10:44 AM, 27th October 2015, About 6 years ago
Written evidence submitted by Neil Patterson
Submission to the Public Committee on the Finance Bill: Landlords react to the Summer Budget ‘restriction of tax relief’ for landlords.
1. My background: I have worked in Financial Services and more specifically the mortgage market since 1994 starting in Barclays Bank. I have worked with Landlords since the popular inception of Buy to Let through roles that include a fully qualified IFA, Compliance officer under the FSA and Head of Operations for the largest Buy to Let mortgage brokerage in the country. Currently I am a Partner in the company you know as Property118.com
2. Summary: As the most directly impacted group – landlords – were not consulted about this decision which is going to ruin many livelihoods, it is reasonable that the Committee now take into account landlords’ views. This submission is largely composed of comments by landlords which were made on the Property118 website, in reaction to the Summer Budget announcement. It would be no exaggeration to say that landlords found the decision confusing, bewildering and shocking. The Chancellor stated that only a small percentage of ‘wealthy landlords’ would be affected. Slowly, however, landlords began to realise this was not true. These reactions give the Committee a clearer idea of its impact, as naturally, the most affected group are bound to look into the measure in far more detail than anyone else. The quotes below illuminate many of the key problems and dilemmas which will ensue if the decision is not reversed. At the end, there is also an annexe which I urge all MPs to read, as it shows what would happen if a similar scenario were inflicted on all MPs.
3. Confusion, disbelief and anger:
3.1. ‘I cannot believe that the UK government would try to tax anyone on anything but an actual income.’
3.2. ‘I don’t fully understand this but if only 20% of finance costs were allowable then most highly geared landlords would be going bankrupt.’
3.3. ‘If I had a lengthy void period, with interest payments still being made but no rent coming in, would I be taxed on the interest payments anyway?’ [answer: ‘yes’]
3.4. ‘There is no point in trying to understand the change because it is incomprehensible. It will be a levy on money paid out to a third party; not a tax on an income.’
3.5. ‘The Government has caused this confusion by using the wrong terminology – a terminology that we professional landlords don’t use. Hopefully, soon it will be clarified once and for all if they are really referring to what we know as offsetting the interest payments as one of our main costs (often the main cost) of running our business.’
3.6. ‘Headline news: “Government moves to close down an industry.” Is it the drug trade? Human trafficking? Counterfeiting? No, it is the provision of rented accommodation.’
3.7. ‘I feel… thoroughly betrayed by the duplicitous act by the Conservatives – the only party not to publicly state they were going to have a go at landlords and they come up with the biggest attack on landlords ever. I challenge anyone to come up with a bigger attack on us in history.’
3.8. ‘I have felt sad since the Budget. Reeling with utter disbelief that anyone I voted for could even consider such an absurd move. It’s a disaster for me…’
4. Clarifying the impact for themselves and others:
4.1. ‘…you will be paying money into a property to allow a family to live there that costs you each month.’’
4.2. ‘I know many landlords whose profit is say £80.00 a month per property. With these changes the profit will be wiped out completely.’
4.3. ‘But the real issue with this it is a ‘disincentive’, it’s not a policy to encourage and it’s non-aspirational. This was one of the criticisms of the recent Labour election campaign.’
5. The absurdity of the decision:
5.1. ‘When someone crosses the line, it’s a new world out there. We never believed this could happen in the UK. But it’s also why we have to stop it happening. We don’t want this kind of thing in our country. I like to be proud of my country but this is a joke.’ (1)
5.2. ‘Two effects arise that are fundamentally unjust:
A. Many of us just break even, with a very marginal profit or even a loss at the moment. Under these new rules we will be effectively treated as making a profit when we haven’t, and then be taxed on that ‘supposed’ profit; a completely new, unjust concept and reality. Yep a turnover tax!!
B. This very major change in taxation rules is retrospective:
Retrospective changes in law or tax rules are generally considered to be both unjust and difficult to pass into law. As most mortgages have significant redemption penalties it would be extremely difficult and costly for us to exit the market and, for example, sell in under 18 months (i.e. the beginning of the new policy). Such a scenario would lead to forced sales anyway, so houses prices could drop and mean we can’t pay back the mortgages and CGT.’
5.3. ‘I saw a clip of David Cameron pre-election saying they wouldn’t introduce a wealth tax – we all know it is unfair to tax people regardless of ability to pay. This proposal is worse as it isn’t even based on your assets or estimated ‘wealth.’ It’s based on a fictitious income which rises whenever your costs rise and on which further tax becomes payable.’
5.4. ‘This proposal to disallow finance costs in calculating our rental profits is an economic nonsense. It is nonsense to claim that repairs and agents’ fees etc. are fully deductible, as incurred wholly, necessarily and exclusively for the business, but that finance costs are not . It is nonsense to claim that finance costs are fully deductible if the property is held through a company, but not if it is held in an individual’s name. It is nonsense to suggest that that part of rent receipts which is paid over to the lender as interest is still retained by us as income. That really is fictitious income . All other businesses are taxed on their profits, not on the amount of money they receive. And interest is our biggest cost . ’
5.5 . ‘ It is also nonsense to claim that BTL mortgagees have an unfair advantage over residential mortgagees . Those who do so have fallen for a politician’s spin. Our interest is an essential cost of buying our properties which we use to generate taxable profits. Residential mortgagees pay interest to buy properties to live in, which do not generate taxable profits. We pay CGT when we sell our properties, residential mortgagees do not. ’
5.6. ‘Landlords running a business and providing a service shouldn’t be compared to owner-occupiers. The Chancellor is forgetting that we’re buying to rent out to people who can’t afford to buy & who need to live somewhere.’
6. The contradictions between the proposal and other Government policies:
6.1. ‘George Osborne was on the news this morning in connection with making planning approval automatic for building on brown-field sites. He wants to make it easier for developers to build the houses and flats the country desperately needs. This comes two days after he attacked the sector which has done most to encourage new-builds this century.’
6.2. ‘I could understand a levy being applied to an activity that he wants to deter, like the provision of tobacco or alcohol whose consumption puts a burden on the NHS. I don’t know why he would want to deter the provision of rental accommodation, already in short supply, which facilitates the mobility of labour both within the country and from outside it, to the benefit of the economy as a whole.’
6.4. ‘Look at the largest property investment company in the UK, Land Securities PLC. It operates on gearing of about 32%, with net rental income of £631m and an interest bill of £193m, representing 61% of its costs. If Land Securities was a person, not a company, it would pay top rate 45% tax on its net profit before tax of £319m. If relief were restricted, as proposed by the Chancellor, to the basic rate, Mr Land Securities’ effective tax rate would rise to 72% and his income after tax would halve. What is Land Securities PLC actually paying in tax? Just 1%. Will it pay any more under this budget? Not a penny. Now should that not be a more interesting target for the Chancellor than the private landlord with 5 student houses?’
7. What about the tenants?
7.1. ‘…not one of our tenants wants to buy a home at this point in their lives! The majority have come into the area for work and have no idea where they will be in a few years time. I’d also add that we have also never bid for a house against someone who wanted it as their home. The majority of our properties have been repossessions and have usually been wrecked by the previous owners, needing full refurbishment; they’ve usually stood empty for very long periods before being sold and have not been the type of house a mortgage company would be happy to lend on until the refurb has been completed, which cuts out all the first time buyers!’
8. The Chancellor is dismissing the contribution made by private landlords:
8.1. ‘BTL landlords often bought properties off-plan, before a spade had been put in the ground. They paid 15% of the price a few weeks later and committed themselves to paying the rest when the properties were finished, perhaps 18 months later. Because of their commitment, the builder was then able to borrow to start on the next project. If he had had to wait for owner occupiers to commit, possibly when the site was finished, he would not have been able to move on so quickly… The fact is there would have been 83% fewer new-builds between 1996 and 2013 without landlords. It is thanks to landlords that these properties exist today.’
8.2. ‘Once upon a time the 2 million individual landlords could expect to be understood and valued by a Conservative Government, as independent-minded folk who like to work for themselves. I can’t think of any bigger attack any UK Government has ever mounted on the small business sector.’
9. Wider implications of the tax on the economic well being of the country:
9.1. ‘Some landlords will pay more in tax than they make in profit; some landlords will face huge tax bills even if they make a loss; thousands of landlords will be forced to sell up; house prices could crash if landlords flood the market with houses for sale; some landlords will be declared bankrupt as they won’t be able to pay their tax bills; there will be a major reduction in the supply of privately rented accommodation; reduced supply will result in higher rents; tenants will be made homeless if their homes are repossessed by lenders;
there will be fewer homes available for people on benefits once landlords start to sell.’
9.2. ‘I’ve gone through this sum so many times now. If 1 in 5 of the 2 million British landlords are affected that’s 400,000. If they each only dispose of 2 properties then that’s 800,000 evictions. If each tenant is a family of 3 then it’s 2.4 million people looking for a home in a shrinking market. This is crazy, why can they not see it?’
9.3. ‘If this Budget proposal gets Royal Assent in the Finance Bill I will have no choice but to start increasing my rents by 5% per annum compound with effect from January 2016 .’
10. Possible amendments to mitigate the devastating impact of the decision:
10.1. ‘Before this legislation kicks in, he should allow all properties bought previously to remain under old rules.’
11. Conclusions drawn by landlords:
11.1. ‘These are truly dark times for many. How many of us are thinking I should have just sat on my backside, did squat for myself and relied on the state to look after me? We didn’t stick our money into the casino aka the stock market only to be told “your money is gone.” If it’s not a business then black is not black and white is not white. Investments once placed and occasionally administered can be left. I spend hours every day, weekends, evenings and holidays dealing with property issues.’
11.2. ‘I still remember the first class on taxation that I attended in preparation for my accountancy exams. The teacher was a former tax inspector. His opening words were: “If there is no income, no income tax is payable.” George Osborne has torn up this principle by imposing a levy on finance costs.’
11.3. ‘Imagine our plight, when interest rates go back to their historic norm. Then the majority of landlords will be in serious trouble. The higher the gearing the more tax… whereas under the current rules the higher the gearing the lower the tax/no tax.’
11.4. ‘The basics of taxation are that tax must be simple and fair. This fails on both counts and is likely to result in people tweaking their affairs (legally) to avoid it.’
11.5. ‘It’s a simple business principle that if you take risk then there must also be reward or there’s no point in doing it. The Government hasn’t been able to provide adequate housing stock for the country’s needs and we’ve taken the risk. Now we can see just what a risk it has been when a Conservative Government (that is supposed to understand business principles) has betrayed the sector that’s been housing 4 million of the country’s inhabitants.’
11.6. ‘Given the aggressive and sudden interference in the market by the Government, I’ve lost trust in them to preserve a stable, moderately predictable or rational business environment and fear anything could happen….’
11.7. ‘Supposing you got planning permission to build your dream house, spent £300,000 building it and then got told to knock it down how would you feel about that? That’s what portfolio landlords have done built up something that works and invested for a future and retirement only to potentially have it knocked down. Did I do something wrong to someone? Am I a bad person?’
How would MPs react if this happened to them?
This is an extract from a letter sent by one landlord to his MP:
‘I reject the idea that landlords have an unfair advantage over either companies or homeowners and offer the following analogy for you to consider based on your own expenses, as I think this may add clarity to my perspective by making comparisons of my predicament to your expenses claims.
Just suppose the tax relief on part of your expenses was restricted to 20% as it is for landlords. Given that mortgage finance is usually the major expense in property, let us treat your staffing costs in the same way for the purposes of this example.
Please consider that MP’s expenses are no more of a sacred cow to the Great British Public than landlords’ interest, so the parallel is rather appropriate – nobody is likely to be rushing to the barricades to defend either of us.
In broad terms, your current income is composed of £74,000 salary as of May this year, plus expenses. Based on the complete year of 2013-14’s figures, your expenses amounted to just over £171,000, of which £129,000 related to staffing costs. In this respect you are in quite a similar position to many landlords as regards their income. In your case the total is £245,000, of which part is taxable and part is an expense and thus deductible. On that basis, in very broad terms, you are liable for tax of around £19,000, leaving you a post-tax income of £55,000.
If the similar restrictions were applied to your staffing expenses in 2020/21, your taxable income would be deemed to be £203,000, comprising your salary and that part of your expenses that you use to pay staffing costs. The tax liability on that income would be £77,450.
“But wait”, I hear you cry, “what about the 20% tax relief due on my staffing cost?”
Quite right, 20% of £129,000 is £25,800 so we can deduct that in order to reduce your tax liability to just £51,650. You must pay that tax out of your £74,000 salary, leaving you a net income of £22,350. Your tax bill would be increased by 175% and your net pay would be down 59.5%.
Would you be able to run homes in Norfolk and London on that income?
If we use the same logic applied by The Treasury to your staffing costs as they are applying to landlords finance costs this is only fair of course. Reducing your tax relief would “level the playing field” between MPs and ordinary citizens who don’t get tax relief for employing nannies, cleaners, gardeners and the other staff they need to support their households.
The figures are actually far worse than that for many landlords, who will be expected to pay substantial tax out of a negative cashflow.
Do you now understand the reason for my concerns?
Companies that own rental properties will still be able to deduct all their finance costs from income before paying tax on their resulting profits at the rate deemed appropriate, as will sole traders in every other form of business. Money necessarily paid out to someone else should NOT be regarded as part of taxable income of any enterprise, whatever its structure.
As to whether private homeowners are taxed less favourably than landlords, consider the impact of two homeowners swapping properties and renting to each other for identical rent amounts. By renting these same properties they are subjecting themselves both to capital gains tax if they sell, and income tax on rental income less costs. If their costs (e.g. repairs, mortgage interest) exceed their rental income, this will leave them in an inferior tax position as such tax losses cannot be offset against other (non-property) income, and they still face a potential capital gains tax liability.’
1. For an explanation of the absurdity of the decision, see: http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11816733/Alice-in-Wonderland-buy-to-let-tax-sets-a-new-benchmark-in-absurdity.html)
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