Mark Alexander invited to consult with Chancellor’s advisers on Budget Tax proposals affecting private landlords

by Neil Patterson

16:40 PM, 6th August 2015
About 3 years ago

Mark Alexander invited to consult with Chancellor’s advisers on Budget Tax proposals affecting private landlords

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Mark Alexander invited to consult with Chancellor’s advisers on Budget Tax proposals affecting private landlords

I am very pleased to inform all members and readers that Mark Alexander (founder of Property118) has been invited to consult with advisers to the Treasury Select Committee on the 24th of August in regards to Budget changes.

The Invitation LetterMark Alexander

Subject: RE: Summer Budget Property Measures Consultation

Dear Mark,

As I am sure you will be aware, at the Summer Budget 15  the Chancellor announced two new policies related to property income. Firstly the restriction to finance cost relief for individual residential landlords and secondly the reform of the wear and tear allowance. The Government announced that it would like to consult stakeholders on the detail of these measures, as an individual with an interest in the area we would therefore like to invite you to participate in a discussion on the changes. We are particularly interested in comments on the legislation in the Summer Finance Bill 2015 regarding the restriction to relief for finance costs (clause 24) and your views on the new relief that allows a deduction for actual costs that will replace the wear and tear allowance (https://www.gov.uk/government/consultations/replacing-wear-and-tear-allowance-with-tax-relief-for-replacing-furnishings-in-let-residential-dwelling-houses).

We plan on running two workshops to discuss these issues, please do let us know if you are able to attend either of these sessions. If you would like to meet to discuss this issue but none of the times above would be suitable, please let us know and we will explore arranging further meetings.

18th Aug 10.30-12.30

24th Aug 14.30-16.30

Finally, if you are not the correct person to talk to about these measures, please do forward this on to relevant colleagues.

Kind Regards

 

Sean Rath | Policy Advisor | Personal Tax | Personal Tax, Welfare and Pensions
HM Treasury, 1 Orange, 1 Horse Guards Road, London, SW1A 2HQ

The reply sent by Mark Alexander

Subject: RE: Summer Budget Property Measures Consultation

Dear Sean

I am indeed aware of the proposals and would like to comment specifically about clause 24 and the Impact Statement which has failed to consider many unintended consequences.

It is somewhat unclear what the Chancellors objectives are. Increase revenue for the treasury, cool the property market down, help first time buyers etc. There have been some very muddled comparisons offered too.

FACTS

“For every £1 invested into new build property £2.12 flows into for the economy” – source ONS.

57% of new build property has been purchased by buy to let landlords since 1992. For every four properties built for sale developers have built another for social housing in recent decades. Therefore, buy to let has been responsible for much of the property development of the last two decades. Reducing investment demand will reduce property values and the viability to build more. This will not improve the housing crisis. IFS support my views on this.

The Impact Statement suggests that clause 24 will affect 1 in 5 landlords. I have run several scenarios though a spreadsheet and arrived at the conclusion that landlords with highly geared property portfolios will be hit hardest. Based on the Pareto Principle (the 80/20 rule) it is likely the affected 20% of landlords will own 80% of the property in the PRS, many of these will be highly geared. Due to the way the proposed tax changes are to be calculated it is possible that many of these landlords will pay more tax than they make in terms of real profit, i.e. profit as calculated after all costs, which is the method used for all other businesses to calculate tax liabilities. Indeed, it is even be possible for landlords to be taxed on losses under the clause 24 proposal. Cashflow problems will get worse as interest rates rise.

Affected landlords have some stark choices to face. Should they increase rents to cover the additional tax burden in order to maintain the status quo for their finances? Do they sell and incur CGT with a view to reducing their gearing? In many cases the net proceeds of sale will be insufficient to pay CGT where a leveraging strategy has been utilised, this is likely to be applicable to the same landlords affected by the tax. The bankruptcy of many landlords is therefore inevitable if clause 24 is implemented as proposed. I am one such person. Mass repossessions are inevitable if clause 24 forces portfolio landlords to into insolvency. This will need to be factored into the recovery of lending institutions balance sheets.

Given the scenario’s outlined above it is likely that the property market will soon be flooded with sales of tenanted properties. This will impact the personal budgets of tenants for many reasons, moving costs for example. There will also be social implications, a simple example is children having to change school.

Surveys of both landlord and tenant groups have all come to the same conclusion, rents will have to rise to protect the cashflow of landlords. However, many landlords are not able to raise rents, particularly those housing LHA claimants. This group are at the greatest risk of insolvency and repossession. The knock on effect is that many LHA claimants will be seeking alternative rental accommodation at a time when availability will be shrinking.

What clause 24 fails to recognise is that over a million people have invested into the PRS over the last two decades and have based their property investment strategies on the normal business principles of taxing profit. The proposed changes affect business decisions made historically, clearly that is unfair.

As you may be aware, I run an online forum for landlords and tenants. Well over 100,000 people have subscribed to our discussion thread on this subject and over 2,000 comments have been posted. Link >>> http://www.property118.com/?p=76164

I have intentionally kept my reply brief at this stage and covered only the most important aspects of a much wider debate.

I would like to attend the workshop on 24th August 14:30 to 16:30. Please send me details, where to report to etc.

Yours sincerely

 

Mark Alexander – founder of Property118.com

Related articles – LINK

http://www.property118.com/category/budget-2015-campaign/

Join The Landlord Tax Levy Campaign Group

YOUR Money, YOUR future, YOUR choice.

 



Comments

Mick Roberts

8:29 AM, 7th August 2015
About 3 years ago

Very VERY good, a great way of putting it forward, let's hope the bigwigs see sense.

Dr Monty Drawbridge

10:30 AM, 7th August 2015
About 3 years ago

Hi Mark,

It's great that you have been invited. As you rightly said some time back, I don't think there is any chance of the general changes being repealed - it would make the chancellor look weak.

What is important is that the fine detail behind the changes prevents devastating consequences for individuals running otherwise successful businesses (which would continue to be successful if incorporated). To that extent I would have thought that the focus of the message needs to be on transitional changes for existing landlords. I believe there are two main options;

1) New rules on new debt only, as you said
2) Probably my preferred, being allowed to incorporate without incurring SDLT and existing CGT being gains carried over into the company.

I don't think Armageddon rent rises, falling house prices and mass bankruptcies are the main message, although they are certainly significant risks supporting the argument for a well handled transition.

Good luck with this. I am so very disappointed by the reaction on some of the other sites.

Lisa S

11:03 AM, 7th August 2015
About 3 years ago

Great news!

I believe, unlike Dr Monty, that these changes are not necessarily set in stone. As has been said on one of the other threads, there are many different ways to cool the market.

However, none of them will really work unless they build more houses.

Claudio Valentini

11:26 AM, 7th August 2015
About 3 years ago

Great reply Mark. A key point in the Governments argument is that they suggest BTL is purely an investment, akin to trading shares. If that is the case, so their argument goes, why should you be given tax relief on this investment when you don't get it for other types of investments? Without question BTL is an investment but they fail to acknowledge that BTL is also business. Ultimately, are not all businesses investments but does that mean that all businesses, sole traders and the like should be denied tax relief on finance costs that they use to drive their business investment?
The treasury needs to acknowledge that BTL in the PRS is a business, at which point their argument rests on very shaky foundations.

Barry Fitzpatrick

12:50 PM, 7th August 2015
About 3 years ago

Mark very well done in getting this opportunity. Your strategy is going to be crucial.

The Chancellor/Treasury knows too well that any tax increase will cause an avalanche of protests from those affected, and they are as a result very thick skinned.

Without wanting to sound defeatist, getting George Osborne to do a U-turn is going to be very difficult politically, even if you can win the fairness, unjust, social implications, housing market instability, etc. arguments. Especially as he wanting to make a play for the leadership of the Conservatives (and he hopes to be a future PM). But proceeding with a policy that backfires wouldn't be good for him either.

We need a win-win but I am sure that the Chancellor/Treasury has a hidden agenda. Perhaps it's CGT revenues from property which the OBR is predicting will double over the next few years (I cannot see how else this can come about) . Not making it retrospective i.e. new rules for new property purchases would be a good outcome but not help with achieving the CGT forecast, but at least it give us private Landlords a way of growing our businesses.

Dr Monty Drawbridge

13:04 PM, 7th August 2015
About 3 years ago

Reply to the comment left by "Lisa Stux" at "07/08/2015 - 11:03":

Lisa,

I'll certainly be delighted if you are right!

Sam Addison

13:59 PM, 7th August 2015
About 3 years ago

If you were to be able to identify the chancellors objectives then you are in an ideal position to help him achieve them without the disasters attendant upon current proposals. It is very pleasing that the government recognises your eminence. You speak for us all!
I am with Dr. Monty that an amnesty on CGT and SDLT for transferring into a company would be a way forward. Particularly as this affects those running it as a substantial business more than those (like me) with only a few properties not highly leveraged.

Abdul Choudhury

14:38 PM, 7th August 2015
About 3 years ago

Dear Mark,

I am very pleased to hear about your participation at the Treasury meeting. The Government says that it wants to level the playing field between homeowners and BTL landlords by restricting mortgage interest relief. However we landlords pay CGT on BLT property, homeowners do not do that. To ensure a genuine level playing field I believe we can reasonably ask that the Government should exempt CGT for BLT properties.

I believe we should strongly argue against the budget proposals on its fundamental unfairness and the devastating effects it would have on landlords but should offer other options and alternatives to the Government like transitional provisions and waiver of CGT/SDLT for existing landlords who would like to transfer their portfolio into LTD companies.

George Osborne prides himself on being the Iron Chancellor and I am not optimistic he will completely change his mind and do a U turn but he might be prepared to save face by making some modifications to his proposals which might lessen the impact on landlords

I would also like you to point out to the Government that the proposals have other wider consequences for people paying child maintenance and other payments which rely on an assessment of their income. Personally, my child maintenance would double under the new formula.

I believe the Government has failed to appreciate the wider impact of the budget proposals and I would fervently ask that you raise this issue at the meeting on 24th August.

Abdul Choudhury

Dr Rosalind Beck

14:56 PM, 7th August 2015
About 3 years ago

Reply to the comment left by "Sam Addison" at "07/08/2015 - 13:59":

But what is the point in putting houses into limited companies? It achieves nothing for anyone. It could easily have been in reverse, had the policy been targeted differently and had they come up with some spurious reason to have a go at ltd companies and not private landlords.

I don't believe this should be our objective. Our objective should be to convince the powers that be that the decision is lunacy, but at the same time come up with alternatives - the kind of alternatives already suggested by the BoE as solutions to stop BTL growing, as they don't seem to want that.

LondonProperty1 L

15:32 PM, 7th August 2015
About 3 years ago

Hi Mark,

Congratulation on the invite. You have made your voice heard.

I wanted to touch on a few points and indicate why I am not sure if you are approaching this meeting/problem correctly, based on the response you provided.

- First of all the government has a number of problems, and the proposed policy swiftly addresses quite a few of them (e.g. discourages excessive leverage, helps budget deficit).

- Any austerity policy will have an impact on a society and this one just happens to impact landlords. Not even all landlords, but only those who took very highly leveraged positions in order to acquire more rental properties (so only a proportion of landlords).

- It may be rather unlikely (although I appreciate your pareto principle) that "highly leveraged PRIVATE landlords are price setters in the rental market". I would argue that they are part of a broader community and the current rents (especially in London) are somewhat constrained by lack of affordability. So whilst you may use the argument of hiking rent, I would think this will be rather easily/quickly disputed.

In my personal view, the only productive way of spending your time in the meeting is to:

- Highlight benefits of PRIVATE landlord ownership vs. corporate ownership

- Highlight benefits of PRS in general (the initial statistic you provided of £1 spent that generates X is the sort of information that is needed, number of jobs created etc.)

- Highlight the difference in type of properties held by investors (many are HMOs) which may not be suitable for occupation by families (as we don't have here so many large families to live and pay for those houses). Therefore, even if BTL investors were to sell some of those properties, they are unlikely to meet the requirements of FTB/home-owners.

- Highlight benefit of property as a source of STABLE investment for retirement. Indeed, stocks proved for many not to be stable and certainly do not offer an attractive alternative for our pensions (house ownership may be part of solution to lower state pension liabilities down the line without sacrificing individuals' life styles).

- You have to offer an alternative solution to the tabled proposals. I would suggest for instance increasing regulation of the BTL market (I believe this is something PRA/FCA are working on) and introduce the requirement for lower lower LTVs <60%. This policy would arrest the house price growth as a result of leverage created by landlords. Make sure to note that following the governments policy private households and corporates could still leverage up leading to higher house prices. Private landlords are not the only ones who use leverage!

- Wear and tear allowance should be probably used as a "haggling" element in the discussion. One reason why this might have been initially removed, is so that it can be added back so landlords may feel like they have gained something.

I do hope the above sounded more like a constructive criticism as opposed to just a general criticism. You are doing a great job on this issue! Wishing you all the best!

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