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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
Related Open Letters >>> http://www.property118.com/category/open-letter-to-mp/
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Si G
11:43 AM, 1st August 2015, About 9 years ago
Hello David, suggest to sell the properties in poor condition requiring improvement will be expense to do this plus loss of rent and evictions but drastic action seems necessary dont think cgt can be avoided, government seems intent on stopping success in this country, look at the fiddling with the stamp duty, reduction in main residence allowance from three to one and a half years now this proposal. That leaves the main residence and land (for self build) as the only places to invest in without paying tax.
TheMaluka
12:21 PM, 1st August 2015, About 9 years ago
Reply to the comment left by "Simon " at "01/08/2015 - 11:43":
Simon I have had several investigations involving the Valuation Office Agency as a result of selling property to my sons. Aware of the HMRC ruling these transfers were always at the current market value and the Valuation Office always found in my favour.
If you use the ploy you suggested I feel you would be well advised to have a professional valuation before transferring to a limited company, worth it to avoid a lengthy investigation.
And beware for HMG may impose punitive taxes on property owned by limited companies in the next budget - just after we have all paid the CGT to transfer‽ Oh I temporarily forgot they already have imposed an annual tax on enveloped dwellings‽
Has anyone noticed that the latest budget plus the freeing of pensions has all been aimed at collecting tax now rather than in the future (in the future as well in many cases)?
Si G
12:39 PM, 1st August 2015, About 9 years ago
Reply to the comment left by "David Price" at "01/08/2015 - 12:21":
David, you know far more than i do on these matters, best as you say to move cautiously as the tax change will be phased in, should keep the lawyers and accountants busy hence even more vat and tax for the government ! Keep it simple buy build and sell tax free you even get the vat back ! (dont tell George tho)
Mark Alexander - Founder of Property118
10:46 AM, 4th August 2015, About 9 years ago
100 years ago 90% of homes were rented.
Laws changed the dynamics until the 1988 Act was introduced, at which time 90% owned.
The UK PRS currently provides homes to around 18% of all households. We have a long way to go before the UK provides the same levels of job mobility through a robust PRS.
Government is wrecking that.
They are also destroying the opportunity to end the housing crisis.
More new homes need to be developed. Further investment is required, not less.
.
Manchester Landlord
11:57 AM, 10th August 2015, About 9 years ago
Letter to MP's in Manchester:
Dear Greater Manchester Conservative MP’s,
Firstly, thank you for taking the time to read my letter, as I’m sure you will no doubt have many issues to deal with.
I and many of my colleagues would like your help in reversing the proposal to ‘restrict tax relief on profits for individual landlords’ which was brought forward in the summer budget. Whilst it is a nice sound bite to appease the left, it is in fact an attack on the very fundamentals of doing business. I and many other landlords went into the property business because it is a business. We operate within the rules and provide much needed accommodation for people who either do not want to buy or cannot buy their own home. I personally house many vulnerable tenants throughout Manchester; including victims of domestic abuse, ex-convicts, ex-substance abusers, and families in the very poorest parts of Manchester.
I bought all of my properties on an individual basis as opposed to a limited company structure. I am now being told that I have to pay tax on my turnover instead of my profit. Please see examples of before and after the tax changes for my personal situation:
Before tax changes:
£150,000 Turnover
£50,000 General Expenses (maintenance, advertising, repairs, voids, fees etc)
£50,000 Interest on finance
£50,000 Profit
£9,500 Tax (approx.)
After tax changes:
£150,000 Turnover
£50,000 General Expenses
£100,000 Profit
£29,500 Tax (approx..)
Less £10,000 basic rate allowance
£19,500 Tax (approx..)
As you can see these changes effectively double the amount of tax that I will have to pay. This is before interest rates rise. If base rate were to go up by 2% I would only be making a profit in real terms of £17,500, but I would still be required to pay tax of £13,000! That is an effective tax rate of 75%.
The effect of this will be bankruptcies amongst normal hardworking people who have done the right thing by investing for their future – but more than that, you will see less people willing to house vulnerable groups, higher rental prices due to higher tax taxation, and lower quality rental stock because there will be less money for improvements.
This is not only unfair, but is morally wrong and completely misguided at best, it is not right to sever the link between turnover less expenses equals profit, and I implore you all to show representation against this change before it is too late.
Petition to Parliament https://petition.parliament.uk/petitions/104880
I have been a Conservative voter my whole life, as have many of my friends, and I can assure you that this one policy alone has completely alienated us from the party.
I am happy to meet at any time to discuss in more details and present alternatives to you.
Best regards,
Neil Allen
Luke P
8:28 AM, 11th August 2015, About 9 years ago
So today is 'Bring-Your-MP-to-Work Day' for me. I'll let you know how we got on...
Luke P
10:35 AM, 11th August 2015, About 9 years ago
So you have one hour to send me suggestions for a question to put to my local MP. If you have anything specific on the tax relief removal issue that you want an answer to that an individual MP might reasonably be able to give, let me know and I will ask it.
Appalled Landlord
10:56 AM, 11th August 2015, About 9 years ago
Reply to the comment left by "Luke P" at "11/08/2015 - 10:35":
Hi Luke
I would start by telling him what the change means, that we will be the only businesses in the UK which will not be allowed to deduct our biggest cost before arriving at taxable profit, so we will be paying a levy on finance costs which will be passed on to tenants.
I would ask him to go to: http://saynotogeorge.co.uk/landlords/, and look at the effect this change will have on tenants, landlords, the housing market, and all the other categories under the tab “How This affects You” and then the rest of the website..
Good luck!
Si G
11:26 AM, 11th August 2015, About 9 years ago
Reply to the comment left by "Luke P" at "11/08/2015 - 10:35":
Luke, can you ask your MP why the government sold off the public housing stock at a discount and now proposes to extend the sell off to LHA tenants ?
Appalled Landlord
8:46 AM, 12th August 2015, About 9 years ago
Reply to the comment left by "Luke P" at "11/08/2015 - 10:35":
Hi Luke
How did the meeting with your MP go yesterday?