Landlord Tax Grab – source document EXPOSED

Landlord Tax Grab – source document EXPOSED

16:18 PM, 21st December 2015, About 8 years ago 74

Text Size

landlord tax grab

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.

FOREWORD

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:

  1. This is an unusual claim – that your activity is not economically useful unless you employ someone. Many workers are sole traders, who employ nobody.
  2. In any case, the claim betrays an ignorance of the business.  There is a small army of tradesmen throughout the country who earn their living, partly if not wholly, by doing work on rented properties. Many owner occupiers never employ cleaners, carpet cleaners, decorators or handymen, preferring to do the work themselves.  Landlords employ these people regularly, and they employ them more frequently than owner-occupiers do because of the way that tenants treat properties.  Some work is not done for owner-occupiers at all, such as electrical inspections and annual gas safety certificates, fire alarm and extinguisher inspections. Letting agents are only employed by landlords.
  3. But all this is beside the point. The main way in which landlords are useful to the economy is in providing accommodation to those who need it.  This does not just include those who would like to buy a property but cannot afford to do so in the area in which they choose to live.  It includes people who do not want to buy a property, either where they are living now or anywhere else, for a variety of reasons
  4. By borrowing to buy properties, landlords increased the size of the economy.
  5. By financing new developments, landlords increased the supply of housing. The English Housing Survey on a government website credits the private rented sector for the overwhelming majority of the increase in the number of dwellings between 1996 and 2013, at the foot of page 1.  It reads: “From 1996 to 2013, the total number of dwellings in England increased steadily from 20.3 million in 1996 to 23.3 million in 2013. Much of this was due to the notable growth in private rented housing which more than doubled in size from 2.0 million to 4.5 million over this period.” Thus 2.5 million out of the 3 million increase was thanks to the PRS.  That is 83%.
  6. For every £1 spent on housing construction an extra £2.09 was generated elsewhere in the economy.
  7. Some landlords bought derelict or otherwise undesirable properties and restored them, increasing the supply of habitable properties. Some bought large properties in towns and cities that owner-occupiers did not want, and converted them to HMO’s, thereby increasing the capacity of housing.
  8. As regards the word ”business”, Clause 24 describes letting as a business 17 times.

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?

EXECUTIVE SUMMARY

David Kingman

David Kingman Researcher at The Intergenerational Foundation

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.

MAIN BODY

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.

RECOMMENDATIONS

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.

CONCLUSION

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.

EDITORS NOTES

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”

But what can be done?

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.


Share This Article


Comments

Fed Up Landlord

20:17 PM, 21st December 2015, About 8 years ago

What a load of left wing twaddle from a spotty faced immature political geek who hates people who try and get on in life. He should reap the retribution of those he has wronged.

Big Blue

20:44 PM, 21st December 2015, About 8 years ago

Indeed. What a shameful truth for this government to be associated with. When reading the report, and Mark's superb exposition of its failings, it becomes clear that the government, and Gauke in particular, have just copied and pasted almost word for word the more daft conclusions of this 'report' (or A level homework, which is the more accurate description).

The next question surely has to be why? Why have the government just willingly taken the ramblings of a uni student over the established knowledge of economists and policy advisors and specialists in the industry? I think it is worth pushing the govt on why they would so willingly embrace an unqualified supposition rather than the IFS, IEA, ICAEW, CML, NLA, RLA, SAL etc etc, some of which possess the finest minds in housing, economics and tax.

What hold does Kingman have?

And how can HE conclude that his own report is the last word on the situation?! It really isn't. Perhaps it's the arrogance of youth shining through?!

Dr Rosalind Beck

20:56 PM, 21st December 2015, About 8 years ago

Reply to the comment left by "James Fraser" at "21/12/2015 - 20:44":

Hi Jamie.
2 corrections: Mark didn't write it; a chartered accountant did.
And: we have no evidence the guy even has a GCSE in Economics or even Maths, never mind an A' Level. I wonder about Georgey as well.

Fed Up Landlord

21:07 PM, 21st December 2015, About 8 years ago

I am sure the landlord community can make much of this to embarrass George The Geek Lover. Puts him well in the frame for the top job if this is the quality of his special advisers.

BTL INVESTOR SCOTLAND

21:11 PM, 21st December 2015, About 8 years ago

Excellent article.

Chris Walters

21:13 PM, 21st December 2015, About 8 years ago

Reply to the comment left by "Angela Bryant" at "21/12/2015 - 19:18":

I am happy to support Crowd funding too.
Please provide info as needed.
I am feeling ever so slightly optimistic !

Appalled Landlord

21:28 PM, 21st December 2015, About 8 years ago

Reply to the comment left by "James Fraser" at "21/12/2015 - 20:44":

Hi James

It’s not just Kingman that seems to be controlling Osborne, over-riding David Cameron’s promise of a few weeks earlier that income tax would not be increased. In spite of its Summer Budget Triple Win, Intergenerational Foundation were not wholly satisfied. So Angus Hanton wrote to George Osborne on 13 October: http://www.if.org.uk/wp-content/uploads/2015/10/IF_Autumn-Statement-Budget-_Submission_Final.pdf

saying “Housing is the most visible example of intergenerational unfairness in the UK today. IF’s housing research reports have led to a number of policy interventions. These include the welcome removal of tax subsidies [sic] for buy-to-let (BTL) investment, the tightening up of rules surrounding the 10% wear and tear tax-free allowance and the reduction in the period for which owners can claim private residence tax relief. However, BTL investment is still increasing, further distorting the housing market. The mortgage market is failing to self-regulate, with mortgage providers now offering more than 900 different BTL products, many of which are unavailable to first-time buyers. These include interest-only mortgages and high loan-to-value (LVT) mortgages. Lack of self-regulation has led the Bank of England to warn of increasing instability in the housing market risking a future housing crash if action is not taken.

Requested action: BTL requires further reform.

Government to ask the FCA to investigate options for greater curbs on BTL mortgages, restrict high loan-to-value (LVT) ratios and withdraw interest-only mortgages from the BTL market."

Fortunately he stopped short of instructing the government to make BTL a criminal offence.

In the following month’s Autumn statement Osborne duly obliged and “further reformed BTL” by increasing Stamp Duty by 3% of the price of every BTL property costing more than £40,000, as from next April.

MoodyMolls

21:49 PM, 21st December 2015, About 8 years ago

The whole conservative government should resign they got in by deceit
They are destroying the housing sector be it BTL council or social.
They are wrapping it up as a gift to FTBs along with their stupid schemes which in fact are pushing all the debt onto FTBs and these schemes will increase house prices. They cant let them fall now.
They are driving out BTL for the Institutional investor who quite possibly with additional monies from the government will take on the HB tenants. Note this will be paid direct to the Institutional investor.
By 2050 there will be no council or social housing it will all be privatised and as with everything thats privatised it will be 3 times the price.
And the icing on the cake is GO budget is based on the report above. Is he D kingmans Puppet? You couldnt make it up.

If house prices do fall FTBs all end up in negative equity and will be repossessed with no rental houses to fall back on.

Wouldnt it be refreshing to have a government that cared about Britain instead of selling off everything it can lay its hands on to foreign investors. How much of our country is actually owned by us?

MoodyMolls

22:57 PM, 21st December 2015, About 8 years ago

Reply to the comment left by "Appalled Landlord" at "21/12/2015 - 20:13":

GO need not have bothered reading out his budget should have just directed us to IF. I wonder what they will ask for next?

Didnt they want pensioners to pay tax after retirement age as now they will have to work til they are 85 by the looks of it.

On the point of fairness that this government like what about all the people that are on the housing list how is selling off council/social houses at massive discounts fair to them.

We are making up the short fall in funds by the tax grab on BTL because GO was advised his plans did not stack up on revenue and he would need to get the money from elsewhere to fund the sell off.

I dont see one policy thats fair , just spin after spin and unfortunately Joe Public is falling for it.

Darlington Landlord

23:04 PM, 21st December 2015, About 8 years ago

No wonder all these changes were kept secret and couched in misleading language until they were brought in - the IF's agenda does not stand scrutiny from aknowledged economic and financial experts!
Osbourne will be discredited by this second omnishambles!

Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership

or

Don't have an account? Sign Up

Landlord Tax Planning Book Now