McDonnell’s distorted and dangerous version of Right to Buy9:01 AM, 5th September 2019
About 2 weeks ago 35
The Government’s tax changes for landlords, announced in this Summer Budget, will significantly eat into landlords’ profits and, in many cases, will wipe them out completely.
A petition against the budget tax change for landlords was launched on 26 July entitled: Reverse the planned tax relief restriction on ‘individual’ landlords.
The petition currently has over 21,000 signatures.
HM Treasury responded on 28 August as follows:
‘The Government is committed to a fair tax system so is restricting tax relief landlords can claim on property finance costs to the basic rate of income tax.
Landlords are currently able to offset their mortgage interest and other finance costs against their property income, reducing their tax liability. This relief is not available for ordinary homebuyers and not available to those investing in other assets such as shares. Currently the landlords with the largest incomes benefit the most, receiving relief at their marginal tax rates of 40% or 45%.
By restricting finance cost relief available to the basic rate of income tax (20%) all finance costs incurred by individual landlords will be treated the same by the tax system. This recognises the benefits to the economy that investment in property can bring but ensures that the landlords with the largest incomes will no longer benefit from higher rates of tax relief.
By unifying the treatment of finance costs for all individual landlords, the Government is reducing the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary homebuyers.
Less than 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure. Taking account of the other measures from the Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted their forecast for house prices. The OBR expect the impact on the housing market will be small. Furthermore, this change is being introduced gradually from April 2017 over 4 years. This will give landlords time to plan for and adjust to these changes.”
Property 118.com Landlord Response:
Landlords who are members of the online forum Property118.com have been actively campaigning against the introduction of the budget tax change and have today set out their initial comments on the Government response:
We are not surprised by this response from HM Treasury. It shows that their impact assessment is weak and does not address all the relevant issues.
We firmly believe that George Osborne’s budget proposal to restrict finance cost relief for individual landlords is ill-thought-out and will result in serious social and economic consequences for many groups not considered by the Government.
As we do not have space in this article to detail how all these groups will be affected, we would direct readers to the excellent www.saynotogeorge.co.uk website which details the extent of the proposal and its ramifications.
We do not accept the Government’s statement that only 1 in 5 (18%) landlords will be affected as they have produced no evidence to substantiate their figure, nor clarify if their figure includes those lower rate tax payers who will be moved into a higher tax band as a direct result of the proposal.
We have asked the Government to confirm their estimate of the number of private rental properties that will be affected as that is the key issue rather than the number of landlords. The Government has declined to answer this question on the grounds that it would be too costly to check their records. The Government has chosen to withhold information so that the true impact of their proposal is not in the public domain. We believe that the publication of this information (and other information we have requested under the Freedom of Information Act) is in the public interest and we call on the Government to be open and transparent with the information it holds.
It is not appropriate for the Government to compare the tax treatment of landlords with ordinary homebuyers. They are comparing apples with oranges. Landlords are buying income-generating assets and providing a service to tenants who either choose or need to live in private rented accommodation. Ordinary homebuyers are buying houses to live in, rather than buying houses to generate income.
The Government’s response compares investment in property to investing in other classes of assets such as shares; however investing in property has one major difference from most other forms of ‘investment’. Investing in property is a socially useful activity, satisfying demand for housing of all types and styles. Many landlords are providing housing to people on benefits and to those on low incomes and a healthy private rented sector aids labour mobility.
Landlords have to provide a service to their customers (tenants) in order to stay in business. Restricting the tax relief is contrary to how all other finance costs are treated for sole traders. There is no logical justification for this, especially given the social and economic benefits that landlords operating in the private rented sector provide.
The Government’s comparison of the tax treatment of landlords with the tax treatment of people who invest in shares is bizarre and is a new line of argument for the Government. People who invest in shares through an ISA pay no income tax on the income they receive and pay no capital gains tax on the gains they make. Landlords pay both income tax and capital gains tax so investors in ISAs receive much more favourable tax treatment than landlords.
Investing in shares via a pension is also one of the most tax efficient ways of investing with higher rate tax payers receiving tax relief at 40% and additional rate tax payers receiving tax relief of 45%.
The Government suggests that the budget proposal will reduce the advantage that landlords may have in the property market over ordinary homebuyers. They have however not articulated what these advantages may be. We believe we are responding to demand for rental accommodation, rather than competing with people who wish to buy. We have asked the Government to provide information which proves that landlords have an advantage and we await their response.
According to a report by the Select Committee for Communities and Local Government, in 1999 there were 2m privately rented homes, out of a total of 20m households. Now there are 3.8m privately rented homes, out of a total of 22m households. There are slightly more owner occupiers – up from 14m to 14.3m – but significantly fewer people renting social housing. In effect, private rentals account for most of the increase in the supply of housing over the past 15 years, but there is no evidence that landlords ‘took’ these from potential owner-occupiers.
Following the Summer Budget, the think tank, the Policy Exchange, noted that ‘In truth, the tax system massively favours home owners – for one thing home owners do not have to pay capital gains tax on their principal residence, whereas buy-to-let landlords do on the rental properties they sell. Rental income is also taxed (and even more now).’
Our position is clear: Mortgage interest is a cost of running landlords’ businesses and should be offsetable for all landlords.
We note that the Government has said that the proposal will have no impact on house prices and that the impact on the housing market will be small. If the Government does not know how many properties will be affected, we do not know how they can come to this conclusion. We have asked the Government for information on these issues and await their response.
It is our opinion that the Government’s policy on Housing is ill-conceived. They are obsessed with promoting home ownership for their own political reasons. The simple fact of the matter is that not everyone can afford to buy a house; not everyone wishes to own a house; there is not enough social housing to house those people on benefits or on low incomes. For all these people, the private rented sector meets their needs.
The private rented sector will decline as a result of this tax proposal as many landlords will be forced to sell or their properties will be repossessed. We believe that many tenants will be made homeless and that councils will not be able to cope with the demand for emergency temporary accommodation.
For a very significant number of landlords, the impact of this budget proposal will be catastrophic. It will destroy long established businesses as tax demanded will exceed actual profit made. For these landlords the effective tax rate on their actual profit will exceed 100%. This is illogical and sends out the wrong message to hard working people who aspire to be self sufficient and get on in life.
Landlords will not remain in business if they are facing huge tax bills and making losses. They will either sell up or go bust. Some landlords are even considering emigrating to avoid going bankrupt. That is how bad this proposal is.
The UK is facing a housing crisis and despite what Generation Rent and some parts of the media say buy-to-let landlords are not to blame. For over 30 years, successive Government’s have sold off council houses, thus depriving the country of affordable housing supply. Now the Government wish to extend the Right to Buy to Housing Association tenants. This is madness. If social housing and private rented housing both decline (and we think it will), who will house those who can’t afford to or do not wish to buy?
Demand for housing is growing and not enough houses are being built. The solution to the housing crisis is simple – BUILD MORE HOUSES. The Government proposal will do nothing to increase supply. In fact, it will slow down the rate of house building as landlords will stop buying new build properties. If private house building rates slow down, so too will the delivery of much needed affordable housing which is delivered via planning obligations.
The tax changes that are proposed are so complex that their true impact is only now being fully understood by some landlords. Our campaign is gaining momentum and is being covered in the national press. We appreciate the support we have received from the Daily Telegraph who have decided to run a campaign to ‘Axe the Buy to Let Tax Grab’. Writing in the Telegraph on 22 August 2015, Richard Dyson wrote: “George Osborne doesn’t have a clear philosophy on tax and how a tax system should work to help an economy grow and help people prosper. Like Gordon Brown, who did so much to destroy a culture of investing – damaging both savers and enterprise – Mr Osborne tends to grab and snatch revenues as he can, with his guiding principle being to snatch from the areas where he’s least likely to encounter resistance. You can hate landlords and lament the rise of buy-to-let as a favoured investment of the middle classes. But even if you do, you must surely also condemn the action of a Chancellor who, out of nowhere, has announced the destruction of this asset class for all except the very rich.”
Dyson goes on to say that: “this tax change, which was called for by cynical politicians and commentators hoping to strike a populist tone, sets a new benchmark of absurdity in Britain’s already ludicrously complex tax regime. We now have a tax which is applied at a rate of more than 100pc on investors’ returns. We now have people paying tax on zero income. We now have a tax regime that appears not to be able to distinguish between revenue and profit. There are other less philosophical objections. Where will the councils find the extra money to put yet more people into short-term accommodation when their book of private–sector landlords shrinks? More importantly, what will happen to families and individuals forced out of their houses as landlords sell up?”
Dyson says: “this Alice in Wonderland Tax sets a new benchmark in financial absurdity” and he believes that the tax change will be the “death of buy to let.” The fact that the proposal is being phased in is no consolation for portfolio landlords who are highly geared. These landlords are trapped. If they keep their properties, they will incur massive losses and will quickly go bust. If they try to sell to reduce their finance costs, or incorporate to avoid paying more income tax as property companies are not affected by the Budget proposal, they will incur capital gains tax and other charges that will mean this is not a viable option.
For all of the above reasons, the landlords at Property118.com say No to George and his Alice in Wonderland Tax.
This is just round one of our fight to have this absurd tax plan scrapped. Our campaign will continue until the Government sees sense.
A Q&A sheet explaining the problem and the likely unintended consequences associated with George Osborne’s proposals can be downloaded here. Please feel free to copy, print, distribute.
To calculate the impact of this policy on your personal finances download this spreadsheet
A petition has been started – see >>> https://petition.parliament.uk/petitions/104880
Would you be prepared to invest just 15 minutes a day to campaign against the Budget proposals to restrict finance cost relief for private landlords?
Editors Note: Due to the overwhelming support and popularity of this article we must apologise that Property118 is physically unable to respond to all direct emails and telephone calls. We would be most grateful if you can comment via the thread below and the team of readers working with us will help pick up on all points 🙂
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