth of rapacious greed. Only two weeks ago, ‘Moneyweek’ magazine produced a column about landlords entitled ‘Making money out of misery’ which went on to contain so many factual errors (that would have been obvious even to a lay-person), that one had to conclude they had made the whole thing up and passed it off as reality.
THE ACTUAL TRUTH
6. In truth we run businesses providing quality homes to a wide variety of people who cannot or do not want to buy for a wide variety of reasons. In my case, I run a permanent 24/7 on-call policy, I spend all day administering, visiting, repairing, and running a full refurbishment outfit where I am hands-on and at the very centre of the housing provision. I have excellent relationships with all of my tenants, many of whom have been with me for many years, some of whom have left and decided to return, and at least two who left for that holy grail – a council house – only to later ask if they could return to my far superior houses and level of personal service! I take poor, damaged housing that few people want and turn them into high quality refurbishments that are desirable and in huge demand from people looking for a high-quality home with full provision laid on.
7. My own contribution to the wider economy, as with many landlords, is immense. I employ multiple tradesmen on a regular basis, occasionally letting agents, estate agents when buying or selling, and, most of all, I have a regular programme of refurbishment, where each house receives around £20,000- £25,000 each and every time it needs refurbishing. This is money that is put directly through the tills of my local hardware stores which keeps staff, kitchen fitters, plumbers, bathroom manufacturers, electricians and all manner of manufacturers in business. Such thorough repairs and refurbishments will inevitably cease if I can no longer afford to carry them out.
THE STRANGE MYTHS OF LANDLORDING
8. The government makes some strange claims that are provably false. Let’s take a look at these myths individually:
8.1. ‘It is an investment – like shares – not a business’
Anyone who says this, or thinks this, has quite clearly never been a landlord, and they’ve certainly never run a housing business. For the vast majority of people trading in shares, they need do nothing more than press the ‘buy/sell’ button at appropriate times. Indeed, the very nature of shares is that someone else is running the business. The investor is not expected to have an involvement. For even the smallest of landlords, there are endless preparations, and every day of their business life they are subject to legislative and regulatory adherements that require an ongoing commitment to another person or family. For portfolio landlords, every day is a full-time occupation of responsibility, with paperwork, phone calls, visits, meetings, financing, services to be provided, repairs to be made, court cases to handle, and for me, full time and expensive provision of totally refurbished properties taking anything up to £25,000 per time of further investment and management, all of which is hands on and an integral part of my working day.
With shares, having a regular, full-time job is expected and usual. As a landlord, it is next to impossible to have any other full-time work and maintain the professional commitment to your business and your tenants.
I also look forward to the day that property can be held in an ISA!
8.2. ‘Only 1 in 5 landlords affected’.
The truth is that most landlords with finance in place – which is the vast majority of them – will be affected. Expert opinion puts this at 60% of the 2.1m, or one and a quarter million landlords. Even if, as is suspected, the government means only 1 in 5 will be facing severe difficulty or bankruptcy as their tax bill rises, often to exceed earnings, this still means 400,000 private individuals being forced into untenable situations simply for pursuing a much-needed business or for providing themselves with a decent pension. If they only housed one person each, that’s 400,000 renters potentially looking for a new home in a shrinking market. The real impact though is that the landlords being targeted in this grossly unreasonable way are the professional, portfolio landlords, so having one tenant each is wishful thinking! If they only had 5 houses each, that’s anywhere from 2 million people upwards, including children, looking for a new home. As a local councillor, I can assure you they will in large part be heading for the local council for support, which simply cannot be offered or provided.
8.3. ‘It’s government ‘genorosity’’ and ‘only the wealthiest landlords are affected’
The wealthiest landlords – the truly wealthy in this country – are usually unfinanced and therefore remain completely unaffected. The landlords that are the most affected, with the prospect of having their entire businesses and wealth effectively confiscated by the government, are the less well off, middle class, working, portfolio holders. Most of these are professional landlords with full time businesses, but we are also talking about potentially destroying the finances of public servants, nurses, doctors, teachers, train drivers, book editors, driving instructors, the retired, and a vast range of ordinary people in ordinary jobs who have invested wisely for their futures. The government says these are ‘wealthy’ people, which neatly plays to the media headlines hungry for a property scapegoat, when the truth is that DEBT does not = WEALTH.
Hitting those with the most borrowing and calling that a taxable EARNING is beyond ludicrous, and something no Conservative – or ANY moderate and right-thinking government – would ever understand as reasonable behavior.
The comments about this being a case of ‘generosity’ to the wealthy are also highly offensive and ill-informed. There is nothing ‘generous’ about a business expense. No so-called ‘wealthy’ retailer, industrialist, manufacturer or service provider is being spoken of in these terms yet they all get identical tax treatment. Why are landlords the scapegoat yet again?
8.4. ‘A fairer tax system’
Taxing debt is not fair. Paying tax rates greater than everybody else, simply because of the business you are in, is not fair. Getting taxed at rates of anywhere between 100 and 156% of earnings, with the inevitable bankruptcy, is not fair. Distorting tax so that lower earners pay more, or get forced into higher tax brackets on non-existent income is not fair. Taking away personal allowances as people on moderate incomes are hit for additional-rate tax is not fair. In fact, the only thing that is fair is the CURRENT SYSTEM where everyone gets taxed the same affordable amount on their profits. This is the only way that everyone is treated equally – singling out a landlord for extreme treatment is DISCRIMINATORY and is fair to no one. Some of these affected landlords with day jobs are being advised by accountants to GIVE UP THEIR JOBS in order to try to protect their earnings and tax band. It is a sickening situation for normal, hard-working people to be forced into this predicament.
8.5. ‘Landlords have an unfair advantage over owner-occupiers’
Owner-occupiers do not pay CGT. They do not pay tax on room rentals up to £7,500. Landlords have to find 20-25% deposit as a minimum, owner-occupiers only 5-10% typically. The IFS has said landlords are far more heavily taxed already than home owners or commercial operators. I have bid on 15 houses this year and been outdone by a first-time buyer or established owner-occupier on every one because they don’t have to factor in business expenses in providing the home to someone else, as landlords do. Most importantly, landlords pay tax on their earnings – sometimes large amounts of tax – which will stop if they cannot continue in business.
8.6. ‘Landlords are responsible for high house prices’
This is one of the most bizarre beliefs, but it is constantly perpetuated. The official, academic studies show that of the last 150% rise in house prices, around 7% is attributable to the private rented sector. According to the ONS, house prices have doubled in this country every seven years since 1948. It sounds incredible, but it is true, regardless of boom or recession, the average has always advanced thus. Since consumer buy-to-let only arrived in 1996, how do you explain the exponential rise over the previous HALF A CENTURY? And since the graph of house price rises continues on the exact same trajectory both pre- and since 1996, it would seem that the private rented sector has had a far less impactful effect on house prices than is often perceived by the public and the editors looking for a sensationalist headline.
8.7. ‘Landlords might destabilize the housing market’
At 19% of the housing stock, and 14% of current mortgage lending, it seems somewhat strange to single out this minority group as the cause of any future instability. Traditionally, landlords have never caused instability, and many of us have factored rate rises into our calculations, as mortgage lenders already do. Most of the long term professionals were trading during the times of 15% rates, and even since 1996 my earliest mortgage rates were 8%. The mortgage lenders have always seen landlords as a safer bet than home owners which is why the lending on these types of business is so popular. What definitely WILL destabilize a relatively secure market is bankrupting or forcing out of business most of the professional operators! A strangely ironic position, don’t you think, considering the government’s claim that this is what they’re trying to avoid?
8.8. ‘Landlords are greedy and selfish’
Really? Apart from the fact that most make only modest returns – 1-2% net is typical – 21% make no profit at all and use their asset value as a long term savings plan or pension. In my case, my refurbishment costs mean my real return on most properties is a negative figure. Also, the large majority of the landlords I am associated with are far more likely than a Local Authority or Housing Association to offer real, proper help and advice, including writing off debts, lowering rent and assisting tenants with all manner of personal issues. I enjoy housing people, taking an interest in their lives, seeing them grow and prosper. Comments to the contrary are just offensive and ill-informed.
THE EFFECTS OF CLAUSE 24
9. Large numbers of landlords are facing bankruptcy. The maths do not lie. It IS that serious and any politician who thinks this is a good idea urgently needs to re-read the facts above.
10. Tenant evictions will gather pace and possibly reach unsustainable proportions. Some landlords have already started on this process. I have already started meeting with my tenants to inform them of their new situation. They are shocked and upset. Where will they go, in a rapidly shrinking market?
11. Those that can find houses for rent will also find the basics of economics apply, namely that a short supply with expensive costs makes the price high. No landlord I know wants to raise rents, nor evict people, but it is an absolute inevitability. If you think differently, please tell me why.
12. A large number of innocent people will now fall foul of child benefit payments, or be moved into a higher tax bracket despite earning no more income. Freedom of Information requests from HMRC PROVE that they have no idea how many landlords are to be affected, how many tenants or properties will now be at risk, how many people will move tax brackets, nor how many people will lose child benefit. NO IDEA. How can any policy seriously proceed on this basis?
SO WHAT CAN BE DONE?
13. Luckily, there are a few options available:
13.1. Make the new legislation applicable to new mortgages taken out from April 2017. This way the government still gets its plan but existing portfolios are not targeted and landlords who might have spent two decades building for their family’s future are not dragged into hardship and even state dependence themselves.
But better yet…
13.2. Only apply the new restrictions to bad or unaccredited landlords. Those who can prove accreditation, or that they have all the relevant certifications and standards in place, can continue on the existing system. Many local authorities are already signed up to the national scheme run by the NLA. This benefits the government in that they can still launch this plan whilst simultaneously forcing the ultimate raising of standards on all landlords, which in turn benefits all tenants and everyone in the private rented sector. It also neatly solves the problem of trying to determine whether someone is a ‘professional’ based on number of properties/number of tenants/turnover/earnings etc etc which various governments have seen as a problem in deciding how to professionalise the sector. This, I feel, is a brilliant plan as it solves several problems whilst creating no real down sides.
But better yet…
13.3. Scrap Clause 24 altogether and save landlords, tenants, related trades, the economy and various others whilst still taking the income tax, VAT and ongoing CGT we provide the exchequer with!
Many thanks for reading. Please stand up for your voters, and what’s right as an elected official of a democratic and moderate government. For evil to triumph it is only necessary for good men and women to do nothing!
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