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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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Luke P
10:19 AM, 12th August 2015, About 9 years ago
So we had our meeting. He seemed concerned that we would be unique as an industry in that we would not be able deduct our biggest cost before taxable profit is calculated. He also appeared to be very bothered by the unusual retrospective nature of this proposal and that it goes against a very British sense of fairness.
I mentioned the petition which he wasn't aware of, but was quite dismissive of the online petitions in general labelling them as 'a bit of a PR exercise,' though went on to explain that 100,000 signatures doesn't guarantee a debate and equally he (or any other MP) can initiate a debate without a single signature. My personal view is that we should carry on the push because it will at very least send a message to the Government that there are a great number of disgruntled landlords (voters) out there.
He explained quite openly that the Government are strapped for cash. No big scandal, but they are perhaps more strapped than folk realise. They are looking to squeeze from wherever possible (and it's a bonus if the public back you too), with landlords being a great target. He went on to say that we should not expect a U-turn but that sensible concessions were the more likely outcome and took interest when I suggested that it should only apply to new debt from 2017. This was agreed as very achievable.
I put it to him that the real problem with housing in the country as a whole is a lack of property in general. He liked the analogy that even were I to bow-out of the industry and gift all of my BTLs to the current tenant, this would not create anymore property nor house anyone presently on a waiting list or in desperate need of accommodation. Who owns a property does not make a difference with respect to this problem.
As you would expect, this all comes down to politics. Back-scratching, out-manoeuvring and private (as opposed to official) conversations with the correct people in the corridors of Westminster is the way it works. A giant game of political chess.
The plan he recommended was to build up support amongst other MPs in the region -even those likely to be politically unsympathetic toward landlords (Labour), but rather dress the issue up as one that will affect tenants (we go out of business, where will the tenants be able to live/afford) and one that will affect local authorities who have few social houses to spare.
I now have peers with large portfolio holders with political connections doing the same as I have done and I am inclined to attend as many of these MP meetings as I can, not only to demonstrate support for my landlord friends and the general issue, but so that I can be the one constant across these meetings spanning the political spectrum. That should put me in good stead to assess the overall momentum in the movement toward change.
Dr Rosalind Beck
12:38 PM, 12th August 2015, About 9 years ago
Reply to the comment left by "Luke P" at "12/08/2015 - 10:19":
Thanks for that Luke. It was really helpful. I have drawn out the key points from you meeting to draft notes for the meeting I will have with my Labour MP next month, as follows:
Notes for meeting with Wayne David 18th of September 2015
1. We would be the only business in the UK which cannot deduct the largest cost of running our business. If we have 'ltd' after our name we can, though (begging the question will ltds be next?)
2. The law is retrospective - applying to businesses which already all set up and can't be easily changed. And will bankrupt people and tenants will lose homes. This seems to be an anti-renter as much as an anti-landlord measure - allegedly intending to improve FTBs chances, but there are numerous arguments which show this is not the primary causal relationship [draft separate sheet on if and why FTBs aren't buying]
3. It creates no new housing - just shifts the ownership - most likely from private landlords to banks (temporarily in cases of repossession), to landlords doing exactly the same job, but who have 'ltd' after their name, to large corporations (NB. they will all be in a strong bargaining position to get the distressed private landlords to sell cheaply), and in some cases FTBs will be able to buy the repossessed houses/houses for sale.
NB. To avoid this, it is crucial to have MPs support, so I will ask MP to please circulate information about this to other MPs.
In the case of Labour MPs, we need to emphasise how this is against tenants (including the poorest in society) and against landlords - who are being discriminated against (Labour MPs are supposed to care about fairness). It will not only do nothing to tackle homelessness; it will exacerbate it, at least temporarily whilst rental houses go off the market.
If Labour MPs championed this, it would show that they can be a pro-business party.
I will also make sure I give examples of what it means for individual landlords and their tenants and also how we will respond - for example, by becoming non-resident and avoiding CGT. (also inevitable rent rises etc.)
Mark Alexander - Founder of Property118
10:22 AM, 29th August 2015, About 9 years ago
I have just sent a third open letter to my MP regarding the need for homeowners and landlords to play on a level playing field, please see the link below
http://www.property118.com/level-playing-field-between-homeowners-landlords/79644/
.
Luke P
10:25 AM, 3rd November 2015, About 9 years ago
Reply to the comment left by "Ros ." at "12/08/2015 - 12:38":
I have, this morning, received a House of Commons letter sent by my local MP I met with (see my above post), with a brief 'update'...
"Just a brief note to update you on the issues you raised with me at our meeting in August and in subsequent correspondence.
In respect of tax relief; having spoken to ministers and colleagues who are closely involved with housing issues I don't get the impression there is likely to be any movement from the current proposals. That said I have written to the minister, David Gauke following from my earlier representations and will let you have his formal reply as soon as I hear from him."
This, whilst maybe expected, did not please me all that much (neither did the lack of use of 'fully justified' text in the body of the letter, but hey...you can't have it all)!