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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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Simon Topple
12:50 PM, 15th July 2015, About 9 years ago
Tell the Express there is the opportunity for another "HOUSE PRICE CRASH IMMINENT" article, along with one on the next page saying "RENT PRICES EXPLOSION DUE" and one further in saying "HOUSE PRICES RISE TO RECORD LEVELS".
Mandy Thomson
12:58 PM, 15th July 2015, About 9 years ago
Reply to the comment left by "Simon Topple" at "15/07/2015 - 12:50":
@Ros and @Simon
I agree we need to lobby, but Simon is right - we shouldn't put the emphasis on ourselves as an interest group, but on what the withdrawal of the service we provide will mean for tenants and for the country as whole - i.e. less choice of housing for individuals and families and a worse housing crisis.
The problem is to many people dismiss any protest coming from PRS landlords as "whingeing" and "bleating" and basically pure self interest and greed.
Dr Rosalind Beck
12:59 PM, 15th July 2015, About 9 years ago
A dictionary definition of 'business:'
1. an occupation, profession, or trade:
2.the purchase and sale of goods in an attempt to make a profit.
3.a person, partnership, or corporation engaged in commerce, manufacturing, or a service; profit-seeking enterprise or concern.
4.volume of trade; patronage:
5.a building or site where commercial work is carried on, as a factory, store, or office; place of work:
6.that with which a person is principally and seriously concerned:
7.something with which a person is rightfully concerned:
I think the business of BTL comes under a few of these categories.
A dictionary definition of 'investment':
1. the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
2.a particular instance or mode of investing.
3.a thing invested in, as a business, a quantity of shares of stock, etc.
Whereas BTL can also be seen as an investment, so presumably can any business. Our argument must be that the latter doesn't nullify the former.
God. It's exhausting - always having to justify our existence - to have to try and fight to be believed that we actually work for a living. I'm just off now to do viewings and sign in a new tenant - and it's not straightforward as there are legal complications I've had to clarify with the Guild before writing the tenancy agreement. This week I've also helped a new Spanish tenant settle in (conducted everything in Spanish to make it easier for him in a new oountry and told him about local networking sites in Spanish to get jobs and advice). I also moved a tenant from one house to another. She was going to order a taxi, but I said 'no way' and delivered her possessions in two car loads... These are just little examples of how we go above and beyond what we have to do, in providing a service to our 'clients.'
Mark Alexander - Founder of Property118
13:07 PM, 15th July 2015, About 9 years ago
Reply to the comment left by "Ros ." at "15/07/2015 - 12:59":
Please publish your letter to your MP etc. here as an example to us all.
I may even send another if I like yours too 🙂
.
Dr Rosalind Beck
15:29 PM, 15th July 2015, About 9 years ago
I have Mark. It's on the page before this one! All the best.
Dr Rosalind Beck
0:16 AM, 16th July 2015, About 9 years ago
Right, the IFS seems to be on our side. So I checked up what they are about and found the following about the organisation generally:
'The Institute for Fiscal Studies was founded in 1969. Established as an independent research institute, IFS was launched with the principal aim of better informing public debate on economics in order to promote the development of effective fiscal policy. Through the establishment of rigorous independent research, for example the IFS Green Budget and Post Budget analysis, IFS successfully opened up debate about public policy to a wider audience and influenced policy decision making.
Today, IFS is Britain’s leading independent microeconomic research institute. Its research remit is one of the broadest in public policy analysis, covering subjects from tax and benefits to education policy, from labour supply to corporate taxation. Our research not only has an impact on policy makers, think tanks and practitioners, it has also gained a worldwide reputation for academic rigour, and contributes to the development of academic scholarship. We communicate our research widely on a national and international scale, providing independent advice to policy makers in the UK, Europe and in developing countries; collaborating with world renowned academics on new economic theories and techniques; and disseminating our research globally through the press, media and the web.'
So that's what they're generally about. Then, their response to the budget included the following (I've picked out a few points):
1. They talk about the idea that the new minimum wage can provide full compensation for the losses by tax credit recipients as being 'arithmetically impossible.'
2. They say: 'Continuing down the list of welfare cuts size the next biggest is an odd one. Reducing social sector rents by 1% a year for four years from 2016-17 is scored as saving £1.4 billion in housing benefit by 2020. By holding rents down it should have that effect. But it is odd indeed to count what is clearly an increase in subsidy to social tenants, as a welfare cut. This is an additional cost that will fall on local authorities and housing associations.
3. And then, significantly for us, they say: 'The tax treatment of rental housing will be made less attractive though. At present if you own a property which you let out to tenants you can set any mortgage interest costs against tax due on rent received. The Budget red book states that this means that “the current tax system supports landlords over and above ordinary homeowners” and that it “puts investing in a rental property at an advantage”. This line of argument is plain wrong. Rental property is taxed more heavily than owner occupied property. There is a big problem in the property market making it difficult for young people to buy, and pushing up rents. The problem is a lack of supply. This change will not solve that problem.'
This is yet another argument in our armoury - that we are supported by this respected, independent body (which has also shown some of the other ideas to be odd and 'arithmetically impossible - seems like the Government doesn't know its 'a' from its 'e'.. No idea if the Government will respect this point of view though. What do people think?
Dr Rosalind Beck
9:24 AM, 16th July 2015, About 9 years ago
On the latest RLA's latest 'e-new digest' they have a survey to complete - only takes a minute - regarding the impact on us of the socalled 'tax relief' changes. I couldn't paste the link because I had just completed the survey and it wouldn't let me. Maybe someone more technically proficient can paste the link here - I'm pleased the RLA have set this up. We now have to support it. It might be as good as a petition - I'm not sure.
Mark Alexander - Founder of Property118
9:30 AM, 16th July 2015, About 9 years ago
Reply to the comment left by "Ros ." at "16/07/2015 - 09:24":
Hi Ros
Can you go back a page to where you found the link on the RLA website and post that please?
Alternatively, if you can open another browser, use a different PC or open an incognito window in Google Chrome you should be able to access the link again.
.
Dr Rosalind Beck
9:30 AM, 16th July 2015, About 9 years ago
(couldn't edit, so to continue)
Mark, would you be able to post a very brief article/note on this and set up a link to the RLA's survey and send it out as a stand-alone issue? That way the RLA would get a whole load of other people completing it. It is bound to strengthen their hand and hopefully help to get our message through to the Government.
Mark Alexander - Founder of Property118
9:39 AM, 16th July 2015, About 9 years ago
Reply to the comment left by "Ros ." at "16/07/2015 - 09:30":
Possibly, I'd like to complete the survey myself first though before making that decision
.