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16:40 PM, 6th August 2015, About 9 years ago 66
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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.
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
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
YOUR Money, YOUR future, YOUR choice.
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Have your say on the Finance Bill 2015
Badger
12:32 PM, 8th August 2015, About 9 years ago
Reply to the comment left by "Abdul Choudhury" at "07/08/2015 - 14:38":
"To ensure a genuine level playing field I believe we can reasonably ask that the Government should exempt CGT for BLT properties."
This is a non-starter I'm afraid.
The government has long been careful to always point out when talking about CGT on private residences that they enjoy an "exemption" rather than any fundamental right.
IMO, the message intended to be received is - watch your step private householders, because we could remove this 'perk' any time we like.
Badger
12:47 PM, 8th August 2015, About 9 years ago
Reply to the comment left by "Jakub " at "07/08/2015 - 15:32":
I don't think the government gives a flying **** for the difficulties of landlords and I think this because I believe the proposed tax changes are not about raising revenue but about appeasing Generation Rent who represent far more votes at the next election and are also drawn from a constituency that is not a natural Tory voting one. Hence the government needs to do something to attract them to vote for the Tories next time around.
Most landlords will probably still vote Tory (I appreciate that this is a bit of an assumption on my part, but please don't shoot me if you disagree) even after this enormous tax insult, so it is not a vote loser per se. After all, who else are they ever going to vote for? Jeremy Corbyn's labour party? I think not, so there are very few votes to be lost by the Tories and plenty to be gained by running with this move. I'm afraid what politicians care about is votes and only votes. Everything else is subservient to their one aim of getting re-elected.
Two further points:
1) I don't think even this manoeuvre is going to swing enough Generation Rent votes to make a difference (but then politics and the law of unexpected outcomes was ever thus)
and
2) Given just how many MPs are supposed to be landlords themselves I don't understand why they persist in insisting that running a rental business is not a business. Surely they must have to get involved in the regular day to day relentless grind of it all just as much as the rest of us?
and (okay, so I can't count)
3) To end on a positive note - hopefully, given that such a high percentage of MPs are landlords, they, like the oft referred to turkeys, won't be voting for Christmas and will strike down this provision when it comes to the division.
Badger
12:54 PM, 8th August 2015, About 9 years ago
Reply to the comment left by "Gary Dully" at "07/08/2015 - 17:28":
Absolutely bl**dy brilliant Gary! 🙂
Monty Bodkin
13:17 PM, 8th August 2015, About 9 years ago
Reply to the comment left by "Ros ." at "08/08/2015 - 07:39":
I don’t think it’s as easy as just passing on the costs to tenants. When interest rates were climbing pre-2007 I couldn’t just keep putting rents up.
The difference then (from the start of the last decade), was that they were gradual increases up to only around 2% altogether, already stress tested into portfolios (if not by landlords intentionally, then by the lenders lending criteria) and only hitting a small number of landlords at different times, in a booming competitive market.
This will hit a significant number of landlords with the equivalent of a double digit interest rate rise (according to circumstances) all at the same time. With a shrinking number of landlords, falling house building and an increasing population. Add in BofE interest rate rises and other regulatory meddling and the result is inevitable.
Even landlords unaffected by this will either be fearfully protective against future attacks or will be greedy and jump on the bandwagon and increase rents.
Tenants not being able to afford any more rent than now is nonsense. The minimum industry standard is income of 2.5 times the rent. There are many sacrifices that can be made before the roof over your head.
Of the landlords that can't increase rents enough and are forced to sell, it will create empty properties for months, if not years. Where are the tenants going to live in the meantime? Council housing? I don't think so.
Rent control is certainly looming on the horizon but implementing it would come too late and create far more havoc than it solves.
Michael Barnes
23:30 PM, 9th August 2015, About 9 years ago
Reply to the comment left by "Jakub " at "07/08/2015 - 15:32":
I have to disagree with you onsome points.
1. I am not highly leveraged (in my opinion) at 50%, but I will be pushed into 40% tax bracket.
2. No alternatives should be proposed until it is understood what the treasury want to achieve. There is no point in putting forward proposals that are of no benefit to the intent of the tresury, and will just waste the limited time available.
3. I believe, but have no evidence, that most properties are let unfurnished (other than HMOs and student lets), so trying to bargain with Wear ant Tear allowance i not beneficial. I also believe that W&T allowance is unfair, being insufficient to cover costs for some and grossly over-compensating others.
LondonProperty1 L
0:17 AM, 10th August 2015, About 9 years ago
Reply to the comment left by "Michael Barnes" at "09/08/2015 - 23:30":
#1 I guess you are aware that you will pay the 40% tax only on the marginal amount that will be within the higher tax bracket? So it is not like all your income will end up being taxed at 40%. Given you do have a low leverage, your mortgage interest should be low so the amount taxed at 40% should be relatively small.
#2 Point taken. Although in my view treasury's problems are known (budget deficit, concern about high LTVs/systemic stability). Even if there is some hidden agenda (as someone mentioned Generation Rent) they will never mention it anyway.
To me, going to a meeting and simply being critical about proposals is not necessairly being constructive. As we speak I am sure there are people out there fighting for the benefits that the government proposed to take away and they are also hoping to win. Critising propsals (and no proposals are ideal) in itself may not be good enough - in my view.
#3 Not familiar with statistics either. I think the figure claimed by landlords was at least large enough to get attention from the government so this cannot be trivial. On another note I believe you have a choice how you classify your expenses (w&t allowance or itemised spending as per your receipts).
Michael Barnes
13:36 PM, 10th August 2015, About 9 years ago
Reply to the comment left by "Jakub " at "10/08/2015 - 00:17":
#2 I am not saying "criticise", I am saying "start by finding out what their objectives are".
THEN discuss how they might meet those objectives in other ways that are not catastophic (and only then put forward any alternatives that have been considered in preparation AND help toward those objectives).
I have learned in business that you can spend days arguing over how something should be done, but when you focus on WHAT is wanted rather than HOW to do something, then you can reach agreement in hours because you can come up with things that are not apparent from the starting position.
Michael Barnes
13:39 PM, 10th August 2015, About 9 years ago
Reply to the comment left by "Jakub " at "10/08/2015 - 00:17":
#1 I understand that, but the government headline is "Our proposals affect only higher rate tax payers", NOT "Our proposals will create more higher rate tax payers without them having any more income".
Appalled Landlord
13:42 PM, 10th August 2015, About 9 years ago
Reply to the comment left by "Gary Dully" at "07/08/2015 - 17:28":
Hi Gary
You may well have to increase rents by 32%, but not because of the calculation that you have shown.
We will not be taxed on 80% of our finance costs at 40%. 100% them will be disallowed, increasing our deemed rental income. This will be added to all other income and the tax will be calculated using the personal allowance and working through the tax bands. HMRC will then allow 20% of the interest as a relief, and give this relief by deducting it from the amount of tax that they calculated.
The effect is that if someone was paying tax at 40% under the current rules, his extra tax will be 20% of his finance costs.
If he was paying 45% under the current rules, his extra tax will be 25% of his finance costs.
If he was paying tax at 20% under the current rules, his extra tax will be anything up to 25% of his finance costs.
32% is not the increase that everyone would need to apply to their rents. The percentage increase depends on many variables. It will be different for everyone. Each landlord will have to do his own calculation, as follows:
1. Download the spreadsheet from the top of the lead article at http://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-253/#comments
2. Calculate the increase in tax using the Calculator sheet by entering your current annual figures
3. Multiply the tax increase by 100, and divide it by 60 (or 55 if you will pay 45% tax), to find the required extra rent
4. Divide this extra rent by your current rent and multiply it by 100 to find the percentage increase.
Michael Barnes
13:45 PM, 10th August 2015, About 9 years ago
Reply to the comment left by "Jakub " at "10/08/2015 - 00:17":
#2 When I first read the proposals, I interpreted them as "calculate profit as now and if you are then in higher rate tax band, then lose 20%/25% of 'relief' for amount of finance charges over 40%/45% threshold".
I was soon corrected by those who understand the devious minds at the Treasury better than me.
The above approach would be more-palatable than the budget proposals.
Not 'fair', but at least tax would not exceed real profit.