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1:00 AM, 26th December 2015, About 8 years ago 280
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Private Buy-to-Let housing providers have chosen Boxing Day 2015 to begin their fight back at Chancellor George Osborne and his discriminatory tax regime, announced in the Summer Budget, which only targets private landlords with mortgages via the Judicial Review process.
New tax rules will treat mortgage interest as though it is earned income and push many rental property owners into higher tax brackets. Knock on effects can also include increased CSA payments and removal of other vital benefits but Osborne’s tax measures will not affect the wealthiest landlords (those with no mortgages), or indeed limited liability companies which borrow money to fund buy-to-let property investment portfolios.
Social Media has been buzzing in recent weeks calling for legal action to be considered.
The first step to instigating a Judicial Review is to obtain a detailed Legal Opinion from specialist legal counsel. Omnia Strategy LLP, established in 2011 by Cherie Blair CBE, QC, has been appointed.
The organisers of the campaign have launched a fund-raising appeal via the Crowd Justice website. Thousands of landlords are expected to donate funds.
Letting Agents and Mortgage Brokers are also being encouraged to contribute to the fund raising campaign. This is because their businesses are likely to be hit too if landlords stop investing or choose to sell up.
A member of ICAEW commented;
“It is a long established principle of taxation that expenses incurred wholly and exclusively for the purposes of the business are deductible when calculating the taxable profits. Clause 24 of the Summer 2015 Finance Bill contravenes that principle and will result in proprietors of property businesses being liable to tax on a fictitious profit – even if the proprietors really make a loss.
The tax change does not just affect new borrowings. Landlords with existing borrowings will be affected. Portfolio landlords will be particularly badly hit.
As a consequence of the tax change, major changes in the private sector will take place. Some landlords will pass on their increased tax by increasing rents. Others will be forced to sell, as they will not be in a position to pay the extra tax demanded by HMRC. Homelessness will increase as some tenants will not be able to afford higher rents and many will be evicted by landlords forced to sell”.
Mark Alexander, founder of the Property118 Landlords Forum said “it is important for the whole country that funding is raised to win this legal battle. Millions of Britons simply do not qualify for mortgages to be able to purchase a home of their own. The number of people seeking to rent privately has been increasing in line with the growth of the population for decades. It is all very well the government having an ambition for everybody to be a homeowner but they must be made to realise that isn’t realistic. The UK has an ever growing reliance on the Private Rented Sector. Investment and building needs to be encouraged, not taxed into oblivion”
In a letter to the Chancellor, Conservative Lord Flight said “A lot of Buy to Let investment has been an alternative to saving for old age via pension schemes. Up until World War II investing in rented property was the main method of providing for an income in old age. Given the poor performance of the Stock Market over the last 20 years, it is hardly surprising that many people have opted for Buy to Let investment as an alternative source of retirement provisioning. But Buy to Let does not enjoy any of the major tax advantages of pension saving, i.e. tax credit on the amount invested and accumulation of income and capital gains tax free within the pension scheme. The only Buy to Let “tax advantage” has been the ability of the interest cost to be offset against an individual’s income to determine their tax rates/bill – the very thing which you have attacked.”
When Lord Flight referred to offsetting the interest cost against an individual’s income he of course meant rental income only, not total income. Buy-to-Let interest is not deducted from any other income that a landlord might have – unlike the way MIRAS used to work.
Nor can Buy-to-Let losses be set off against any other income. A BTL property has to pay its own way. If it gives rise to a loss, the owner has to make good the loss out of other taxed income. Landlords do not receive any tax “breaks”.
BTL has increased housing stock by 2.5 million between 1996 and 2013.
BTL was only responsible for one-twentieth of the 150% price increase between 1996 and 2007, which is insignificant. Prices would have gone up even more if BTL had not financed the 2.5 million increase in supply – and so would homelessness.
Deducting finance costs from rental income is not a tax relief it is normal accounting practice everywhere, and for every business. That is why Lord Flight put “tax advantage” in inverted commas.
Disallowing finance costs for existing rental businesses is iniquitous and will be damaging for the economy. Rents will rise. Tenants who cannot afford the rises will be made homeless, to be put in temporary accommodation in whichever part of the country it can be found, at greater cost.
For these reasons, it is vital for private landlords, tenants and the entire rental sector that this funding campaign is successful.
The window of opportunity to submit an application for Judicial Review closes on 17th February 2016.
The Crowdfunding website page for making donations to the legal action fund can be found via a Google search for “Crowd Justice Judicial Review of Clause 24” or CLICK HERE.
Sue Wall
14:57 PM, 1st January 2016, About 8 years ago
Have pledged and totally support this initiative. Would like to mention high quality student HMO s If forced to sell there would be a lack of supply and may deter students from choosing a certain UNI or going to UNI at all. Students do not want to purchase houses but want good , well managed and serviced accomodation.
Maybe student unions / universities / students would want to get behind this for their own futures
Sue
Gareth Wilson
17:21 PM, 1st January 2016, About 8 years ago
Reply to the comment left by "Sue Wall" at "01/01/2016 - 14:02":
Hi Sue, thank you for your contribution. This is the kind of proactive response we love to hear : )
Tracey Hoad
17:29 PM, 1st January 2016, About 8 years ago
Wishing everyone a prosperous New Year with good health and happiness.
Can we include our individual pledge as a professional fee in our tax return?
Dr Rosalind Beck
17:37 PM, 1st January 2016, About 8 years ago
Reply to the comment left by "Tracey Hoad" at "01/01/2016 - 17:29":
Well, I'm going to - there is a delicious irony about it.
Laura Delow
18:00 PM, 1st January 2016, About 8 years ago
I've just received this week a 2 page reply letter from HM Treasury. The key paragraphs/sentences are:-
1) The Government wants a fairer tax system. That means ensuring that landlords with the largest incomes no longer receive the most generous tax treatment.
2) The Government does recognise that the PRS plays an important role in the UK housing market & economy.
3) Finance costs are different to other expenses as having a mortgage on property allows the landlord to purchase a more expensive property and incur a larger gain on the investment than they would have done without the mortgage.
4) we appreciate that the restriction will mean some of these landlords may face difficult decisions regarding their properties.
I can't upload a copy but if anyone wants a full copy of the 2 page reply, email me at laura.stonard@openwork.uk.com & I'll scan you a copy.
Private Housing Provider
18:05 PM, 1st January 2016, About 8 years ago
Reply to the comment left by "Laura Delow" at "01/01/2016 - 18:00":
'different to other expenses', an expense is an expense. However they twist it.
As the Crowd Funding site writing on why we are raising fund puts it clearly with all the points, there is no fairness in it at all.
Alex
23:14 PM, 1st January 2016, About 8 years ago
Hi Laura
I received the same letter late last year. I met with my (Conservative) MP Iain Stewart last summer and when I received this letter I was to disgusted I didn't even reply. However, I recently sent Iain Stewart this response asking him to reply.
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Dear Iain
When I received this letter I was thoroughly disgusted by the nonsense I read from David Gauke and his ridiculous justifications for this ill-conceived and completely unfair tax proposal. At the time I was so disgusted that I didn’t want to receive a response from you. However, having shared this letter with many others on social media and seeing that we have all received the same ‘identikit’ response I have decided that I now DO wish to receive a response from you, to see precisely what you have to say about this letter.
1. The first issue about a ‘fairer tax system’ we all know is complete rubbish. How can it be ‘fair’ to tax one area of business using different accounting principles from all other businesses? I’d love to hear your ‘non-party line’ justification for this nonsense.
2. Secondly, I really want to hear your justification for one of the most stupid statements I have ever heard, namely “Finance costs are different to these other expenses as having a mortgage on a property allows the landlord to purchase a more expensive property and incur larger gains on the investment than they would have done without the mortgage.”
Statements like this do nothing other than expose the sheer stupidity of the author. Firstly, ‘leverage’ is a simple financial business concept whereby borrowing money allows a business to make a larger gain than it would otherwise make without borrowing the money. There is nothing ground breaking about this strategy and all businesses use it in one way, shape or form. To somehow suggest that making a larger (taxable) gain is ‘unfair’ really shows how out of touch your Government really is.
Also, the above statement blatantly exposes the nonsense of the supposed justification, which I will explain by example.
a) Let’s say that I have £100,000 and I wish to buy one BTL property for £100,000 that will yield a £6000 gross annual rent. Let’s also assume (for the purposes of making this example simple enough even for David Gauke to understand) that I have no other allowable business expenses other than my mortgage, if applicable. If I buy one property, then I make £6000 annual taxable income. If I sell that property 20 years later for £200,000, then I also make £100,000 taxable capital gain (£200,000 - £100,000). In this scenario HMRC receives tax at my personal rate on £6000 per year, plus £100,000 when I sell the property.
b) Let’s now assume that I use that same £100,000 to buy four properties with 75% LTV BTL mortgages at 5% annual interest. I now receive £24,000 (4 x £6000) rent per year and my mortgage interest costs are £15,000 (£300,000 x 5%). I therefore make £9000 annual taxable income (£24,000 - £15,000), which is 50% more than I would have made without ‘leverage’. If I sell the properties 20 years later for £800,000 (4 x £200,000), then I also make £400,000 taxable capital gain (£800,000 - £400,000). In this scenario HMRC receives tax at my personal rate on £9000 per year, plus £400,000 when I sell the properties.
So, using ‘leverage’ and the current (and correct) accounting principle of ‘Turnover - Expenses = Profit’ HMRC receives at least 50% more income tax from me every year, as well as 400% more capital gains tax from me when I sell the properties. How is that justification to tax me at an even higher rate?
3. However, I have saved the best for last. “Corporate landlords will continue to receive relief at the corporate tax rate. However, the rate of relief is not more generous (currently 20%, due to fall to 18%) than the rate income tax relief will be restricted to once these changes are fully in place by 2020/21.”
So, does David Gauke really think that we're stupid enough to fall for the "you currently get more tax relief on your allowable business expenses than a company does, because you're taxed at a higher rate, which is unfair" argument? Companies will still get ALL of their finance costs as an allowable business expense. Please explain.
Who wrote this letter? If it really was David Gauke then I fear for our country having such a halfwit in the position of Financial Secretary to the Treasury.
As I said above, these justifications have done nothing for your party other than to reveal the sheer stupidity of this tax proposal, of those who dreamt it up and of those who support it.
What can you possibly say to defend this ridiculous letter and this ridiculous tax proposal your Government has dreamt up?
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I'll post his reply here, if I receive one, which I doubt.
Rachel Hobdell
3:53 AM, 2nd January 2016, About 8 years ago
What about the increase in stamp duty ? That does not bother anyone ?
Is that not included in the campaign / judicial review ?
Gareth Wilson
10:31 AM, 2nd January 2016, About 8 years ago
Please can everyone on Facebook share this lady's posts concerning GO, as they're quite brilliant. Likewise if you're on Twitter, please retweet them:
https://www.facebook.com/lisajorme/posts/10153880930991967
Sudy Trivedi
11:28 AM, 2nd January 2016, About 8 years ago
Reply to the comment left by "Sue Wall" at "01/01/2016 - 14:57":
Sue you make a great point here.
When one of my current students moved into one my properties last September 2015 he asked me about how clause 24 was going to effect. Shocked by the question my first recaction was. Wow how does this guy even know about c24.
After he explained to me that he had heard about it and read a few articles, I explained the the full implications to the landlord, rents and maybe even a shortage of accommodation for students , as some landlords may sell up, but even more shocked because he said he wanted to one day get into BTL properties.
He went on to ask me how this would effect him.
The simple fact is that this tax grab is going to effect many many people even a budding property tycoon.
Sad ?