Letter template for Landlords to send to local CouncilsMake Text Bigger
The following letter template has been drafted by a member of the Property118 campaign committee. Please feel free to copy/paste and send it to your local council officers, who have responsibility for housing the homeless.
Would you mind forwarding this email to your fellow councillors and council officers who have responsibility for housing the homeless in your constituency please?
Why is homelessness going to increase?
Because of last year’s summer budget, individual landlords with mortgages will pay more tax. They will either have to increase rents or sell their properties. Tenants who cannot afford rent increases will be evicted. Tenants of properties to be sold will be evicted, to compete for a reduced supply of rental dwellings.
What was in the summer budget?
Clause 24, which became section 24 of the Finance (No 2) Act 2015, introduced a new way of taxing individual landlords. The change is being phased in from April 2017, so landlords will start to pay more tax from then.
From 2020/21, if the sum of total income plus BTL finance costs (including interest) is more than £43,000, a landlord will pay more tax compared to today.
HMRC are going to pretend that the money which landlords pay to mortgage lenders in interest is somehow still in their bank account as well. Then HMRC will tax them on it at 20% (or 25% for additional rate taxpayers).
How will that happen?
The way it will work is as follows. All finance costs (including mortgage interest) will be disallowed. This means that they will not be deducted from gross receipts when calculating the profit. This will inflate the profit by a fictitious amount.
This inflated “deemed” rental income will be added to all the landlord’s other income (salaries, pensions etc.) and the tax will be calculated using the personal allowance and working through the tax bands.
HMRC will then allow 20% of the interest as a “relief”, and give this relief by deducting it from the amount of tax that they calculated.
What is the net result?
The net result is that if someone was paying tax at 45% under the current rules, the extra tax will be equal to 25% of the finance costs. (45% tax minus 20% relief.)
If the landlord was paying 40% under the current rules, the extra tax will be equal to 20% of the finance costs (but more than 20% if the personal allowance is lost or the landlord is pushed into the 45% band).
Some landlords who are basic rate taxpayers now will be pushed into the higher rate band by the fictitious profit. So the extra tax will be anything up to 25% of their finance costs.
The extra tax will, in effect, be a levy on finance costs.
Why is that a problem?
The total tax may exceed 100% of the real profit. Tax (the levy on finance costs/fictitious income) will be payable even if the property really makes a loss. HMRC will bankrupt those who do not have the means to pay the levy.
There are further ramifications, as the Institute of Chartered accountants in England and Wales pointed out:
“The increase in taxable income as a result of the changes will have a significant impact on some taxpayers, the operation of the restriction on finance costs increases the income measurable for several income related reliefs, such as
- Tax credits, with no real economic change in income the credit could be lost
- Child benefit, again with no real economic change child benefit could be “lost” completely or be restricted
- Loss of the £5,000 0% savings rate band
- Personal allowance lost if the income without the benefit of the interest relief exceeds £100,000”
What are landlords likely to do?
Landlords will have to sell their properties or increase the rent. However, tax will also be payable on the increase in rent. Just to maintain the same income as today, a landlord who pays tax at 45% now would have to increase the rent by 45.5% of the finance costs.
A landlord who pays tax at 40% today would have to increase the rent by 33.3% of the finance costs.
The landlord would be no better off from these increases – only the government would. The tenant would be worse off.
What will happen to tenants?
Tenants who receive housing benefit will not be able to pay the increased rent and will be evicted. Tenants whose landlords sell to owner-occupiers (the Chancellor’s ostensible aim) will be evicted. Homelessness will increase. Those who cannot afford the increased rents will make their way to the Housing Departments of local councils.
What can councils do?
Plan for the worst, but try to prevent it. Plan for increases in the number of homeless people and in the cost of temporary accommodation for them, but use your influence with all political parties to prevent the landlords of existing BTL properties being taxed on fictitious profit.
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