Housebuilders share prices plummet post Budget

by Neil Patterson

21:07 PM, 8th July 2015
About 4 years ago

Housebuilders share prices plummet post Budget

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Housebuilders share prices plummet post Budget

Housebuilders share prices fell immediately to post Budget reaction that BTL mortgage interest tax relief will be capped to the basic rate of 20%.shares

Barratt shares fell 5.7%

Taylor Wimpey  shares fell 5%

Persimmon down 4.7%

This is direct instant economic indicator to what the financial markets think about the reduction in tax relief, as no other policies seemed to have such a direct connection to house building.

Far from freeing up the market to make it easier for home buyers, the markets seem to be saying they think less homes will be bought because of a reduction in demand from investors.

Basic economic rules say that if this is the consequence, and less homes are built (supply decreases), but the same number of people still need housing (e.g. demand does not decrease) then the Price (i.e. rents and property values) must increase, all other non-open market factors being equal.

That would definitely not help the housing crisis !



Comments

matchmade

16:39 PM, 9th July 2015
About 4 years ago

Well, the big housebuilders are back up by 4-5% today, so it was clearly a very short-term reaction, possibly by small skittish investors who are under the impression that BTL landlords buy a lot of new-builds.

I think the removal of higher-rate tax relief is fair. Landlords and organisations like the RLA justify mortgage interest being tax-deductible by arguing that their rental investments should be taxed as businesses, just as companies that own or rent factories and offices are able to deduct mortgage interest or rent from their taxable profits. However companies can only deduct at a marginal rate of 20% corporation tax; why should some private landlords be able to deduct interest costs at 40% or even 45%? This change brings BTL into line with other forms of tax deduction for mortgage interest: I just hope it isn't the start of removing the deduction entirely over time.

Mark Alexander

16:55 PM, 9th July 2015
About 4 years ago

Reply to the comment left by "Tony Atkins" at "09/07/2015 - 16:39":

oooo, I don't think that view will be very popular amongst landlords.

If I'd have known this was likely to happen then I may well have purchased my BTL's in a company and benefited from the lower tax rates on profits.

As it stands now I am facing a SUBSTANTIALLY higher tax bill and yet more tax in terms of CGT and SDLT if I decide to bite the bullett and move to a company structure.

BTL has always been an over taxed hybrid between investment and business, e.g. landlords have no CGT rollover as with other investment asset classes and we can't offset profits or losses from BTL against other income either as is the case for businesses.
.

Jerry Maguire

17:13 PM, 9th July 2015
About 4 years ago

Completely agree with your sentiments mark, nothing that frustrates more than politicians changing the rules of the game.

matchmade

17:29 PM, 9th July 2015
About 4 years ago

Mark, I agree that rental property taxation policy is a weird hybrid of business and investment tax, largely to HMRC's advantage as and when it suits them. I'm just saying that if landlords want to be treated as businesses and have facilities like rollover relief, they have to accept that 40-45% mortgage interest tax relief looks strange compared with what commercial companies are allowed to deduct. Also, 40-45% relief is only given to higher-rate taxpayers, so 80% of private landlords don't receive it: why should a landlord who happens to have a higher-paid job get double the taxation relief than one who doesn't, and double what all companies are allowed to claim?

As I'm sure you know, setting up a company to hold a rental portfolio is no panacea. For starters, BTL lenders don't like lending to companies - in fact, no one does, and investment companies have to pay a much, much higher interest rate on their mortgages. Also, getting your money out of the company is tricky. If you pay yourself a salary, you are hit by income tax and NI in the same way as owning the houses directly, and if you pay yourself dividends instead, the Chancellor has just attacked that approach pretty hard with the changes to the taxation of dividends: the 7.5% tax on basic rate taxpayers wipes out any advantage in not having to pay National Insurance. I believe you also can't sell off the company at the end of your working life either and benefit from Entrepreneur's Relief, as this doesn't apply to residential property. I suppose a clever thing to do might be to sell up the company's houses towards the end and invest instead in commercial property or buy another company with the "right" sort of trading activity, then claim ER, but this is going to be rather complex and not the worth the hassle for the vast majority of small landlords, who will also be facing a hefty CGT bill when they sell up . . .

Alan Loughlin

17:35 PM, 9th July 2015
About 4 years ago

whichever way we look at it, higher costs will inevitable lead to higher rents, just as it does in any business. Strange how we as landlords are forever being berated for high rents, then the situation changes to worsen that. all seems a little odd.

matchmade

17:58 PM, 9th July 2015
About 4 years ago

Alan - higher costs won't necessarily lead to higher rents: some landlords aren't being hurt by this as much as others, so they can keep their rents lower and make life harder for the high-rent landlords. And others might decide to accept even lower returns, especially if they can't find tenants at the higher rents, because tenants simply cannot afford the extra costs.

Alan Loughlin

18:07 PM, 9th July 2015
About 4 years ago

maybe more of a problem in the south.

Mark Alexander

18:15 PM, 9th July 2015
About 4 years ago

Reply to the comment left by "Tony Atkins" at "09/07/2015 - 17:29":

Hi Tony

The highest ever UK corporation tax rate was 52% - source http://www.tradingeconomics.com/united-kingdom/corporate-tax-rate

So if it went back up to that Ltd. companies would get that much tax relief.

It's like comparing apples with eggs to compare the new BTL interest rate tax to Corporation Tax relief just because they are both likely to come out at 20% ish based on yesterdays announcements, i.e a similar size. I forgive you for it though because the Chancellor failed to see this too and theoretically he should be a lot smarter than the both of us.
.

Ian Ringrose

23:32 PM, 9th July 2015
About 4 years ago

Remember that the tax on divs from companies have also been increased! (And I expect it will go up more, maybe even a higher rate for closed companies.)

matchmade

14:43 PM, 10th July 2015
About 4 years ago

People commenting at AccountingWeb suspect the figure of 7.5% tax on dividends for basic rate taxpayers was reached because the whole point of the exercise is to attack small company directors who pay themselves a basic salary that is just under the zero-rate threshold, and top up the rest of their income with company dividends. This used to save employee-directors from paying National Insurance on most of their income, and made small limited companies a more attractive option than declaring oneself self-employed.

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