My Meeting With George Freeman MP

My Meeting With George Freeman MP

14:48 PM, 2nd October 2015, About 6 years ago 73

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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”

Related Open Letters >>>


by John Frith

23:32 PM, 6th October 2015, About 6 years ago

Reply to the comment left by "Mark Alexander" at "06/10/2015 - 17:02":

Hi Mark. I understand that you are invested in your viewpoint, but I stick with mine. If the BoE didn't sanction this policy, wouldn't it already be dead in the water?

That the idea was raised in a Green Party manifesto just adds credence to my view that the proposed law was not formulated by the Conservatives. Why would they steal a dirty trick from them? This is far too clever an idea for the politicians to come up with.

All the reasons the politicians are giving for the law are straw men arguments. We can wail about how unfair it is, but the reality is that it will, at a stroke, disincentivise housing demand from landlords who want (or need) to gear their investment. And that is the reasoning that needs to be confronted.

by MoodyMolls

7:51 AM, 7th October 2015, About 6 years ago

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Expert advice on starting up and running a Bed and Breakfast Business including: attracting B&B ... Permission for B &B With Fewer Than 3 Rooms? ... converting our previous family manor house into a b and bwe wondered if there are…

by MoodyMolls

8:02 AM, 7th October 2015, About 6 years ago

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by Jason McClean

8:51 AM, 7th October 2015, About 6 years ago

Reply to the comment left by "John Frith" at "06/10/2015 - 23:32":

Hi John

The point is they can disincentivise the housing market moving forward if they like. In a lot of ways that may be needed, but surely increasing the housing supply is the best way to do that?

Retrospectively wiping out my pension (property portfolio) that was built on a legal framework that has existed for years seems short sighted and a simple tax grab.

My tenants have no clue what's coming. I wonder where they will move and what they can afford when I evict them? As the supply of houses reduces in the area, prices will only go up for them.

I'll survive this and forever hate the Conservatives for destroying the fruits of my enterprise, but what will the tenants do?

Look at 2007-2012, house prices barely fell and the number of house sales fell as Brits hung on for higher prices. This isn't going to fill the market with low cost houses that zero hour contract workers can afford - and banks are only lending to the very lowest risks at inflated rates.

As for The Bank of England. Bankers...what more needs to be said? They don't have a sterling record on anything apart from printing money for other bankers and protecting the old regime.

Sickens me.

by Claudio Valentini

11:18 AM, 7th October 2015, About 6 years ago

Reply to the comment left by "Jason McClean" at "07/10/2015 - 08:51":

Jason, Your portfolio is similar to mine and I’ve gone through the grieving process. I see the new landscape as painful but nevertheless an opportunity.In my opinion this is not going away. We need to deal with it.
Lobbying politically is a noble thing to do but on its own is not enough. As I write, Dave (The PM with the genuine common touch) is about to speak at his Party conference on housing and the lack of it. Housing is now a political issue and unfortunately this story will be painted with good guys and bad guys. Unfortunately Landlords will be painted as the Guys with the black hats.
So, if someone plans to move our cheese we need to plan to find some new cheeses.
• consolidate
• pay down your BTL mortgages
• reduce your LTV
• plan to sell all or part of your portfolio
• move forward in a Ltd. Co.
We must do something but doing nothing is not an option.
One way or the other it seems the path is being cleared for new stakeholders into PRS, either Corporate institutional on the Right or through Government intervention on the Left. I’m not a defeatist but I am a realist. Leveraging was a good ride while it lasted but now the rules of the game are about to change, we still have just over a year to restructure.
When the Plotlanders started to challenge vested interests in the middle of the last century the planning laws were changed to maintain the status quo. I feel Clause 24 is a 21st Century analogy to last Century’s Plotlanders story where ordinary folk could bypass the traditional route and channels to security through building their own vision of security, just as many Landlords have done today.
There comes a point where you have to be prepared to stack, take your winnings and move on…

by Jason McClean

11:57 AM, 7th October 2015, About 6 years ago

Reply to the comment left by "Claudio Valentini" at "07/10/2015 - 11:18":

Hi Claudio

I agree the landscape is about to change, for the worse for everyone apart from the wealthy individuals and corporates.

I am planning a mixture of reducing BTL mortgages, selling a property or two and increasing rents. I am also considering drawing nothing from my business and holding profits in there whilst living off rental income.

This legislation is going to hurt lots of people though, particularly those that don't understand it and will end up evicted (tenants) and bankrupt (landlords). Poor decision making by Government as the desired outcome of more housing is not attained through this either.

by John Frith

12:01 PM, 7th October 2015, About 6 years ago

Reply to the comment left by "Jason McClean" at "07/10/2015 - 08:51":

I agree Jason, but in all the time I've been into property (about 35 years) no government has ever been able to oversee the building of sufficient stock to narrow the gap between demand and supply.

by Jason McClean

12:36 PM, 7th October 2015, About 6 years ago

Exactly John. So PRS has grown as a market led solution. They'll still not build enough and now they have broken the market solution as well.

Big corporate renters will step in now. That's possibly the real outcome they want from this...

by Claudio Valentini

13:03 PM, 7th October 2015, About 6 years ago

Reply to the comment left by "Jason McClean" at "07/10/2015 - 12:36":

Jason. Nail on the head. This is exactly what it’s all about. Corporate entrants. The private rented sector has grown on average by 5.4% per year since 1999 and now accounts for 19.4% of households and big business wants a piece of the action. Someone once said “ Buy land – they’re not making any more”

by Mick Roberts

12:45 PM, 11th October 2015, About 6 years ago

Very very very good. Bit late by me I know.

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