Open Letter to George Freeman MP – Conservative

Open Letter to George Freeman MP – Conservative

14:21 PM, 13th July 2015, About 9 years ago 94

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Dear Mr Freeman Open Letter George Freeman MP - Conservative

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

Related Open Letters >>> http://www.property118.com/category/open-letter-to-mp/

Related articles – LINK

http://www.property118.com/category/budget-2015-campaign/

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Comments

Mark Alexander - Founder of Property118

11:47 AM, 14th July 2015, About 9 years ago

Reply to the comment left by "Alistair Cooper" at "14/07/2015 - 11:35":

The political banter made me smile, but we are the same side when it comes to this issue so I do not consider a political report necessary on this occasion 😀

"An enemy of my enemy is my friend" LOL
.

Alistair Cooper

11:56 AM, 14th July 2015, About 9 years ago

Very good Mark, indeed we are on the same side on this one, no offence intended.

We have both been left out to dry by our own chosen parties. I am currently in political wilderness anyway, there's not a lot to inspire me in the current Labour leadership race!

Perhaps all but me should rush out and pay the £3 and vote for Corbyn.... at least he only proposes draconian rent controls and to force us to sell at below market value to existing tenants.. perhaps a long slow death rather than a more swift throat cut!

Luke P

11:58 AM, 14th July 2015, About 9 years ago

Mark,

Would you mind me forwarding the same letter to my MP?

Several of our region's landlords are regularly wined and dined at the Carlton Club and we have a good relationship with him generally. Might do some good...

Mark Alexander - Founder of Property118

12:00 PM, 14th July 2015, About 9 years ago

Reply to the comment left by "Luke P" at "14/07/2015 - 11:58":

Be my guest, use any part you like, that's why I shared it.

Please share on Social Media too 🙂
.

brian gibson

13:35 PM, 14th July 2015, About 9 years ago

Totally agree with the above however, no one has mentiond stamp duty which would also impact on the trasfering in to ltd companies - £125k -2% or in my case 12% as portfolio over 1,5 milion !!!!

Mark Alexander - Founder of Property118

13:42 PM, 14th July 2015, About 9 years ago

Reply to the comment left by "brian gibson" at "14/07/2015 - 13:35":

There is some light beginning to emerge at the end of the tunnel, please see my latest article which is linked below
.

TheMaluka

14:49 PM, 14th July 2015, About 9 years ago

As a mathematician it has not escaped my notice that, in the 2020 example quoted in the open letter the effective tax rate is infinite. Will this government go down as the first in the world to introduce an infinite tax rate? Sadly no for Sweden had such a rate many years ago - a situation which led to many suicides (there may be other examples of infinite taxation).

I have long considered that the government wish to rid themselves of the private landlord, this new taxation scheme confirms my suspicions.

Appalled Landlord

15:15 PM, 14th July 2015, About 9 years ago

Reply to the comment left by "Alistair Cooper" at "14/07/2015 - 11:35":

Hi Alistair

You are right, I have understated the tax in Mark's example.

I am not used to the levels of income in the example, and I did not know about the loss of the personal allowance that this entails until recently. Removing this gives me tax extra tax of £4,950, making a total of £74,500, is that correct?

Would the tax relief not be reduced to 20% of £200,000 minus the personal allowance, even if it were not used in calculating the tax?

Why would NI be payable, and how is it calculated?

Mandy Thomson

11:52 AM, 15th July 2015, About 9 years ago

This is an absolute catastrophe for large portfolio landlords who hold their portfolio in their own name, but it's also going to be expensive for the small landlords who are in the higher rate tax band through other income sources, but still have very low DISPOSABLE income through supporting families.

The problem is, if a CGT amnesty is given, this will potentially worsen the housing crisis as many landlords will simply sell up. Another problem with holding rental property as a limited company is a much more restricted choice of lender.

With this and increasing landlord licensing, the PRS is being squeezed. I have no doubt that the current national government does appreciate the country's need of the PRS and will listen but unfortunately many local authorities fail to appreciate this.

Dr Rosalind Beck

12:45 PM, 15th July 2015, About 9 years ago

Hi Mark. I am re-posting my letter to my MP here, and anyone can feel free to copy any bit of it and use in their own letters to their MPs. The last time I wrote to my MP it took about a month to get a proper reply (rather than the holding letter that is sent out more quickly).
Re lobbying, I can see a few priorities, in addition to writing to MPs Ministers and the Chancellor, Namely: a petition, eg. organised by the RLA. I am wondering if anyone here knows people in the RLA to discuss this?
Also: I think we should write to pro-business newspapers. I read the Daily Express in my local coffee shop and they seem pretty pro-business. We need to somehow get publicity along the lines of this is the 'biggest attack on private landlords for a generation/ever' and 'overt discrimination against private landlords' etc.
Anyway, here is my slightly adapted version of the letter I’m intending to send to the Chancellor and also now, ‘Nick Boles,’ the Business Minister. (is Brandon Lewis still the Housing Minister? – excuse my ignorance)
I sent the following yesterday:

Dear Wayne
Thank you for your reply to me earlier this year regarding your support of landlords. It was much appreciated. I am now writing again, this time with regard to the latest attack on landlords in the Budget, through the proposals on ‘tax relief’ for landlords. Many of us landlords were initially confused about the terminology ‘tax relief’. As the mist has cleared, we realise that what is really being proposed is that the cost of raising interest, through BTL mortgages, which is our biggest cost in running our businesses, has been re-defined as ‘income.’
Obviously, this makes no sense. How can money going out from our bank accounts be classified as ‘income’? It looks like the Conservative Government wants to introduce a new principle of taxation in this country, whereby outgoings are considered to be ‘income’ (but only in the special case of private landlords).
On a personal note, this year we had the pleasure of discovering our tenant in a house we own was a front for cannabis producers and the first we knew of it was a call from the Fire Service saying our house was on fire. The work to repair and renovate this house took four months – during which time we had to continue to pay the mortgage obviously, whilst having no rental income.
According to this logic, any or all of the costs of running our business could be re-defined as ‘income.’ Why just mortgage interest? And if our costs can be re-defined in this way, why aren’t all businesses in the UK falling under this new (and incredible) tax regime? In fact, Buy-to-let is not a simple, hands-off ‘investment’, as it is often portrayed; it is a very labour-intensive business, often very stressful and for many of us constitutes a full-time job, whereby we work and are on call 7 days a week, including evenings.
Unfortunately, the failure to understand our business (ignorance, by another word), has led to the Government becoming confused and announcing this bizarre proposal.
To illustrate with a simple example of someone with a large portfolio.
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

According to this, net cashflow would still be zero but tax would be payable on £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? And the position worsens when interest rates increase. As landlords, we have been dumbfounded this week, absorbing the shocking news. We are starting to find our voices however and are intending to fight this.
As Housing Associations, ‘limited companies’ and all other businesses are receiving favourable treatment and are excluded from this measure, and allowed to offset their loan interest as an expense, where is the ‘level playing field?’ We’re all providing the same service.
As you know, ours is a large business sector which provides an essential service to millions of renters and which also provides work for a massive amount of tradespeople, insurance brokers, letting agents and estate agents and so on. This measure could decimate our industry.
This singling-out of landlords as a special category whose interests can be so unfairly attacked can only stem from an anti-landlord prejudice, based on outdated and offensive ideas about us as business people.
I am hoping you can use your influence and your vote to help quash this measure. I believe it is going to be published tomorrow in the Finance Bill.
Yours sincerely

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