16:18 PM, 21st December 2015, About 7 years ago 74
Researchers from a landlord tax campaign group, who joined forces via the Property118 online forum, believe they have located the source documents behind the discriminatory taxation policies targeting private landlords which are being implemented by Chancellor George Osborne.
The landlord tax grab, which will make the housing crisis worse, was proposed by David Kingman, a non-economist, in a deeply flawed report which he wrote in 2013, the year he left university with a degree in – Geography!
In the Summer Budget the Chancellor (a graduate in History) implemented a recommendation that was in a report from the Intergenerational Foundation, written by David Kingman.
On his Linkedin profile, David Kingman states: “I was the lead author on a research project looking at the tax treatment of buy-to-let property which led to major policy changes in the 2015 Budget”.
He claims that his top skills are Urban Planning and Politics. However, he claims no skill in Economics, Taxation, or Business.
It is understandable therefore that his report displays a lamentable ignorance of the subject throughout, from the foreword to the conclusion.
A retired member of the ICAEW (who wishes to remain anonymous) has dissected the Kingman report and commented as follows.
His colleague Ed Howker wrote the foreword. He claimed “MIRAS remains for buy-to-let landlords who deduct mortgage interest payments from their tax bills”. This is not true.
Landlords do not deduct interest from tax. They deduct it from income received and pay tax on the result, just like any other enterprise in the country.
Then he stated “Indeed, economically, buy-to-let investors should not imagine they are small-business owners. They are much less useful to the economy, rarely employing anyone who would not be employed by owner-occupiers to service their homes and deriving their income from gambling on house price rises.”
This raises several points:
Ed Howker goes on “Worse, the special treatment of landlords places first-time buyers at a disadvantage. This paper reveals good evidence that first-time buyers are losing out – paying more tax, enduring weaker mortgage terms and finding that buy-to-let investors are not encouraging more house building but pushing up the price of housing and skewing the types of homes that are built. Britain is getting good at building investment flats and worse at building family homes.”
This is more nonsense. Landlords pay tax on rental income and capital gains; owner-occupiers do not. Landlords do not decide what type of property will be built – developers and councils do that. He seems to be suggesting that landlords should buy more houses from developers – instead of owner-occupiers.
Building flats on brownfield sites in towns and cities is a very productive way of using land in areas that would not attract house buyers.
And that was just the foreword. Should tax policy be based nonsense like this?
David Kingman’s Executive Summary starts with “Landlords receive a public subsidy worth up to £5 billion in tax relief per year. This is relief that they are able to claim for their business expenses, including interest relief on mortgages.”
If this is a public subsidy, then every enterprise in the country that pays interest gets a public subsidy. It is absurd to call it a subsidy. Deducting interest from income to find the profit is just normal accounting
He states “The growth of buy-to-let hasn’t significantly increased the overall supply of housing. The “BTL boom” has mostly just led to increased competition between landlords and first time buyers for our existing housing stock instead.” This is just not true. 2.5 million out of the 3 million increase in the number of dwellings in England from 1996 to 2013 was due to the PRS. That is 83%
He continues “BTL pushes up prices. There is clear evidence showing that the growth of BTL increases overall house prices for everyone, including first-time buyers.” He doesn’t produce any evidence for this in the Executive Summary.
In the main body of his report, David Kingman states: “A study published by the National Housing and Planning Advice Unit (NHPAU) in 2008 argued that, based on their model of UK house price inflation, the BTL sector was responsible for increasing average house prices by up to 7% between 1996 and 2007 through the additional competition which BTL landlords added to the market. The authors note that average house prices would probably still have risen by 130% in real terms during this period for a range of different reasons.”
In fact the NHPAU study stated, on page 20, “For instance, since 1996 Q3 house prices increased in real terms by 150 per cent and, even without the estimated effect of BTL, they would still have been expected to increase by more than 130 per cent.” It also said “In term of affordability it is an open question as to whether a 7 per cent increase in house prices in 2007 Q2 represents a significant additional cost.” Indeed. 7 percentage points out of 150 is less than one-twentieth of the total increase.
It also stated “There is some evidence to suggest that BTL has increased the size of the private rental (PRS).”
In the very next paragraph of his report, David Kingman acknowledges that landlords have increased the supply of housing – but he only does so to complain that too much of it (in his opinion) consists of flats!
He writes: “Proponents of BTL often claim that it provides a social good by increasing the overall supply of housing which is available. However, there is evidence to suggest that this view is misguided; instead, the growth of BTL has skewed the supply of new housing towards the particular type of properties which are more likely to appeal to property investors, without having a substantial impact upon the overall amount of new housing which is being built.” So, in his opinion, financing new-build property developments does not increase the number of dwellings!
He continues “Nationwide, the BTL housing stock mainly consists of older properties, with only around 20% of BTL properties in new-build developments. Most new-build BTL developments consist of large complexes of one- and two-bedroom flats, often located on brownfield sites in formerly rundown parts of cities in the north and midlands of England, which have been built specifically for the purpose of letting by property investors.” Presumably, as these flats are not in London or the south east then they do not count towards increasing the supply, in his opinion.
In fact, “complexes of one- and two-bedroom flats, often located on brownfield sites in formerly rundown parts” were built specifically for the purpose of selling to whoever wanted to buy them, be they owner-occupiers, shared-ownership owners/renters, second-home owners, holiday-let owners or ordinary landlords. And of course, the developer also had to build affordable housing for housing associations, as the price of obtaining planning permission.
It does not seem to occur to David Kingman to wonder what would have happened to house/flat prices (and rents) if landlords had not increased the supply of new dwellings by 2.5 million in the period 1996 to 2013. Both would have gone up by more than they actually did if BTL had not increased the supply. So BTL has had a restraining influence on prices and rents. To claim that BTL has pushed up prices is a gross distortion of the facts.
Also in the body of David Kingman’s report is a list of revenue expenses, “meaning that landlords are able to claim tax relief against them.” He states “As the figures presented below will show, the most significant of these forms of tax relief is that on mortgage interest.” In that sentence he purports to convert a legitimate and normal business expense into a tax relief.
It is pure sophistry to say that we can claim tax relief for interest just because it is deducted from receipts to find the taxable profit, like it is in every type of enterprise in the country. It is politically motivated nonsense to select one of these legitimate business expenses and say it should be disallowed for people who bought property in their own names, as a punishment for borrowing to provide decent accommodation for those who need it.
Among David Kingman’s recommendations are:
“Reduce the ability of landlords to deduct their mortgage interest against tax, because this allowance is regressive and distortive” and
“Build more housing to reduce housing costs for young people”
It is no surprise in such a poor piece of work that no thought was given to the predictable effects of the first recommendation. Apart from increases in rents and/or eviction notices, which have already started, the first recommendation will have a negative effect on financing the last one.
David Kingman’s conclusion starts “This report has demonstrated conclusively that the generous tax relief which is given to private landlords causes serious distortions within the UK housing market.”
This is the opposite of the truth. The correct conclusions are:
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 is not a tax relief, it is normal accounting practice everywhere. Disallowing them for existing 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 that it can be found, at greater cost.
A flawed report has resulted in a flawed Finance Act.
So there you have it!
You can download the full report produced by David Kingman HERE. Note some of the familiar phrasing used in both this report and the Chancellors Budget speech, e.g. “level playing field”
A group of landlords are looking into Crowd Funding a Judicial Review to consider the legality of Clause 24 of the Finance Act 2015 based on a variety of legal arguments, further details of which we are unable to report on until 26th December 2015 due to an official embargo. Apparently Boxing Day is one of the busiest days in the year for property related online searches.
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Dr Rosalind Beck
17:00 PM, 21st December 2015, About 7 years ago
An excellent rebuttal of pure nonsense. How incredible that we now know that the Chancellor has ignored Paul Johnson of the Institute of Fiscal Studies who said this measure was 'plain wrong' and Professor Philip Booth of the Institute of Economic Affairs, who said it 'didn't make sense,' but instead listened to the unsubstantiated opinions and 'recommendations' of someone with no expertise in the field who had just left University with a Geography degree.
The Chancellor also consulted with no landlord bodies before the decision was made and also refused to listen to them afterwards.
Since the decision was announced other professional bodies have heavily criticised it - including the Institute of Chartered Accountants of England and Wales and the Council of Mortgage Lenders.
Many journalists are also now picking up on how bad this decision is and its awful ramifications for landlords and tenants.
The Government will not willingly admit how wrong it is about this. Hopefully, the Chancellor will pay more attention when this is taken to Judicial Review - and the injustice, lack of logic and discriminatory nature of it will be fully exposed.
17:07 PM, 21st December 2015, About 7 years ago
Quite simply, George Osborne should now resign. If he ignores top economists and takes advice from someone straight from Uni with a geography degree he cannot be trusted to form economic policies. What next? Will we have Michael Fallon basing his policies on military action is Syria being guided by someone with a BTEC in food hygiene???
18:05 PM, 21st December 2015, About 7 years ago
On 29 April David Cameron promised the electorate that his party, if elected, would not increase income tax in this parliament, full stop. You can see him make the promise on youtube: https://www.youtube.com/watch?v=u5kGUAtvtv8 after 4and a half minutes.
On 7 July George Osborne implemented David Kingman’s recommendation in the Summer Budget by announcing that he would restrict tax relief on finance costs to the basic rate of income tax. Translated, this means an increase in income tax from 2017 for landlords who borrowed to buy properties in their own name (but not for those who borrowed and bought through companies).
It will be done by omitting finance costs (including mortgage interest) when working out the rental profit. This artificially inflated profit will be added to the landlord’s other income, and tax will be calculated on the total. Then this tax amount will be reduced by an amount equal to 20% of the disallowed finance costs in order to arrive at the amount payable.
This means that landlords will be taxed on that part of their rental income that they have paid to the lenders as interest, as if this money was also somehow still in their own bank accounts.
If the landlord’s total income (including the fictitious element of profit) does not exceed the ceiling of the basic rate (currently £42,385) then this change in the rules will make no difference to the amount payable. However, as from 2017, any landlord whose total income exceeds the basic rate ceiling will pay more tax.
The inclusion of the fictitious element of profit will even move some landlords from the basic rate of tax into the higher rate. Following a Freedom of Information request, HMRC have stated that this will happen to 70,000 landlords. However, the National Landlords Association puts the figure at 130,000.
George Osborne cynically adopted this measure in order to increase tax revenues, at the same time pretending that it will help would-be first-time buyers who are unable to buy because prices are too high. It will only help them if it makes landlords cause a price crash by selling en masse, the very thing that the Governor of the Bank of England is afraid of.
However, to avoid bankruptcy, landlords will increase rents to pass this extra tax on to tenants. Those who cannot afford the increase will be evicted. They will have to move to temporary accommodation provided by councils, at greater cost. Landlords will be no better off, but tenants will be worse off.
18:40 PM, 21st December 2015, About 7 years ago
Reply to the comment left by "John McKay" at "21/12/2015 - 17:07":
John, awesome discovery mate. Well done.
Mark Alexander - Founder of Property118
18:45 PM, 21st December 2015, About 7 years ago
David Gauke should resign too as he's clearly using the Gospel according to the Patron Saint of the House Price Crash forum to create the template letters his staff are sending to MP's who have met their constituents and begun to understand the consequences and ask questions about this ludicrous legislation.
18:53 PM, 21st December 2015, About 7 years ago
Reply to the comment left by "Saeef Khan" at "21/12/2015 - 18:40":
Thanks for the compliment Saeef but it's not my discovery (I wish that it was). But yes - awesome!
18:55 PM, 21st December 2015, About 7 years ago
Reply to the comment left by "Mark Alexander" at "21/12/2015 - 18:45":
Absolutely Mark. Gauke has lied to the electorate and to his fellow MP's. Also let's not forget his shame of the MP's expenses scandal.
19:00 PM, 21st December 2015, About 7 years ago
Reply to the comment left by "Mark Alexander" at "21/12/2015 - 18:45":
Mark, I take it you discovered this culprit?
Mark Alexander - Founder of Property118
19:01 PM, 21st December 2015, About 7 years ago
Reply to the comment left by "Saeef Khan" at "21/12/2015 - 19:00":
Nope, not me, I wish it was!
Dr Rosalind Beck
19:04 PM, 21st December 2015, About 7 years ago
It was Kathy who discovered it! Credit where it is due.