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

Barry Fitzpatrick

11:11 AM, 24th July 2015, About 9 years ago

This proposal is a quite obviously a political choice and not one based on sound financial logic, as a sop to the intense lobbying that "Generation Rent" and "Shelter" have been making over the last couple of years. And also to the supporters of the Green Party whose policy was to eliminate tax relief on finance costs totally.

I have my doubts therefore that a financial argument will gain much traction. Unfortunately the Government hasn't the guts to stand up to these lobbying groups and tell them their ideas are nonsense, and will hurt the very people they are supposedly trying to support. It could a case of "we tried it your way and now look what has happened". Hence limiting the change to private Landlords who are in higher tax brackets (as damage limitation), there are a lot of accidental Landlords who have high salaries from their jobs who will probably get out because of this as well.

Bit of a conspiracy theory I know, but it does answer a lot of questions.

Luke P

13:34 PM, 24th July 2015, About 9 years ago

I forgot to mention yesterday that my local Conservative MP has received and read my letter and is coming to my office on 11th August to discuss...will report back after then.

Mark Alexander - Founder of Property118

13:36 PM, 24th July 2015, About 9 years ago

Reply to the comment left by "Luke P" at "24/07/2015 - 13:34":

Well done Luke. Other than a telephone call from my MP's office to acknowledge my letter I've heard nothing 🙁
.

Luke P

13:53 PM, 24th July 2015, About 9 years ago

Do you think I should perhaps point him in direction of this thread or maybe it's best we keep this for 'open' discussing amongst us landlords only (not that he couldn't access it anyway, although unlikely he'd find this exact thread amongst the whole internet)?

Mark Alexander - Founder of Property118

13:58 PM, 24th July 2015, About 9 years ago

Reply to the comment left by "Luke P" at "24/07/2015 - 13:53":

I doubt he will have time to read forums - make things simple for him, see >>> http://www.property118.com/new-landlord-tax-rules-for-new-debt-only/76750/
.

Si G

17:45 PM, 29th July 2015, About 9 years ago

Ha Ha Ha ! you voted them in - Tories turn on their own - the landlords who bought all the flats in Maggies council house sell off obviously a trap ! its a rat trap and youve been caught, fat cats get a real job should be lots of cheap flats flooding the market soon, ftb's interested ? great now we (the banks) can get them up to their eyeballs in debt. Nothing ever changes and its soo predictable just think all your hard (did i say hard ? ) earned profits going to your tenants via tax credits i mean, you coundnt make this stuff up ? ssssh ! dont tell the government the main residence is tax free sssh !

Dr Rosalind Beck

18:12 PM, 29th July 2015, About 9 years ago

Reply to the comment left by "Simon " at "29/07/2015 - 17:45":

I suggest you keep out of it. You don't know what you're talking about. Troll.
You may hate landlords, but you have to understand that if we go down, we'll be taking a lot of people with us.
You sound nasty and vindictive. No empathy. If HMRC said to you, 'Excuse me. I know you've only got £10,000 in income coming in this year, but we're going to make you pay £30,000,' you'd be outraged, incandescent. Some people lack the ability to empathise - narcissists particularly suffer from this affliction. Do you agree that that is a good description of you?

Si G

12:22 PM, 30th July 2015, About 9 years ago

Hello Ros, that's a bit harsh please don't take my comments personally I didn't mean to offend honestly ! I always say it like it is and you are right it's grossly unfair on landlords, it's a British thing and it's called "punish success, punish those who're making money" I was tongue in cheek when I said landlords are fat cats, but that is how they're portrayed by the media. I am a property manager have been in the business for twenty years so I know what I am talking about. This matter is a complete shambles who are the Tories pampering for votes to are there any FTB's out there ? By the way Ros this is a forum for debate so if you don't like what I write that's tough !

Si G

11:26 AM, 1st August 2015, About 9 years ago

Reply to the comment left by "Appalled Landlord" at "13/07/2015 - 16:42":

Appalled Landlord take solace i have found a solution -
Tip 1: sell you b2lets into a ltd (at undervalue) to minimise cgt, costs count as expenses
Tip 2: ltd will pay 18% tax, in future problem solved
Where else can you get free advice like this ?
And the worry was over and all the landlords and their tenants lived happily ever after.

TheMaluka

11:36 AM, 1st August 2015, About 9 years ago

Reply to the comment left by "Simon " at "01/08/2015 - 11:26":

Except that as connected parties the individual and the Ltd company will be charged tax on the current price of the property.

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