Property118 campaign team demolish Treasury’s ill-conceived arguments

Property118 campaign team demolish Treasury’s ill-conceived arguments

8:29 AM, 10th April 2017, About 5 years ago 45

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Please read the Treasury letter below and then our response:

Correspondence & Enquiry Unit

1 Horse Guards Road

London

SW1A 2HQ

Public.enquiries@hmtreasury.gsi.gov.uk

Dr Rosalind Beck
April 2017
     Our reference: TO2017/06948
Dear Dr Beck

 Thank you for your correspondence dated 23 February to the Minister of State for Housing, Planning and London about the changes to the taxation of landlords. As it is not practical for Ministers to respond to all the letters they receive, I have been asked to reply on their behalf.

I am aware that you have received several letters from HM Treasury officials and Ministers on the restriction of finance costs tax relief for landlords, and I am afraid I cannot add much more to the previous responses as the Government’s position on the policy remains unchanged. However, I will try to address the further specific points you have made.

You highlight the impact of the change on landlords in the case studies within the report. While I cannot comment on individual’s tax obligations, the ‘Plymouth Portfolio’ and ‘Pension Portfolio’ examples used in the report would be extremely rare cases and, based on the analysis done by HM Revenue and Customs (HMRC), are far from representative of the impact of the changes on the vast majority of landlords.

While some commentators and survey results based on the change have estimated the impact of the changes, the conclusion that only 1 in 5 landlords will be affected is based on simulations on actual self-assessment and property income data, modelling the impact of the new rules on real data. The Government is therefore confident that this is the most accurate estimation of the impact.

As pointed out in previous correspondence, given this statistic, only a small proportion of the housing market is expected to be affected. Therefore, the Government does not expect there to be a significant impact on rent levels or house prices. The Office for Budget Responsibility (OBR) also expect the impact on the housing market will be small. Taking account of this and other measures at Summer Budget 2015, the OBR did not adjust their forecast for house prices.

It is important to be aware that, while changes to taxation will typically result in some hard cases, the estimation that only 1 in 5 landlords will pay more tax as a result of this measure is not a justification for the change; it is an estimation of the impacts. The previous responses to you have set out the rationale for the change including to reduce the advantage landlords have in the property market compared to homeowners, who receive no income tax relief on their finance costs, and to reduce the distortion between investment in property and investment in other assets, where income tax relief for finance costs is also not given.

In the letter to you dated 8 February, it was explained that, as property income is derived from a landlord’s interest in the land, rather from the services they provide, property income is considered to be an investment, rather than a trade, for tax purposes. For this reason, property income is not taxed in the same way as income from a trade.

With regards to the Chancellor’s comments to your colleague. I can assure you that he fully understands this policy, including the impacts on landlords and the wider housing market.

Thank you for taking the time to make us aware of your further concerns. We will keep this policy under review, as we do with all tax policy.

Yours sincerely,

Nicholas Irvin

Personal Taxation

HM Treasury

 

Property118 team response below:

To whom it may concern.

We are replying to your email to Dr Rosalind Beck dated 6th of April 2017. We would appreciate it if you would follow the numbering in your reply so that we can be sure you have answered all of the points and not accidentally missed any out. These are very important matters for the providers of rented housing in the UK.  As such the questions need to be answered in full by the Treasury in the interests of accountability for the Treasury’s actions against the private rented sector:

  1. If you are so confident only 1 in 5 landlords are affected, please explain if you disagree that this means approximately 425,000 landlords. Do you consider this number insignificant? (Incidentally, independent AXA research has estimated 40% of landlords will be affected)
  1. Why do you find it acceptable to destroy the finances of between half and a million people?
  1. You say you are not trying to justify Section 24 by repeatedly quoting the figure of ‘1 in 5’ (Jane Ellison and Gavin Barwell also do this) and that you only quote this as it is an estimate. However, logically, the only reason you would quote it would be to suggest that a ‘small proportion’ is affected and so this does not matter. It constitutes an attempt at trivialising its importance; if you believed 4 in 5 were affected you would not be quoting this; although ironically, it is likely that this is the proportion of tenants likely to be affected.  I would also add, on a philosophical level, that even if only one person were affected by a disproportionate, outrageously unfair policy contrary to the rules of natural justice, that would in itself be an abomination. So I don’t see at all why the idea of only 20% of a large group of people being affected should prove so reassuring to yourselves. Since when would it be a moral defence?
  1. Can you also clarify if it is still the Government’s position that tenants are not an impacted group, as they were entirely omitted in the Impact Statement?
  1. Does your 1 in 5 statistic derive from including landlords with and without mortgages? If you have carried out the appropriate research since the policy was announced by the former Chancellor (clearly there was no time beforehand as it was rushed in without preparation or consultation) you will also know the exact number of properties owned by those affected landlords, as listed in the relevant tax returns.That would help you come to your own assessment of the number of likely affected tenants. The Government’s current official position on this remains that zero tenants will be affected. Our estimate, based on an indepth analysis indicates the figure to be close to 4.6 million. Which do you think is the most accurate and how do you come to this conclusion?
  1. Based on your own estimate of 1 in 5 landlords (if you are still sticking to that), can you please share with us the modelling and research used by the Government to calculate how many tenants are now either facing steep rent rises or eviction, assuming that you have updated your analyses?  Many eminent organisations and individuals are now pointing to the obvious fact that rents must rise to pay for this tax levy on the PRS, so we would like to know what assessment the Treasury has made of rent rises especially (as these will in many cases lead to eviction when the tenants do not have the means to pay).
  1.   In terms of the case studies in Dr Rosalind Beck’s report, what is the Treasury’s definition of ‘extremely rare’ and on what do you base this assessment? The NLA estimates that more than 140,000 landlords will move from being basic rate payers to being higher rate payers with no actual increase in their taxable profit. This doesn’t strike us as fitting in with the ‘extremely rare’ label. It also contradicts The Government’s policy to try and take people OUT of being in the higher rate.
  1. The AXA study revealed that 21 per cent of landlords said they plan to sell all their rental properties, 10 per cent will reduce their portfolio, and 7 per cent will switch to commercial property ownership, which is perceived as a safer option. In all, around 46% of private landlords are considering a complete withdrawal from the buy-to-let market or will at least sell some of their properties by 2020. As the PRS contracts because of this and as landlords are now obviously increasing rents wherever they can in order to get ready for paying tax on fictitious profit (money that they do not have, as it has been paid to the lender) how does the Government think this will affect the homelessness situation and the finances of local Government? Will homelessness rise or fall?  Will what happened in Peterborough where 74 families were evicted so that their homes could be used as hostels for ‘the homeless’ become the norm?  What economic analysis and projections has the Treasury made with respect to the costs of ‘temporary accommodation?’
  1. Given that local authorities are now saying homelessness and ‘temporary accommodation’ is rocketing as landlords sell up as a result of the new tax regime of taxing costs instead of just profit, please explain where these people are going to live. Is the Government now categorically stating that there is sufficient social housing for it to not matter if thousands of landlords who provide this kind of housing go bust and/or sell to owner-occupiers – despite there being a mismatch between the two? You will be aware that private landlords have, over the last two decades plugged the gap left by successive Governments following the policy of selling off public stock and not replacing it. So are you saying that this ‘social’ type housing within the private sector can now be got rid of? The local authorities are saying something VERY different; they desperately need this rental housing.
  1. As being a landlord is clearly a full time job for many landlords, requiring physical work and an ever-growing adherence to strict regulations (even including border enforcement duties now) why are you saying that running these businesses providing rented housing do not constitute being engaged in a trade? Why do you refuse to recognise full-time professional home providers as a trade? How would you describe the activity?
  1. Why are you convinced the TWO failed Irish examples won’t be repeated here? We would like evidence please, not the usual unresearched assertions without evidence.
  1. We found your arguments about landlords’ income being derived from an interest in land very confusing. The interest in the land MAY produce a capital gain (although not necessarily – many houses in South Wales for example, have not gone up at all in value in 10 years and some will be in negative equity), but the income accrues from providing accommodation, not from owning land (which in itself does not provide any income).  Also, all trading business has as its aim the provision of goods or services for which people pay a charge. Renting out property is no different (whether it is done by an unincorporated landlord, an institution, comes from a holiday let, having lodgers and so on).

Also, many, if not most, rental properties are leasehold flats. The landlords who let them do not own the land.  Such landlords have no interest in the land. Their income is derived from the tenants’ willingness to pay to occupy the building.

This demonstrates the absurdity of your claim that:  “property income is derived from a landlord’s interest in the land, rather from the services they provide”.

In addition, every business in the country uses buildings that stand on land.  But you do not claim that their income is derived from their interest in the land, do you?

You further state that “For this reason, property income is not taxed in the same way as income from a trade.”  This is not true.  HMRC’s manual states that: “The profits of a rental business are calculated in the same way as the profits of a trade.”  http://www.hmrc.gov.uk/Manuals/pimmanual/PIM1103.htm  This has been the case since April 1999.

  1.  Independent reports have shown that landlords do not compete with first time buyers (the types of houses required are mostly very different with little overlap) and it is clear that providing a housing service to others is very different to simply living in your own home. Your conflation of the two is equivalent to saying that car rental companies have no right to claim finance costs as an expense of doing business because private car buyers can’t. Do you believe what you call the ‘restriction of finance cost relief’ should be extended to car hire companies (or any companies that hire out anything)? If not, why not?
  1. The Rugg Report of 2008 made it clear that tenant satisfaction levels amongst tenants of ‘individual’ landlords and those in ‘institutional’ lets are broadly the same. The same report recommended that individual landlords be incentivised and encouraged to extend their portfolios to help alleviate the housing shortage. Why is the Government following the diametric opposite path of trying to wipe out as much of this by far more important section of the PRS whilst feting the institutions; who on the whole charge far higher rents, do not serve tenants in any better way and certainly will not get involved in the lower end of the market where individual landlords’ work is hugely important.
  1. Since bodies and individuals such as Paul Johnson of the IFS, Professor Philip Booth of the iea, the Institute of Chartered Accountants of England and Wales, the Policy Exchange, the Council of Mortgage Lenders, Professor David Miles and Dame Kate Barker (not an exhaustive list) are highly critical of Section 24, have said it is ‘plain wrong,’ doesn’t make sense,’ ‘overturns centuries old principles of taxation’ and so on, whose research has the Government used that is superior to theirs? Why are these esteemed economic bodies and individuals so wrong on this when the Government thinks they’re so right on everything else and therefore seeks their views at Treasury Select Committees?
  1. The OBR was set up by George Osborne, who appointed three of his friends to the top positions in it. Are we to then happily assume that these people are impartial and independent? I think not.  Quoting them is therefore irrelevant as they lack all credibility.

As we say, we would appreciate your answering these points, sticking to our numbering. You wouldn’t like to be accused of evading any particular point as it might then be deduced that you have no rational answer to it.

As we are not politicians or game players and thankfully don’t have to engage in the outright dishonesty we observe emanating from the political system of which you are a part (this is not honourable work), we will add that this outrageous policy against the PRS – attacking landlords and tenants equally – with landlords certainly not just taking the hit, as the Treasury implies – will be overturned at some point, so it would be better for all concerned if it were sooner rather than later.

We therefore urge you to pass this correspondence up to the highest level and inform us regarding to whom you have referred it.  This is a matter of such national importance that it should be being dealt with at the highest level, rather than the powers that be sitting back and waiting to see how bad it gets before they act.

We also respectfully suggest that now is the time that we landlords had an audience at the Treasury – that is the least that should happen – so perhaps you can also pass this on as a formal request from the landlords at Property118 to meet with the Chancellor?

 

Yours faithfully.

Dr Rosalind Beck, Councillor James Fraser, Mark Alexander (Founder of the Landlords Union), John McKay, Chris Cooper and Dr David Price.

 

 



Comments

by Gromit

11:20 AM, 10th April 2017, About 5 years ago

Reply to the comment left by "Neil Arnold" at "10/04/2017 - 10:22":

@Neil

Your absolutely right and these points have been put, by Landlords, to their local MPs, even the Chancellor and PM. All of the Tory MPs toe the Treasury line in every respect, Labour MPs are anti Landlord - period. The prefer not to "rock the boat" and believe George Osborne's sophistry and the specious Treasury rhetoric. They'll even deny that there is any similarity with the outcome of similar measures in Ireland in 1998-2001 and 2009-present day).

Charities like Shelter and Crisis are anti-Landlords as well (irrespective of the impact that s.24 will have on the people they are supposedly trying to help).

As I've said elsewhere the Government will repeal s.24 but instead of taking the easy route and repealing it now, it is taking the hard route and will repeal in a few years time (regrettably though it won't be until a massive amount of pain & misery is inflicted on Tenants and Landlords, and homelessness has gone stratospheric).

by JohnCaversham

11:31 AM, 10th April 2017, About 5 years ago

Reply to the comment left by "Tobias Nightingale" at "10/04/2017 - 11:15":

I agree, I see here in Reading large blocks of commercially owned build to rent blocks going up with 15plus flats each unit...Very nice very swish but very expensive with rental cost per sqmeter far in excess of privately rented stock.
Also though, I do get concerned at the number of new build mostly flats being targeted directly at the private landlord-I get many emails from agents aiming directly at the prs, I can't help but think that we're not doing ourselves any favours buying such properties at the cost of ftb in the current anti landlord climate...

by Laura Delow

11:49 AM, 10th April 2017, About 5 years ago

If this is reversed, what I believe is far more worrying is if Landlords are treated as a trading business & not an investment (that could be all thanks to our point in argument), and as a result Class 4 NIC is levied. See one of many links on this subject:- https://ion.icaew.com/taxfaculty/b/weblog/posts/propertylettingandnationalinsurance
Even worse is if Section 24 is not reversed but our having argued so strongly that we should be treated as a trade for tax purposes, that Class 4 NIC is introduced on top of Secion 24 (9% on profits between £8060 & £43,000 & 2% in excess of this 2016/17)
An additional concern I have is the hidden threat of a land or property value tax about which there are many articles published by economists who are in favour of this.
If I were in Government I would look to play the long game & introduce a tax to intentionally illicit argument from those effected, content of which I'd hoped from day 1 would result in them they hanging themselves. Our very arguments could be our downfall.

by Rachel Hodge

11:58 AM, 10th April 2017, About 5 years ago

Reply to the comment left by "Laura Delow" at "10/04/2017 - 11:49":

Which is why we should be concentrating on the effect S24 is going to have on tenants, not LLs.

by Tobias Nightingale

12:06 PM, 10th April 2017, About 5 years ago

Reply to the comment left by "John Maynard" at "10/04/2017 - 11:31":

Another thing that you/others may not know is many (at least 50%) of these new builds are built so poorly they will almost certainly collapse within 25 years or possibly even earlier,. Think the powers that may be do not know? Think again it would classic case of short term 'unintended consequences' which to my mind next to all of them are actually deliberate.

by Michael Fickling

12:08 PM, 10th April 2017, About 5 years ago

The governments responders might need to be reminded ..yet again that we pay capital gains tax..private home owning occupiers do not..therefore comparing the two is ridiculous....as they do..without taking that into account. Also on the nonsense theyve touted about buy to let not being a business...their faulty rationale should then also be applied to commercial buildings such as offices etc. plainly it isnt. I also think we need to keep hammering the point that this is a tax levied on a cost not on any form of income and is therefore. a complete reversal of all previous income tax and income accounting rationales. Whilst income tax legislation has been used to introduce and enforce it...it is actually not an income tax at all..( being based on a cost ).but something completely different..( actually a levy upon finance costs already incurred )....and as such represents a misuse and departure from all previous use of income tax law. Given that departure from normality and also deviance from reasonable revenue raising principles I still suspect there is a legal challenge route there ....somewhere.

by Tobias Nightingale

12:17 PM, 10th April 2017, About 5 years ago

Reply to the comment left by "Laura Delow" at "10/04/2017 - 11:49":

I disagree about the NIC's being a worry, a bigger worry is the idea of a 'investment income' surcharge of 15% like some on the left have proposed. and Unlike NIC's which drop to 2% above £40k ish they are adamant it would stick at 15% so above 40k would in effect be 55% and £150k 65%. They normally cite such a tax existed before 1985, only difference back then the 15% extra only applied to income over (by memory) £7k which is a lot more than today and the omit to mention that but go on to state unearned income above £2k or sometimes marginly more should be levied with the surchage. Deceptive absolutely.

I doubt they will do a land value tax, because it would bring in lots of money and in my mind the whole 'austerity' cutting deficit etc is about cutting it slowly as possible so future generations can told about its regretable previous generations did not deal with the debt, but deep breath we will and so from hense forth the basic rate of tax will be 40% and 40% rate will be 60% etc etc. All by design in my view.

by Laura Delow

15:36 PM, 10th April 2017, About 5 years ago

Reply to the comment left by "Tobias Nightingale" at "10/04/2017 - 12:17":

There's very little chatter on the www. re Investment Income Surcharge (IIS) yet with regards Class 4 on property income there's loads & mounting commentary on land value tax (LVT). This doesn't mean to say IIS wouldn't resurface at some point in the future, but the commentary on the other 2 taxes is current and becoming more rife by the day. We are therefore playing in to the government's hands re Class 4 with regards our argument of "treat us as any other trading business" & we need to change tactics. Re LVT aka property/wealth tax, we are one of few if not the only country on the continent that doesn't tax land/property ownership with tenants/residents paying a consumption tax aka council tax.

by Paul Green

16:30 PM, 10th April 2017, About 5 years ago

It's not the politicians you have to convince, it the citezens of the UK. Any political u turn comes from grass root individuals and organisations that already know of the indignation. As Ghandi said you can only change policy, if the public recognise the wrong. You have to start with public opinion, which means bringing on board the wider public, not just landlords and tenants. Otherwise your just talking to yourselves and it becomes a cult. You have to tap in to a sentiment that is already there, in this case unjust taxation laws, one rule for one (individuals) & one for another (corporations). You have to start from the consciousness of the British people, unfortunately they have been propagandised, by the media. Theres also no political willingness to change direction. You never see the BBC's daily politics show, question time, Andrew Neil on Sunday or news-night, commentating on this issue because it's not on their agenda. Its never be on prime time BBC news at 1pm 6pm or 10 pm. It's hidden from view. Politics is not about enlightenment of the people, it's to quicken the Conscienceless of the public to get them to act on what they already know is wrong. Please watch Professor Norman Finklestein interview, link below on you tube. Regarding mass movements, Ghandi and how to change policy. https://youtu.be/oooSpzJT1cU

by Tobias Nightingale

19:03 PM, 10th April 2017, About 5 years ago

Reply to the comment left by "Laura Delow" at "10/04/2017 - 15:36":

For your information very few countries have 'wealth taxes' India which did have got rid of theirs last year, Norway still does but has no estate duty AND 'investment income' is taxed their at about 28 od % compared with rates upto about 50% on earned. . I imagine if they did do a LVT there would be huge pressure from the right wing newspapers to cut taxes massively so would not necessarily be bad. As for one of the few countries that does not have a lvt (I am aware down under does) but we are one of the few countries that have estate duty (oz does not for starters) uk has close to highest as well so would be preasure to abolish that in tandem) As for the investment income idea Richard murphy (said to be guy behind corbynomics) has mooted in several times in last year and owen smith (guy who lost to corbyn) mooted it).


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