Covid-19 Bounce Back loans for property businesses16:06 PM, 5th May 2020
About 3 weeks ago 46
Dear Mr Duncan Smith,
Thank you for your reasoned comments in the Sunday Telegraph on 18th June regarding the treatment of private landlords by the current government. I apologise for the length of this correspondence, however, the changes affecting landlords is so broad-ranging and complicated, I haven’t been able to condense it any further.
The instigation of a retrospective tax on mortgages already taken out and only applicable to encumbered landlords (exempting limited companies both foreign & national, housing associations, holiday lets, B&Bs and hotels) is already negatively impacting the Private Rented Sector. Many landlords are planning to increase rents, incorporate their property business to reduce the tax impact, or turning appropriate homes into serviced accommodation, taking them out of the residential rental market altogether.
To disallow finance costs as a legitimate expense for landlords, but no other category of business, is unjustifiable and unreasonable. As you know, it is standard accounting practise that one pays tax on the profit of a business ie income minus expenses. Private landlords will be the ONLY business sector in the UK which cannot deduct legitimate business expenses against their tax liability. Some landlords will face an effective tax in excess of 100% and will have no choice but to raise rents or sell up, increasing the demand on councils for social housing.
We currently pay tax on our profits and the mortgage lenders pay tax on the interest they receive from us so in effect, this is double taxation.
Is the Government aware that in every major European country, landlords are entitled to full tax relief on mortgage interest (listed in an LSE study) and many of these countries are reputed to have a better-functioning PRS than ours, and without landlord licensing. In Germany, landlords may also sell a property entirely free of CGT after 10 years.
By the Treasury’s own calculations, approximately 400,000 landlords will be affected but it has confirmed that it has no idea of how many properties and therefore tenants, will be affected. If each landlord only has 1.5 properties, housing 2.5 tenants in each, this will potentially impact 1.5 million tenants – a consequence that the government and Treasury continue to ignore. Some estimates are even higher at 2m – 4.6 million tenants. If David Miles is correct and landlords will be forced to raise rents by 20-30% to cover the tax implications of Section 24, how will those Just About Managing afford this? According to research by the anti-landlord organisation Shelter, more than a million households living in private rented accommodation are at risk of becoming homeless by 2020 because of rising rents, benefit freezes and a lack of social housing.
The government arguments that ‘the relief reduction being phased in over 4 years means landlords will have time to adjust their business’. This is not necessarily the case for many who are tied into mortgages of 5, 7 or 10 years, most of them with early redemption penalties. And what of those who are in negative equity?
The Bank of England was concerned about the potential problems in the housing market, but if 25% of landlords sell up and flood the market with tens of thousands of properties, would the resulting price crash not also be a concern?
Twice Ireland introduced a Buy to Let tax and both times it had to be repealed after it caused rents to increase by 50% in 3 years, and homelessness soared. Their tax only applied to new BTL purchases so did not affect existing landlords. I would like to know why the Treasury thinks that an even more draconian tax, levelled retroactively, will not produce the same (or worse) result here?
How can the Government say they are committed to improving home ownership and reducing rents while simultaneously introducing a tax that will only result in higher rental costs, and therefore making it harder for people to save for a deposit?
Tenants are facing significant rent rises and the changes to Universal Credit is making it more difficult for them to secure a rental property. Tenants on housing benefits are already being evicted as they cannot pay the increased rent. Landlords are exiting the market thereby reducing the availability of property to rent.
Working Example from The Telegraph:
Landlord pays 40% tax.
Landlord’s BTL earns £20,000 a year and the interest-only mortgage costs £13,000. Tax is due on the profit. You pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
From 2020 tax is due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.
You pay 40% tax on £20,000 (£8,000), less the 20% credit (20% of £13,000 = £2,600).
HMRC gets £5,400 and you get £1,600. Your tax bill has gone up by 93%.
This is a very reasonable scenario for a London landlord with just one property.
£20,000 income a year equates to £1,666pcm rent (Londonpropertywatch.co.uk states average price for 3 bedroom house in SW16 is £1,744pcm. £2,257 average 3 bed house in SW2 according to Zoopla).
£13,000 interest payment could be on one property with a mortgage of £350,000 paying an interest-only mortgage at 3.71% on a property valued at £466,000 (below the London average of £563,715 or £580,625 on Zoopla for SW2).
If mortgage interest payments go up by 1% by 2020 that would cost £16,485pa in interest and the landlord will pay HMRC £5,400 on a loss of £3,485.
So is this really only affecting the wealthy BTL landlords?
Recent changes that negatively impact the PRS:
Not a level playing field:
The Treasury Minister, Mel Stride MP, recently confirmed that landlords are taxed more than homeowners, noting that they pay tax on their rental income, extra Stamp Duty and Capital Gains Tax, unlike home owners, killing off assertions made by the former Chancellor, George Osborne, that tax rises on private landlords were about levelling the playing field with home owners.
To argue that S24 was to support first time buyers is disingenuous. The PRS don’t generally compete against FTB as we tend to buy slightly larger properties, create new residences through converting pubs and offices, and refurbishing ones that are in poor condition to bring them back into use.
Buy to Let mortgage are commercial loans, not personal. They are not regulated or protected by the FCA. The mortgage company dictates the terms of the mortgage including who can live in the property, how many, what types of tenants are permitted and under what conditions. BTL mortgages are more expensive than residential mortgages.
When the Chancellor compared landlords with owner-occupiers, he ignored that fact that for us it’s a business, not a residence. Corporate landlords and housing associations provide the same service we do, yet they are permitted to deduct their finance costs.
The government appears quite happy to create an unlevel playing field with initiatives such as Help to Buy schemes.
VAT can be reclaimed on goods and services in connection with the construction of a new dwelling when it is intended for owner occupation, but not when it is constructed to rent out.
The police do not view malicious damage to a rented property as criminal, they claim it is a civil matter, and will not prosecute the perpetrators, whereas they would prosecute for damage to an owner-occupied address. The Criminal Damage Act is very clear on the first page that any deliberate damage is criminal even if it is by you to your own property
“PRS provides sub-standard housing”:
Councils and registered social landlords are exempt from the health & safety regulations and licensing that apply to PRS landlords. The bedroom tax doesn’t apply to council houses, nor electrical certificates, hard-wired smoke/fire alarms, nor tenant packs etc, and yet council houses have taxpayer-subsidised rents. Why is it not a level playing field where regulations apply to all residential landlords regardless of their structure? Legislation should amended to remove this exemption forthwith.
Rented homes should be far safer than owner-occupied houses because landlords are obliged to provide lots of safety features that home owners aren’t. For instance, landlords must have gas appliances and flues tested at least once every 12 months and the tenant must be given a copy of the gas safety record to prove this has been done. Tenants must be provided with the EPC cert, How to Rent booklet and even appliance manuals by law in addition to Legionella Risk Assessments. All furniture and soft furnishings in rental properties must be fire retardant and landlords must provide working smoke alarms on every floor and a CO monitor, and make sure they are tested regularly. HMOs have even more onerous regulations to comply with. No home owners are required to do these.
Landlords are already legally obliged to provide safe, secure, hygienic accommodation — and if they don’t, councils have the powers to prosecute them. Punitive measures are in place against landlords. Councils like Durham prosecuted a landlord because she omitted to get a reference for a tenant.
A circular argument:
If the government wants more FTB to be able to afford to buy their own homes, with the need to raise rents to cover the new tax regime, it will take them even longer to save for a deposit.
Even if owner-occupiers buy a BTL property form a landlord forced to sell, it worsens the housing crisis as it removes that property from the rented sector, therefore rents go up more and people are forced into worse accommodations if they can’t afford a higher rent.
Shelter and other organisations have sometimes tried to blame landlords for homelessness, citing as evidence statistics about how the end of a private tenancy is the most common cause of homelessness. This is only because landlords are providing housing in the first place! However, research carried out by Simple Landlords Insurance found that Ministry of Justice figures reveal over half of repossessions in the first quarter of 2016 were in the social housing sector (57%), while just 15% of claims took place in privately rented homes. Also, the English Housing Survey found that 78% of tenants reported their last tenancy ended because they wanted to move. Only 1% of tenants said their landlord terminated their last tenancy.
A redistribution of current homes adds nothing to the housing stock. If landlords are forced into selling their portfolio, it doesn’t make more stock available. If individual landlords are forced to sell properties are likely to be bought by corporate landlords who have the finances available but are driven by the bottom line, not human or humanitarian instincts.
When the government released pension pots recently, a lot of people used them to invest in BTL, this potential infinite tax could wipe out people’s pensions or make them bankrupt, so what will happen when they need to retire? Will they be housed by their council? If so, where will the council find the stock?
The reduction of investor demand also reduces supply of ALL housing. If developers don’t have an investor income stream, they will build fewer properties and that means fewer homes, for everyone, including First time buyers and affordable homes created by larger developments.
PRS operating in a skewed industry:
Councils, Shelter & CAB have all been advising tenants to stay in properties until the bailiffs arrive which is illegal*, and incorrect. A council is not allowed to advise a tenant to stay in a property if they have breached the tenancy agreement. Councils argue that they can only re-house people when the tenant is homeless or threatened with homelessness. If the tenant has been issued with an eviction notice due to non-payment of rent or a breach, they have effectively made themselves homeless and are therefore not entitled to council accommodation, regardless of whether the bailiffs are called.
The government is introducing a national database of “rogue landlords and letting agents”. At present there is no central database for tenants where possession orders with money claims are registered, as the courts do not recognise possession claims with arrears as a County Court Judgement. If they did, this information would show up on tenant referencing. As it stands, a rogue tenant can move from property to property running up rent arrears and it does not show up on referencing unless the landlord goes to additional expense of trying to enforce the money order.
PRS Landlords are not money-grabbing fiends:
A new report from the National Audit Office has revealed that private sector rents have increased modestly, in line with earnings across England. But whilst the cost of renting in the private sector has largely followed changes in earnings, the figures show that rents in the social sector have increased faster than wages. The exception to this is in London, where rents are rising much faster as a consequence of the supply-demand imbalance in the capital.
These findings will surprise those who have falsely sought to argue that landlords are profiteering. So now the question is: why is the heavily subsidised social rented sector seeing its rents rising so much more than earnings?
According to Kent Reliance research, in the Capital the average cost, excluding mortgage costs and tax but including void periods, is £6,535 per property per year or 32% of the amount landlords receive in rent.
According to tax returns, two thirds of landlords equating to 1.9m people are Basic Rate tax payers and only 4% are Additional Rate tax payers so we are hardly “wealthy”.
When social housing was sold off under Right to Buy, it was not landlords who got the massive discounts, but social tenants, who often went on to sell these properties for massive, CGT-free profit.
My mortgage contract states that I must have a RICS surveyor value the rental potential of my property every year and we must raise the rent to the maximum the market can bear. I have fought this clause and have had a partial victory in that the lender will change this in future contracts but it still stands for existing borrowers like us!
Capping Deposits at one month (proposed):
Following the downturn, lenders were rapped for not managing risk properly. It’s surprising, therefore, that the same attitude isn’t taken towards landlords. Like all businesses, landlords price for risk. Higher deposits are a way for landlords to mitigate risk, which then influences the decision to let and the rent charged. If we cannot use our own judgement as to the reasonable amount of deposit to be held, rents will inevitably increase to compensate, or we will need to take more rent in advance. Other options to minimise our exposure to non-payment of rent or damage to our property might include making tenants take out insurance to cover their damage and to take out rent guarantee insurance, at a cost, if they can get it, but those who are most vulnerable are the least likely to pass referencing.
What about landlords who allow tenants with pets, as they take additional deposits to cover pet damage – will they ban pets? Research by Dogs Trust says 78% of tenants with pets have trouble finding a property to rent. The RSPCA and Cats Protection have voiced their concerns about removing private tenants’ flexibility to provide a higher deposit to cover the likes of pet damage.
Furthermore, some landlords take a higher deposit from tenants who have a poor credit history and they have been grateful for the opportunity to rent when others have turned them down.
It is estimated that around 40 per cent of deposits exceed one month’s rent. While capping them may reduce the move-in costs for some, it will increase the temptation for others to view the deposit as the last month’s rent, leaving landlords out of pocket at the end of the tenancy if, for example, the property has been damaged.
Deposits mean the tenants are invested in maintaining the property. If no damage, tenant gets full deposit refunded and the money is protected by DPS. There is mandatory arbitration for disputes at the end of the tenancy.
If landlords are unable to protect themselves by charging a higher deposit for tenants deemed high risk, they will stop letting to these tenants. They are not obligated to take on tenants with pets, for example, and, if there’s a risk that can’t be mitigated with a higher deposit thanks to new government rules, they’ll just stop letting to them altogether.
The PRS Is the solution, not the problem:
Shelter revealed in 2015 that a third of councils in England had not replaced a single home sold through the Right to Buy scheme since 2012, and in March this year it was revealed councils have been forced to pay more than £800m from Right to Buy sales to the Treasury over the past five years – money that could have been used to build more than 12,000 additional council properties.
From 1980 to 2013, 1.869 million council homes have been sold off (at a discount!) and replaced with only 1 for every 8 sold or even every 10 sold, depending which statistic you use. This has always been untenable. At least if Right to Buy schemes were scrapped now, councils could maintain the stocks they have, thus preventing the situation from further deteriorating.
Landlords have a strong track record of providing accommodation, being responsible for the creation of 2.5 million homes between the 1996 and 2013, which was 83% of the increase in dwellings over that period in England alone.
Private landlords often bring properties back into use, upgrade existing properties or extend the potential number of residents of a property, thus easing some of the housing crisis. If 100,000 landlords create one new property per year, this would be almost 50% of the government’s goal for additional housing per annum. Big build-to-rent developments take years to design, plan, implement infrastructure and build, and only supply a fraction of this number of accommodation per year. Bovis, for example, has a target of building 6,000 new houses a year.
If the responsibility for building houses is transferred into the corporate sector, profit becomes a driving force. Flooding an area with lots of new homes puts downward pressure on prices, which means builders and developers make less money per home so there is no incentive for big builders to create large numbers of homes.
According to the Treasury, there have been 45,000 affordable homes added to UK housing stock per year since 2010 which is nowhere near enough to alleviate the strain on those trying to find affordable homes to either rent or buy. The PRS has already provided three times this amount of new housing stock to the market.
Blaming and taxing BTL landlords is neither a long term nor short term solution to our housing crisis. The only real solution is to provide more housing, to which the PRS already contributes significantly. Would it not be more sensible for councils to joint venture with the PRS to bring buildings (back) into use in return for a set period of discounted rent to provide a low cost housing solution for councils?
If the government’s aim is really to get FTBs onto the property ladder, where the issue for them is raising the capital for the purchase and deposit, surely the simplest, fastest solution would be to cut or abolish SDLT for FTBs? On an average price 2 bedroom property in SW2 at £563,715 (Rightmove) this would save them £18,186 in up-front costs, surely much more effective than Help to Buy ISAs or FTB Guarantees?
Repeal the discriminatory s24 and the 8% CGT levy to encourage more PRS landlords to provide homes.
A thorough review should be held on the restrictions that mortgage companies place on landlords, such as preventing properties from being rented to LHA tenants, as HMOs, or stipulating the rents must be raised to the maximum amount supported by market conditions every year.
New builds pay a reduced level of VAT. If this were extended to those bringing disused properties back into the residential sector (whether for rent or sale) it would encourage smaller builders/developers to reinstate neglected housing stock, or create new stock. These properties would be un-mortgagable in their original condition so would create new stock that would otherwise not be available. The reduced tax take would be compensated by the increased activity in the market.
Curb or review council licensing of the PRS. Many landlords, especially in the north, only make about £100pm profit but have to pay in the region of £600-£800 for a license for each property. The license is justified as a way to ensure landlords are operating within regulations, so as a minimum, licenses should be per landlord, not per property.
Encourage or persuade mortgage companies to lend on non-standard constructions so that houses can be built more quickly using pre-fabs or steel frames, thus shortening the build timescale and costs dramatically.
Enable Universal Credit payments to be paid direct to landlords/agents so that landlords can ensure prompt, regular payments. And speed up the payments to UC recipients so that it no longer takes 8 weeks where they have to chose to pay their bills or eat.
SpareRoom, provided some research data which suggests that there are 20 million empty bedrooms in the UK and if just 5% were of them were rented out, there would not be a housing crisis. Perhaps there is room for the government to re-visit the tax free allowance of renting a room in a home to be per room, rather than per property.
Stop Right to Buy and keep social housing for those in need of social housing.
Where authorities claim they do not have funds to retro fit sprinkler systems and other Health & Safety measures, they could sell their properties at discounted prices to the PRS with stipulations to ensure full compliance with Fire regulations etc. And perhaps also agree a rent-back scheme.
Revisit the 3% SDLT surcharge for BTL which is stifling new purchases. For us to provide a home to a family it cost £21,600 in SDLT on top of all other costs.
Let councils keep the fines they get from breaches in Landlord Licensing to use to improve housing in their areas as currently it goes to the state which does not provide the council with an incentive to pursue rogue landlords through the courts. There will need to be protection/arbitration for landlords so that this doesn’t become a revenue-stream for councils.
Cap tenant fees, don’t ban them. Improve enforcement of letting agents having transparent fee structures.
Introduce a (mandatory) national register that identifies tenants with a history of non-payment of rent, vandalism and anti-social behaviour so we can avoid the nightmare situation of having a tenant who won’t pay or won’t leave.
Encourage and promote (or create a national) Tenant Reference Passport whereby they can get references done once, and use these for a duration of say 3 months, while looking for a home. This would mean they don’t have to pay for referencing for each property they try to get. (There are a few referencing companies already doing this).
Provide relief or incentives for landlords who bring their properties above the EPC rating of E, perhaps with VAT rebates for materials.
Improve the eviction process for tenants in breach of their agreements so that the process is streamlined and more efficient.
Some facts & figures:
Landlords’ costs have a huge impact on their tenants’ rents, and policymakers must therefore ensure that property investment remains an attractive proposition to all landlords, and not just institutional investors.
I sincerely hope that you will continue to use your influence to persuade the government and Treasury that S24 Finance Act #2 2015 “restriction of Mortgage Interest Relief” will cause considerable harm to our citizens, entrepreneurs and councils, and work towards a more positive, integrated approach to the PRS’s contribution to the solution of our housing crisis.
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