14:48 PM, 2nd October 2015, About 7 years ago 73
The one thing that struck me is that my MP did not understand how Restrictions on Finance Cost Relief for Individual Landlords works in practice.
It was only when he understood that, after I gave him a very simple and relevant example, that he could begin to comprehend the unintended consequences.
When I explained that I had met Sean Rath and Megan Shaw at The Treasury he seemed bemused why no amendments had been tabled. I confessed that my presentation to him was probably more polished that I had previously given. That was because I had prepared a 20 minutes presentation for Mr Freeman whereas my preparations for my meeting at The Treasury were for sound bites on the basis that I was expecting to be one of many contributing to a much larger group discussion. As it transpired, the meeting was only attended by me, a policy adviser The Treasury and Megan Shaw and her boss from HMRC.
Towards the end of our meeting Mr Freeman asked me to write to him and to reiterate my presentation. I am sharing that letter below ….
“Dear Mr Freeman
Thank you for granting me surgery time at Attleborough Town Hall today. I am a lifelong supporter of the Conservative party and a private landlord operating in your constituency, hence it was a pleasure to meet you in person.
My objective was to persuade you to lobby The Finance Bill Committee to table an amendment to clause 24 of The Finance Bill, in order to prevent unintended consequences which I subsequently went on to explain during our meeting. Thank you for explaining why you are unable to lobby the Finance Bill Committee.
Nevertheless, you asked me to summarise our 20 minute meeting in writing so that you are better placed to raise the matters we discussed politically with your colleagues at Westminster.
First I provided an example of how Restrictions on Finance Cost Relief for Individual Landlords actually works in practice.
We used an example of a flat in Attleborough rented to a single parent who works 16 hours per week and claims various benefits including Working Tax Credits and Local Housing Allowance. Her rent is £500 a month which provides her landlord with a gross 6% per annum return, i.e. £6,000 per annum.
Her landlord budgets £1,000 per annum for management, maintenance and compliance and the remaining £5,000 a year of rent is used to service his mortgage, for which he has very prudently fixed the interest rate for the next 10 years. Therefore, the landlord makes no cashflow profit from this property. His long term strategy is that rents will rise and his profits will increase on that basis, and that he will also benefit from capital appreciation in order to fund his retirement and long term healthcare if and when required, such that he is less likely to need to rely upon state support later in life.
The finance cost restrictions mean that by the year 2020 the £5,000 a year being spent on mortgage interest will be added to any other taxable income and that he will be liable for tax at the prevailing rate for this “notional income” based on the appropriate income tax band.
I then went on to explain that the landlord could own 20 properties in your constituency and a further 20 properties elsewhere. By 2020 he will be taxed on £200,000 of profit which he has never actually had, i.e. 40 X £5,000 of finance costs. Given that he is already a higher rate tax payer, his tax at 45% will increase by £90,000 but he will receive 20% tax relief on the £200,000 of finance costs, ie. £40,000 thus reducing his additional tax burden to £50,000. A key point here is this; he has not received the profit upon which this tax is payable, it was a legitimate expense of his business. Accordingly, his business model is no longer viable. He cannot pay tax on profits he’s never actually received, it is ridiculous that anybody would expect that to be possible. If he had known this could happen then it would have been extremely unlikely he would ever have made the decision to buy the rental properties as investments. Nevertheless, he must now deal with the consequences in order to avoid becoming insolvent. His decision in that regard is to sell the properties to people who can afford to buy them for owner occupation. Fortunately there is pent up demand so that is unlikely to pose a problem.
None of his tenants are in a position to buy these properties as they do not qualify for mortgages for a variety of reasons including income and credit status. The very realistic scenario I posted to you is how you would provide housing for the 20 displaced tenants in your constituency. I think that is when the penny dropped for you in terms of the unintended consequences I had initially referred to. You don’t have the available social housing. Temporary B&B style accommodation would become strained, expensive and inappropriate in for anything other than a short period of time. The real problem though is that you will not only be facing this problem for the tenants of just one landlord in your constituency unless changes are made. The restrictions on finance cost relief for individual landlords will affect 1 in 5 landlords in your constituency, and in fact the whole of the UK, according to the Impact Statement prepared by the OBR.
I then went on to explain that a campaign group I am working for had submitted Freedom of Information requests to HMRC asking how many properties and how many tenancies would be affected. The responses to both questions is that such data is not available. This is clear evidence that the unintended consequences of the tax change cannot possibly have been considered with factual data by the OBR. Accordingly I have made the following prediction based on mathematical logic …..
We know the balance outstanding on buy-to-let mortgages that have been granted to individual landlords is around £200 billion. Based on the 80/20 rule (Pareto Theory) it is likely that 20% of landlords are responsible for 80% of this debt, i.e. £160 billion. This also ties into the Impact Statement that 1 in 5 landlords will be affected by clause 24 of The Finance Bill. I have no statistical data on what the average LTV ratio is on buy-to-let mortgages, but if we suppose it is 80% that means that £200 billion of rental property could be affected by the unintended consequences to landlords, tenants and housing needs as I have described above by the year 2020.
I think we are generally in agreement that to avoid the unintended consequences, The Finance Bill could be amended so that Restrictions on Finance Cost Relief for Individual Landlords are only imposed to new buy-to-let purchases post April 2017. This would affect new investment decisions, but will not affect historic business decisions made by existing landlords, thus leading to the potential unintended consequences and mass disposals of PRS stock due to Government policy rendering buy-to-let as being not viable for many existing individual landlords. Such an amendment would have the effect of taking the froth out of the buy-to-let market, because it would discourage accidental landlords who do not have the financial resource to adequately maintain their properties from entering the market. However, it will not discourage future investment in the sector from those with the financial wherewithal, because they will form limited companies, which are subject to far more robust underwriting requirements in terms of debt, and unaffected by finance cost restrictions. Coupled with the increased regulatory powers granted to the Bank of England to influence and regulate mortgage lending criteria this should have the affect of leveling the playing field to the extent that Government deems necessary.
I completely support the notion of home ownership wherever appropriate. However, we must also remain mindful that home ownership is unrealistic for a growing percentage of the UK population due to their ability to borrow, requirement for job mobility and housing whilst in education etc. Accordingly, I urge Government to consider that destabilisation of the PRS, which has the prospects of leading to a reduction in supply of rental accommodation, is highly likely to result in significant issues in terms of homelessness and associated pressure on the welfare system.
In five years time I do not want to see you being confronted at your surgeries by an angry mob of homeless people, evicted as tenants by individual landlords who have been left with no choice other than to sell their properties due to this tax change.
The only solutions to the housing crisis generally are to build more and/or managing population growth.
If Government wishes to raise additional tax revenue, the introduction of a form of CGT on residential housing conforms with the taxation policies widely accepted by many other countries. If such a tax could be coupled with tax incentives for provable maintenance and home improvements then that could also have a significant impact on black market labour too.
By the way, just eight days before the election David Cameron promised not to increase tax, George Osbourne made his boss a liar within 100 days by introducing this tax change which wasn’t even mention in the party manifesto.
I shall now leave these matters in your hands.
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