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

Dr Rosalind Beck

18:19 PM, 18th July 2015, About 9 years ago

Please sir, I think the median is 2.
Thanks David. In fact, I was being falsely modest and I do know the meaning of the mean, median and mode. I'm wondering more whether the mean - which I imagine is used when calculating average rents - is the right one. But I think the real problem is that London could be seen as an outlier. That'll rile everyone who thinks London is the centre of the universe - it isn't if you don't live there. Leave London out and then work it out, is what I say.
Anyway, it's probably a red herring in the context of not letting us claim all our finance costs anymore. Because the Government should have to prove a causal link between these two issues, backed up by extensive research to prove that the measure would bring down rents/enable first time buyers to buy. I must have blinked as I've not seen this robust evidence presented.
I've just pasted my latest draft letter on the other thread - summer budget 2015 - landlords' reactions - because a lot more people are reading that one!

TheMaluka

18:24 PM, 18th July 2015, About 9 years ago

Reply to the comment left by "Ros ." at "18/07/2015 - 18:19":

Woops sorry you are correct, I put the firth number in the set rather than the value of the fifth number. I claim a "senior moment".

Jay James

19:15 PM, 18th July 2015, About 9 years ago

Median is simply the middle value. Where there are two middle values, the mid point of those two is the median.

BigMc

10:26 AM, 19th July 2015, About 9 years ago

Some small Compensation? The Chancellor can probably justify this on the basis that income tax is a tax on income and not profit. However, Capital Gains Tax can only be on a gain, so presumably all the extra 20% interest which is not being allowed against income tax must surely be allowable against capital gains.
Not what any of us would prefer, I'm sure but better than nothing..
I am not a tax specialist and would welcome comments from any in the forum.

Appalled Landlord

12:51 PM, 19th July 2015, About 9 years ago

Reply to the comment left by "George Stone" at "18/07/2015 - 13:49":

Hi George

No need to ask which camp you are in. But think about this: without us there would be fewer homes in the country today, and the housing crisis would be worse than it is. Therefore, due to supply and demand, rents would be higher than they are today.

It was the commitment of BTL investors who bought off-plan who enabled developers to build many of the hundreds of thousands of new flats and houses on brownfield sites since the millennium.

We did not take existing properties away from first-time buyers (FTB’s). On the contrary, we facilitated the construction of new homes. Some of these were bought by owner occupiers who thereby freed up other properties in selling chains which ultimately allowed FTB’s to get a foot on the ladder.

In addition, in order to get planning permission developers had to build affordable housing on the same sites for housing associations.

If BTL landlords had not made this commitment, developers would not have sold
so many properties, or so quickly. Therefore they would not have been able to develop so many sites before the recession started in 2007.

Appalled Landlord

13:04 PM, 19th July 2015, About 9 years ago

Reply to the comment left by "Christopher Power" at "18/07/2015 - 15:29":

Hi Christopher

Interest is not a tax break. It is a cost of our business, just the same as for any other form of enterprise in the country.

Appalled Landlord

13:13 PM, 19th July 2015, About 9 years ago

Reply to the comment left by "Mike McDonagh" at "19/07/2015 - 10:26":

Hi Mike

This punitive levy is designed to drive us out of the business. The government will not be trying to soften the impact in any way.

George Stone

13:45 PM, 19th July 2015, About 9 years ago

Reply to the comment left by "Appalled Landlord" at "19/07/2015 - 12:51":

But supply is being artificially limited as well.

The councils and government are limiting what land can be built on, and what can be built there. So when the properties do come on the market it's BTLers snapping them up because they can pay more than a FTBer due to the disparity between rents (also artificially inflated by housing allowance) and mortgage costs (also artificially kept low by low base rate)..

I doubt it's any coincidence that all these government schemes seem to prop up property prices. 1/4th of all MP's are Landlords.

The government has a vested interest in keeping house prices as high as possible, and I'm glad to finally see a chancellor tackle part of the problem.

Should be nice to finally get some housing stock aimed at actual people and not investors looking for an alternative pension.

No if only the Tories would open up some of the green belt. That'd really get things going.

Dr Rosalind Beck

13:58 PM, 19th July 2015, About 9 years ago

Reply to the comment left by "Mike McDonagh" at "19/07/2015 - 10:26":

Hi Mike.
I think you may have had a brilliant idea there. I'm not sure - maybe someone with more experience in the field can either support or question your idea. It might even be a brainwave! The more people who think laterally about this, the better. (NB. even if your idea is not workable, it could lead to something else springing to mind)
Obviously, we don't want it to go that far, but we could get leverage against the Government, if we could negate our need to pay CGT because all that extra tax we pay on the cost of the interest payments can somehow later be offset against CGT. My brain isn't very good at this kind of thing though, so maybe someone brainier can work on it?

Appalled Landlord

14:36 PM, 19th July 2015, About 9 years ago

Reply to the comment left by "George Stone" at "19/07/2015 - 13:45":

Hi George

I have made the point I wished to make. You are clearly not affected by the Budget announcement, so I am not going to engage in a debate with you, or give an opinion on the merit of your posting.

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