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14:21 PM, 13th July 2015, About 9 years ago 94
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Dear Mr Freeman
I have been a Conservative voter for my whole life and have used the influence of my property forum and blogs (200,000 subscribers) to encourage my peers to vote the same way.
I would very much like to meet with you to discuss my concerns regarding the budget, in particular the impact on lending institutions and a hardcore of Conservative voters who invest into buy-to-let property. I believe the impact is far more wide reaching than may have been considered and could well lead to another banking crisis, as I will go on to explain below.
My understanding of the logic behind the budget announcement is to reduce incentive for highly geared buy to let transactions, which the Bank of England recently reported to be a risk to the economy. I broadly agree with that. However, the consequences of the budget are that an established private landlord using a high gearing business model could now end up falling into the 45% tax bracket even if his rental portfolio is only breaking even and even if he has little or no other income or resources with which to service that increased tax burden. Please see the example below:-
SCENARIO AS OF TODAY
Rental income: £300,000 per annum
Mortgage interest: £200,000
Other legitimate expenses: £100,000 (e.g. insurance, letting, management, maintenance etc.)
Taxable income = zero.
SAME SCENARIO AS OF 2020
Rental income: £300,000 per annum
Legitimate expenses excluding interest: £100,000
Net taxable income = £200,000
Net cashflow is still zero but tax is payable on £200,000 less a tax credit of £40,000 due to the 20% relief on the £200,000 of mortgage interest.
Given that net cashflow is zero, where is the landlord expected to find the money to pay the extra tax from?
The position worsens when interest rates increase.
It gets worse!
Until now, buy-to-let mortgage underwriting and associated lending criteria has been based on the current tax system, which has not made provision for this extra tax. Many thousands of established professional landlords have based their business models on the current tax system and lending criteria. If these landlords are now allowed to fail we could be looking at another credit crisis, plus of course a further negative impact on the housing crisis..
Worse still
General consensus is that highly geared landlords will be able to pay down their debt by selling some of their properties. However, the very nature of a highly geared property investment strategy means that in several cases the net sale proceeds would be insufficient to pay CGT due to outstanding mortgage liabilities having significantly exceeded the original purchase price of assets due to refinancing in line with property values during the property boom which has occurred since the early/mid 90’s. There is no CGT rollover relief available to private landlords on residential property so they cannot convert to a corporate structure either without incurring CGT. Accordingly, many are trapped into an inevitable bankruptcy scenario by the budget announcements. The net losers (in addition to these landlords) will be the banks and society as a whole due to the losses incurred on forced sales, the reducing supply of quality rental property and the associated demand led rental inflation.
The Chancellor said that he wishes to make it easier for people to become homeowners. A significant exodus from the Private Rental Sector may well facilitate this in terms of reducing property values but it will not create any more housing. In fact, it may well reduce incentive to develop new housing. This is because over the last two decades a significant proportion of new build housing stock has been purchased by landlords, thus driving up the profits of developers to a point where it makes developing new builds viable. A reduction in the appetite for buy-to-let investment, combined with a reduction in property prices, may well have the effect of reducing property developer profits, and hence incentive to build new homes. Another knock on consequence of this is that a reduction in new developments would result in less new social housing being built.
My suggestions
It would be politically very awkward for the Chancellor to do a u-turn at this point, albeit not impossible. However, the following concessions may be equally effective to deal with the Chancellors objectives whilst negating the necessity to openly backtrack in order to avoid the negative repercussions and unintended consequences of the Summer 2015 Budget:-
Option 1) announce that the new tax rules only apply to new debt as of 2017 or
Option 2) introduce CGT rollover for residential investment property in order to allow landlords with large portfolio’s to roll their assets into a corporate structure or
Option 3) declare a CGT amnesty for BTL landlords for a given period which will still have the effect of reducing the size of the PRS (albeit with some reduction in property values due to the possible scale of transactions) but with reduced negative consequences in terms of insolvency induced forced sales and the knock on effects to banks and property developers.
I look forward to your reply and hope we can schedule a meeting sooner rather than later.
Yours sincerely
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Appalled Landlord
16:30 PM, 13th July 2015, About 9 years ago
Rounding off the current personal allowance and 20% band, I estimate that this landlord, with no income from property or anywhere else would have to pay about £32,000 in "tax". Brilliant!
This is not a tax it is a levy on landlords who put the properties in their own names.
Those who hold properties through companies will not have to pay it.
Appalled Landlord
16:42 PM, 13th July 2015, About 9 years ago
And if the Bank Rate goes up, the mortgage interest will go up. So this landlord would make a loss - but the levy would get bigger. Even more brilliant!
Appalled Landlord
16:56 PM, 13th July 2015, About 9 years ago
HMRC’s explanatory document states that “The measure is not expected to impact on family formation, stability or breakdown.” Except that once this landlord has used up all his financial resources to pay the annual levies, HMRC will bankrupt him - if his lender has not already done so. Brilliant!
Mark Alexander - Founder of Property118
17:20 PM, 13th July 2015, About 9 years ago
Reply to the comment left by "Appalled Landlord" at "13/07/2015 - 16:42":
The tax levy would not get bigger because his taxable income would not change.
In fact, he would get more tax relief BUT ....... and here's the rub ......... his cashflow (real term loss and effect on his personal finances) would be worse.
.
Shakeel Ahmad
21:07 PM, 13th July 2015, About 9 years ago
Hi Mark,
If there is a CGT amnesty with a view to transferring into a limited company. I do not think that lenders will allow this change and if they agree than you will have to have a new product and the new products will not be as attractive as we currently hold.. .
Mark Alexander - Founder of Property118
21:10 PM, 13th July 2015, About 9 years ago
Reply to the comment left by "shakeel ahmad" at "13/07/2015 - 21:07":
Yes I agree, but anything right now is better than nothing.
I do have another cunning plan too though 😉
Se my recent comments in the linked article below.
.
Appalled Landlord
21:49 PM, 13th July 2015, About 9 years ago
Reply to the comment left by "Mark Alexander" at "13/07/2015 - 17:20":
Hi Mark
You are right, the levy would not go up, as it is based on the rental receipts minus allowed costs, not the amount of interest per se.
However the relief would not go up either because it is applied to the lower of taxable proift or finance costs, and the taxable profit is the lower amount.
Mick Roberts
8:12 AM, 14th July 2015, About 9 years ago
New debt, EXACTLY!
We’ve all made decisions for the future on the rules that the Govt put in place at the time.
And now we’ve invested our money & time in our future & housing people, the Govt then say ‘Thanks a lot, we’re now changing the rules’ Disgusting!
Like you say, if he’s gonna’ do it, do it for NEW people or NEW loans, so they know what they’re getting theirselves into. And they can decide whether to or not. It’s too late for us now, now we’ve done what the Govt effectively asked & allowed us to do.
Can’t pull the rug under our feet after we’ve already cleaned it & sat on it.
Mark Alexander - Founder of Property118
9:50 AM, 14th July 2015, About 9 years ago
Reply to the comment left by "Mick Roberts" at "14/07/2015 - 08:12":
Excellent post Mick, dare I say your best yet! 😀
.
Alistair Cooper
11:35 AM, 14th July 2015, About 9 years ago
The tax due is actually far worse than AppalledLandlord refers to. At current rates tax and NI due on an income of £200,000 is £ 82384, even taking off the most generous credit of £40000 he is due to shell out £ 42384 from a net cash flow of nothing!
What worries me is that my figures are pretty close to Marks' mystery landlord; he must have had me in mind!
Unlike Mark I am a life long Labour voter (one of those awful Blairites!) and served as a Labour Cllr for 8 years. The bizarre juxtaposition is that Osbourne has gone far further than any Landlord Bashing proposed by Milliband! In fact Tory govt's have not served landlords well in history; the 1988 Housing Act was introduced under Thatcher for example. In addition Gove wants to close 50% of the current County Courts...Possession in 12 months + may well be the result!
Political banter aside, the real injustice in these Budget proposals, despite them effectively being retrospective which is not a typical feature of British Law, is the totally unjust way in which gross rental income (less expenses) is used to establish the Tax band and only then is the 20% relief applied. I am not a qualified Accountant but I cannot think of any other trade/profession that is treated in this unjust and illogical way?
Of course one last and final blow.... Mystery Landlords expenses are now only likely to be £70k due to the loss of the 10% wear/tear allowance! His tax bill (from cashflow of pretty much nil as he commits the 'crime' of reinvesting all his gross profits into the quality of his stock) is now an eye watering £ 56484! (after the £40k 'concession')
I will be writing to Anne Main MP (St Albans) who has always championed the small man having a go, in a similar vein and will let you know of any response.
At least post bankruptcy Mystery Landlord could claim from the much reduced Tax Credits pot (but will they be gone by then!)