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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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Alistair Cooper
15:32 PM, 19th July 2015, About 9 years ago
Christopher/George
You may have a point on the 10% Wear & Tear allowance being considered as a Tax Break and that the holiday is now coming to an end, and there has been little objection to the loss of this relief so far on this forum.
How you can realistically argue that the removal of Mortgage Interest as a deduction from profit is the end of a cynical Tax Break to Landlords is however beyond me.
Reasonable landlords just want to be taxed fairly on the profits that they make; they do not on the whole operate like Amazon & Starbucks and 'hide' their profits abroad. Any other business or trade borrows money and pays interest in order to expand and improve that business; why should a landlord be treated any differently to say a hotel operator?
Why landlords deserved to be 'punished' for not having operated their businesses within a Ltd Co. and having the crystal ball to foresee these bizarre budget changes is equally beyond me.
You will not find any new lending available at anywhere near 0.5%, and lenders margins have increased dramatically since the record low interest rates; so the majority of landlords do not benefit from the low interest rates as much as you may think.
If Landlords make a genuine profit after deduction of expenses they should be taxed on that profit as in the same way as anyone on PAYE or running any other business. How can an annual tax charge of £50,000+ possibly be justified when a landlord has made a LOSS? (and this is a perfectly possibly scenario if these proposals are implemented).
I agree with you on releasing more Green belt land; that's the kind of proposal that may lead to more house building and a softening of increasing house prices.
Bankrupting innocent individuals into oblivion will do nothing to increase the supply of affordable housing, whether rented or owned.
Matt Cole
16:26 PM, 19th July 2015, About 9 years ago
Reply to the comment left by "George Stone" at "19/07/2015 - 13:45":
I can't really agree with your thoughts on building on green belt. The problem is not a housing shortage. Where I live there are a crazy amount of empty properties both for rent and for sale. Very affordable housing too. The problem is an over populated island not lack of housing. If only the government looked at helping to shift the current stock instead invest in the areas of most need, I'm sure we wouldn't be talking crazy about building on green belt.
18:22 PM, 19th July 2015, About 9 years ago
Everyone reading this should email their MP - especially their Conservative MP.
I've spent 12 years buying and renovating houses to bring them up to a decent standard - houses which would have remained empty if a landlord hadn't bought them. I do not believe I have stopped any first time buyer from buying their first home. We cater to the lower end of the market and provide what I believe to be decent homes to low income families, and reserve 15% of these properties for ex offenders and people with learning difficulties. Many have been in their homes for years. Bought at auction these properties are generally not mortgageable until they have had work done to them and often 25% of these properties remain unsold.
By all means, as Mark suggests, let the new regulations apply to properties purchased from 2017 or even 2016 onwards - at least then I can make an informed decision to buy or not based on the rules at the time. Changing the rules in the middle of the game is unjust - who will be the next target for retrospective tax changes?
Dr Rosalind Beck
18:55 PM, 19th July 2015, About 9 years ago
While I obviously would be relieved personally if the Government at least backtracked on this being retrospectively applied, I do think it will still be a really bad idea and kill any expansion of buy-to-let - apart from when people can buy houses outright. It will stop all new BTL lending though, I would think.
But it's really just an all-round awful idea. When it gets overturned (think positive), I wonder if heads will roll?
Chris Brown
11:26 AM, 20th July 2015, About 9 years ago
Like Mr Brady, I have been buying & renovating unmortgagegable properties - mainly because my former landlord had let his property become so dilapdated I was possibly the nly person to buy it at anywhere near the price he wanted.
Because I was then less than 10 years form retirement, I decided to buy on a repayment mortgage, and it was several years before we made a profit. along the way, it became obvious that governments of any persuasion were unable to control expenditure and would be looking for another source of taxation: and property owners are a very slow target. Surely you saw it coming, just as you must have seen the proerty bubble before the politicians admitted it?
As with Starbucks, Kraft-Cadbury & others, \\\\i would like to see a trunover tax on any business that avoids tax by structured indebtedness.
Mark Alexander - Founder of Property118
11:36 AM, 20th July 2015, About 9 years ago
Reply to the comment left by "Chris Brown" at "20/07/2015 - 11:26":
So basically you want to close down industry in the UK?
I think you may be better served emigrating to North Korea!
.
Badger
12:58 PM, 20th July 2015, About 9 years ago
Reply to the comment left by "Alistair Cooper" at "19/07/2015 - 15:32":
"why should a landlord be treated any differently to say a hotel operator?"
That's one of the best analogies I've seen so far.
Some hotels are even paid for / owned on a room by room basis where private individuals raise funds to purchase an individual room.
Stewart
16:56 PM, 21st July 2015, About 9 years ago
I went to see my accountant about the proposed changes and all he could say at his stage was that we should wait for the actual details of the proposals before making any plans.
The idea of removing the right to offset the costs of doing business against the income from business is clearly ludicrous. Is there any other business where you cannot deduct your fair and reasonable costs? I cannot think of one.
The fatuous line about private individual landlords getting an "unfair advantage" compared to owner-occupiers because they can deduct the cost of the revenue producing asset is hogwash.
All businesses can deduct, for example, heat and light bills, the cost of purchasing vehicles and the fuel they put in them, the cost of fixtures, fittings, stationery, uniforms and clothing for staff, training,business travel, accountancy and professional fees. And of course , their finance costs.
If the wretched Osborne wants to truly level the playing field then I suggest all businesses are asked to give up all their deductibles too.
I hope the NLA, RLA, Property 118 and any other Landlord organisations can work together to scupper these silly and dangerous proposals.
The providers of finance to private (buy-to-let) landlords must be looking with great alarm at these proposals. There must be thousands of Landlords who would be unable to continue in business if they were taxed on gross profit rather than net.
I wonder if these lenders can be brought into a campaign by the Landlord trade bodies? I wonder how we can all get involved too? Any suggestions?
Mark Alexander - Founder of Property118
17:11 PM, 21st July 2015, About 9 years ago
Reply to the comment left by "Stewart Jackson" at "21/07/2015 - 16:56":
I agree Stewart
The same arguments being made against landlords could also be applied to PCP and car leasing companies. They buy cars cheap and then rent them. Does this make it easier or more difficult to drive the car of our dreams? Why aren't the government disallowing the finance costs incurred by car leasing companies?
Same could be said about mortgage lenders. They borrow money cheap and lend it out at a higher price. Why do they escape these new tax laws?
.
Dr Rosalind Beck
18:40 PM, 21st July 2015, About 9 years ago
Reply to the comment left by "Mark Alexander" at "21/07/2015 - 17:11":
Another excellent point, Mark.
There are so many excellent ideas, arguments, calculations and so on, on this site, that it would be brilliant to get a thorough report together on it. I may do it, and ask for assistance along the way - maybe over the next few weeks.
I feel the pressure has eased slightly today - with the realisation not much can be done if MPs are on holiday etc., with the knowledge that the RLA and NLA are doing something and planning more; with the fact that the IFS has been at the Treasury meeting - I hope to God the subject of the landlord tax (yes, I wish I could patent the term - could make a fortune) is discussed, etc.
I've heard nothing from the DPS regarding them being willing to circulate an e-petition. I'm a lone wolf without contacts and connections... so I'm passively waiting for an email response. I have asked Adrian at the Guild of Residential Landlords if he has a connection, as we have had someone from the DPS come to the Guild meetings in the past. Maybe the RLA or NLA will start one though and then we can all share ideas of how to best circulate it.