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

Appalled Landlord

0:49 AM, 17th July 2015, About 9 years ago

Reply to the comment left by "Mark Alexander" at "16/07/2015 - 17:29":

Hi Mark

This is excellent. I would emphasise in the first paragraph that this “tax relief”/ levy will only apply to landlords who bought property in their own names.

Maybe we should preface it with an Executive Summary. This is something that busy executives ask for so that they can decide whether it is worthwhile to read a long letter. For example:

Landlords who bought in their own names will pay tax on their interest expense, rather than on real income.

You are changing the rules for people who bought 20 years ago or more.

Rental property is not an investment like gold bars. Being a landlord entails work. They are on call 24/7, 365, to deal with problems. For some it is a full-time job
maintaining their properties and dealing with tenants and agents.

Under the proposals, if they make a loss but have a mortgage they will pay tax on the interest. If they have no other source of income HMRC, a branch of the government, will make them bankrupt. The result will be divorce, murder-suicide, and an increased burden on the state. The lenders will lose money.

Landlords who bought in their own names will exit the sector on masse, causing a house price crash.

They will not start companies to buy the new-builds, so fewer homes will be built, fewer sites will be developed, so less affordable housing will be built.

For both reasons the amount of rented accommodation will fall, reducing the mobility of labour both within the country and from outside, and the rents in the remaining properties will rise.

The IFS says the measure is wrong.

Please reconsider.

Dr Rosalind Beck

15:20 PM, 17th July 2015, About 9 years ago

Hi Appalled Landlord. Thanks for complimenting my letter.
We are not aiming to have one template though. If I were you, I would put the points you have just made into bullet form in a letter to George Osborne and get it off today. We can always send him more letters if we think of things we've left out.

9:11 AM, 18th July 2015, About 9 years ago

Rental prices in some areas are already 50% of disposable income , limiting or removing deductible expenses ( incl the mortgage interest burden ) will affect the landlord business model and underlying economics ..... rentals will have to increase , tenants encouraged to move to more affordable areas ... all inconveniences will become ongoing due to the ripple effect of price within the property market .... An extremely short sighted set of policies , again ( unless all landlords can use the McDonalds model - separate operating from owning - owning company pushes in the head office costs then gets the cash out if the operating unit , cash goes to overseas bank accounts ) Go back to school Mr Chancellor .

Suggestion : property118 to run a Facebook call to quantify the magnitude of this issue in the UK

Matt Cole

12:11 PM, 18th July 2015, About 9 years ago

Dear all, I'm hoping this is the right area but I'm extremely worried for me and my family regarding the changes the conservatives have recently imposed. I'm one of the groups of people who have fallen into property ownership by cicumstance and not as a business. I'm not a financial guy and get by in ignorance mainly loosing money as I have just realised by not claiming a penny for wear and tear etc. My scenario is this:

My wife and I both work and have two children. About 5 years ago we moved out of our 2 bed terraced when more space was required due to the second child. We could not sell the property so decided to rent. Mortgage is currently on a BTL and provides accommodation to a council tenant on benefits. The mortgage just about breaks even. We claim for nothing and actally pay HRMC £90 a year from an adjustment on our tax code.

The property we are currently in is for sale as we have found our resting place home, or at least until the kids leave. Again, due to the area we live in houses are not selling but are renting. Within two days we have found tenants and they are due to move in next month. We have the mortgage secured to purchase the new property and all seemed good...until I started reading comments on here regarding the budget. I have a contacted my current mortgage provider and they have agreed to a consent to let for 6 months, then they introduce an extra 1% interest taking it to 4.99%. My plan is to swap to a BTL once the tenants are in to hopefully have the rental income cover the mortgage and insurance costs.

We get £435 pcm from one and will get £550 from our current property. My job pushes me into the 40% tax bracket, the wife hardly earns anything.

I really don't understand where we are going to be with all these changes, I doubt I can lift the rents to cover any increase in costs due to the areas the houses are locates (north east and still poverty stricken).

All I want it to provide quality property until we retire and either sell or pass to the kids. Am I likely to go bankrupt or is there nothing to worry about?

Dr Rosalind Beck

13:46 PM, 18th July 2015, About 9 years ago

There was an article yesterday on the front page of The Metro, about the rising rents and, in a matter of fact way, linking this to the Government's measure on 'tax relief.' Apart from the link being 'just plain wrong' according to the IFS, I would like to point out that rents do not constitute that high a proportion of many of my tenants' incomes. It is not unusual for individual tenants to pay £250 per month (for a room in a shared house) and earn in excess of £1,000pm, sometimes in excess of £1,500. I think London rents must be skewing all of this and then being used as a justification for a nationwide attack on landlords. (I'm trying to remember my maths - the mean median and mode - sometimes one is far more accurate than the other, as I recall - and we also have to leave out 'outliers' - anyone good at Maths here, could maybe elaborate/correct me on this and let us know which would be the average rent to use...) It's the usual lies, lies and damn statistics.

George Stone

13:49 PM, 18th July 2015, About 9 years ago

Reply to the comment left by "Appalled Landlord" at "17/07/2015 - 00:49":

@Appalled Landlord:

Well the good news is that you have 3 years until these changes take place. Ample time to let your tenancies expire and to sell up if it's really that much of a burden on you.

The gravy train has called at its last station. You had a good run.

Christopher Power

15:29 PM, 18th July 2015, About 9 years ago

Interesting discussion.

I am not sure if it is constructive to frame this debate as different sides.

The housing market was different in 2003 compared to 2010 and you would be feeling different had you got into the market at each time. But there is still no 'sides' between those two periods. The environment is just different. Like oil producers in 1980 vs 1990s. In one case you're laughing and the other you're not.

In my opinion, if you're running your portfolio through a company (as there are benefits to doing so) you would not have this problem.

You should be calculating profitability ratios. If you are not profitable without the tax benefits, then you are ultimately not profitable. The tax relief is a sweetener and a government tax break to promote behaviour, not something to base your business on. We only have to look at history to see all the subsidised businesses that dropped when the sweetener was pulled out. Such as pension funds dividend tax credits or solar panel subsidies.

I think option 2 is the most palatable otherwise it will take too long for the behaviour to change.

Calculate your underlying profit without tax breaks! If you calculate your profit with tax breaks, then you are basically like a farmer who believes his crop will never be damaged by a storm.

Hope this helps

TheMaluka

16:50 PM, 18th July 2015, About 9 years ago

Reply to the comment left by "Ros ." at "18/07/2015 - 13:46":

I am indebted to Aaron Levenstein for my favourite quote on the subject "Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.” and if I may paraphrase the oft quoted remark about statistics usually accredited to Benjamin Disraeli, "There are four kinds of lies: lies, damned lies, statistics and government figures". (The reader should note that the latter is particularly relevant to the results of the Universal Credit trials.)

On a technical note, in a set of numerical values:-

Mean is the average value (add up all values in the set then divide by number of items in the set)

Median is the middle value in the set which should be ordered numerically

Mode is the value in the set which occurs most frequently. If no number is repeated then there is no mode value.

Now you should be profoundly confused so I will give an example:-

1, 1, 1, 1, 2, 3, 7, 8, 9

Mean = Sum(1, 1, 1, 1, 2, 3 ,7, 8, 9) / 9 = 3.667
Median = 5
Mode = 1

I will leave range for another day!

Mark Alexander - Founder of Property118

17:17 PM, 18th July 2015, About 9 years ago

Reply to the comment left by "David Price" at "18/07/2015 - 16:50":

Thank you David, every day is a school day for me here at Property118 😉
.

Appalled Landlord

17:33 PM, 18th July 2015, About 9 years ago

Reply to the comment left by "David Price" at "18/07/2015 - 16:50":

Where does the 5 come?

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