My Meeting With George Freeman MP

by Mark Alexander

14:48 PM, 2nd October 2015
About 6 years ago

My Meeting With George Freeman MP

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My Meeting With George Freeman MP

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. My Meeting With George Freeman MP

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.

Yours sincerely


Mark Alexander”

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Jon Pipllman

18:39 PM, 2nd October 2015
About 6 years ago

Mark's letter puts this side of the case well. I think the 80% LTV average is very much on the high side, but that distracts only from the detail, not the main points being made.

I think it is safe to work on the basis that Rath, Shaw et al at The Treasury understand the implications. That no amendments were made as a result of their workshops etc. tells me that the government has made the choice to knacker 'leveraged BTL' / '20% of landlords' on the sword of being seen to be on the side of the OO / FTB.

The fall out, unintended or not, is for them to pick up the pieces from.

Let's see

Mark Shine

18:50 PM, 2nd October 2015
About 6 years ago

A very good and logical letter Mark!

Talking of logic, another factor relating to urban rentals and accommodation space that MPs should consider, I will explain by way of a typical urban example:

One typical property of mine is a 1300 sq ft apartment with 3 very good sized double bedrooms. At the start of the initial tenancy 4 years ago, there were 3 professional sharers who knew each other from University. After a year one partner joined and then a year later another partner, so there was then 2 couples and a single. I was concerned about over occupation and raised this point with them. However these tenants (very decent people) insisted that it would not be an issue and I accepted. There have been no rent increases, but per head the rent divided by 5 is obviously more affordable than divided by 3.

The two couples are actively looking to buy in the next few months, and one of their purchases is now 'in solicitor's hands' and they can use the break clause to terminate the tenancy at any point with notice.

The point is that when they do, each couple want to move to minimum 900 sq ft apartments. So for urban accommodation, space requirements are different for OOs and tenants. So in this case that's 900 + 900 for the 2 couples and 900/2=450 for the single guy (assuming he finds a partner). So total minimum required space is 900x2 + 450 = 2250 sq ft for OO minimum space satisfaction for this group of 5, whilst they are very happy with 1300 sq ft while renting.

Conclusion: George and crew can't just cross their fingers and say 'we want to level the playing field' by taxing non incorporated LLs and hope for the best. They also need to create an extra 950 sq ft (minimum) of residential accommodation for this group of 5 tenants satisfaction.

Space requirements are different for urban OOs and tenants.


18:58 PM, 2nd October 2015
About 6 years ago

Excellent letter Mark, well done.

Mark Shine

19:11 PM, 2nd October 2015
About 6 years ago

@ Jon Pipllman. It's not just generally high LTV that are targeted. It's specifically LTY (loan to yield) that will bear the brunt of this, hence either you and your HPC comrades will get what you want (HPC) OR there has to be greater upward pressure on rents in low yielding / high demand locations. Just as your crew @ HPC repeatedly say that (non incorporated, although they forget to mention that bit) LLs can't have it both ways in the armchair investor vs LL businesses argument, surely your HPC fraternity can't also have it both ways in the OO vs tenants arguments?

Jon Pipllman

19:41 PM, 2nd October 2015
About 6 years ago

Reply to the comment left by "Mark Shine" at "02/10/2015 - 19:11":

>Mark S

I don't have a crew. @HPC, or anywhere else for that matter.

You are right, it is LTY rather than LTV.

Rental yields going up by virtue of rent increases would indeed enable LLs to cover the additional tax burden caused by the proposed legislation changes.

House prices falling (or crashing if you prefer the word) could be contributed to by additional properties coming on sale and lenders reducing the availability of loans for (highly leveraged) BTL purchases - IMO Basel III is going to be more significant to 'BTL' than these proposed budget changes.

That rental yields are so low and have been so low for some time in high demand areas makes me think that a price correction is more likely than a rent increase: if rents could be increased, they would be increased (already).

Rental yields go up as prices fall of course and it might just be that massively leveraged (to yield) portfolios paid too much for the properties they are holding. That might be the cause of the low rent yield and the high leverage requirement to buy it.

That said, I wouldn't be surprised to be wrong. I know no more about what tomorrow will bring than anyone else.

Incorporated vs unincorporated is a red herring as far as I am concerned. By the time the money is through the company and everything paid, there isn't a massive difference in any but the most extreme cases of LTY. There really is no more reason to start out incorporated now than there was before the budget.

Jon Pipllman

19:58 PM, 2nd October 2015
About 6 years ago

>Mark S

One other thing leans me towards a price fall.

I can think of no other market in which participants speculate on the basis that prices will increase that has never suffered multiple significant price falls. There is no reason at all for UK housing to behave differently from every other market in existence.

Sure, house prices can be expected to rise over the course of time. But to think that those rises will be smooth, always upwards and never interrupted by significant falls is, simply, wrong.

We have enjoyed a significant period of house prices rising faster than other asset prices and incomes in some areas. It would be no surprise for that to be mirrored with prices falling sometime in the future. It would be no surprise for the fall to overshoot some measure of fair value on the way down as many would say they have overshot some measure of fair value on the way up.

I am the first to say that I don't know what will happen. Even if my guess of a price correction is right, as I frequently say on HPC: Predicting when a 'price crash' will start, how big it will be or how long it will last, is impossible.

Mark Shine

21:09 PM, 2nd October 2015
About 6 years ago

Reply to the comment left by "Jon Pipllman" at "02/10/2015 - 19:41":

Yes Jon, your posts here are very different to your many posts on HPC but in your defence you do seem to be one of the more 'balanced' amongst the HPC nutjob gang, who also seem to reappear on every related online news article comments section (as one can fairly easily tell by writing style). But the reality is that regardless of the discussion matter (whether it is house prices or rents or most effective moustache style for modern day living or literally anything else conceivable) it is very easy for anyone to carefully copy&paste news articles or quotes or even data to 'back up' almost any 360 degree angle argument these days on whatever subject the Internet. My advice if you want a rational and balanced debate on any subject matter would be to stay well clear of the yeahbutnobutyeah one tracked HPC gang?

Jon Pipllman

21:56 PM, 2nd October 2015
About 6 years ago

>Mark S

I now have the accolade of being labelled similarly here as there and have received somewhat similar advice from both places about the other place too

I have learnt lots from many different forums, some of which are on the internet. Many of those learnings are useful and accurate, many are total pony and useless. There is no single forum that does not contribute both types of information. I expect that will continue.

Ross McColl

8:31 AM, 5th October 2015
About 6 years ago

Great work Mark. A simple, effective argument.

G Cox

10:04 AM, 5th October 2015
About 6 years ago

I am sorry to disagree.

You cannot describe interest payment as a legitimate 'cost' unless it is in a company structure and there is no higher rate relief in tax on companies.

You don't have to borrow, or borrow as much . At the end of the day borrowing to buy property is a speculation: it is merely gearing.......making the returns more volatile.

As for discriminating against future landlords, words fail me.

I really do not know why you did not use the example of the working standard rate tax payer landlord (unless you are blinkered by being a large buy to let landlord). That is where it is really heinous .

You would have been better asking for roll-over relief so people can get their properties into a company : where they belong /

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