Should I sell or risk tenants buying at undervalue price?9:08 AM, 25th September 2019
About 4 weeks ago 48
A few days ago, a fellow landlord brought to my attention a new type of reply from the Treasury, which Property118 users can download Here. In response to this strengthened Treasury reaction, I typed the following for himself to reply back with and to fuel the responses of other landlords, should they themselves receive replies from the Treasury of this enhanced nature.
Dear Mr Irvin,
We cannot say with 100% certainty that every single landlord to be affected by Section 24 will own multiple rental properties because a) those landlords who are truly the wealthiest – mortgage free individual landlords and large corporates – are to be left totally unscathed by this regressive tax change, and b) the Treasury’s prediction of 1 in 5 landlords being affected by Section 24 is itself hotly disputed: a study by the Residential Landlords Association revealed a much larger 56% of respondents seeking to raise rents in reaction to Section 24, during the course of the next twelve months https://news.rla.org.uk/landlordsraisingrents/. Such a percentage, when applied to the 2.1 million population of individual landlords confirmed by the Treasury itself, entails Section 24 additionally hitting a significant proportion of rental providers owning just a single rental property. In this context, the point you raise regarding portfolio size and its relation to wealth poses only a minor mathematical caveat, and is still insufficient to present Section 24 as anything other for tenants than a source of increasing rents and evictions. It also does nothing to mitigate the events of the real world, unfolding right now during the course of this correspondence.
As has been stated once again on behalf of the Treasury, this time by yourself, the Government expects (in spite of the exemption of cash buyers) that the wealthiest individual landlords will be those rendered unable to deduct full finance costs from their tax liability. In the overwhelming majority of cases, a wealthy individual landlord will be an individual with multiple rental properties and multiple rental incomes. So while the total population of individual landlords owning multiple rental properties is not an absolute demographic of landlords impacted by Section 24, it still remains a) by far the most probable demographic of landlords to be impacted, and b) a demographic accounting for 1 in 5 individual landlords (400,000), strikingly similar in number to the affected population calculated by the Treasury.
The fundamental truth of Section 24 is that it increases tax liabilities by restricting the deductibility of mortgage payments – mortgage payments corresponding to rental properties. On the basis of the actual purpose for which Section 24 was designed, the obvious dominant source of this enlarged tax take will be a calculation based upon its payers’ mortgage payments. Therefore, it clearly stands to reason that landlords with greater total mortgage outgoings, corresponding to a greater number of rental properties, will be by far the most likely individuals to fall within the Treasury’s forecasted subset of 1 in 5 individual landlords.
For your benefit however, let’s come up with a best case scenario for the impact of Section 24 upon 1 in 5 individual landlords. Let’s imagine not only that 400,000 landlords do pay more tax as a result of this change, but also that by some miracle they all each own just one single rental property. Because according to the ONS, the average rental property in England and Wales is occupied by 2.3 tenants http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/rel/census/2011-census/detailed-characteristics-on-housing-for-local-authorities-in-england-and-wales/short-story-on-detailed-characteristics.html, this absolute best case version of the 1 in 5 landlords would still mean 920,000 tenants at risk of rent rises or eviction.
But it is because this best case scenario is utterly contradictory to the mechanism of Section 24, and therefore vastly improbable, that we cannot dwell upon its figure. After all, it is by taking the Treasury’s own number of private rental properties declared by individual landlords (3.7 million) and dividing it by the Treasury’s other own figure of declared private individual landlords (2.1 million) that we can calculate the average number of rental properties per individual landlord in the UK to be 1.76. A figure for tenants at risk of rent rises or eviction based upon this average would therefore be a very dangerous 1,619,200. Yet even this figure is an overly optimistic underestimate because, as the Treasury itself repeatedly states, Section 24 is intended to restrict the tax deductibility of the wealthiest individual landlords, not a 1 in 5 of average individual landlords. By definition of this admission the tenant count will be higher.
While questioning the underpinning of 4.6 million tenants being at risk of rent rises or evictions because of Section 24 (https://www.property118.com/new-landlord-tax-could-affect-tenants/83886/), you are also overlooking the fact that a survey by the RLA showed 56 per cent of landlords were facing the need to increase rents over the next 12 months to cope with the tax changes. Applying just the average number of properties per landlord (1.76) and average number of tenants per property (2.3) to this percentage of individual landlords produces a number of tenants at risk of rent rises or eviction of 4.76 million. With each study of landlords’ intentions and behaviour, both the Treasury’s 1 in 5 landlords and the 4.6 million tenants calculated from it appear as ever-greater underestimates of Section 24’s full impact.
But alas, these are no mere predictions for the future. They are explanations of a process of mass rent increases and evictions, taking place within the rental sector right now. To help convey this point, I have included twenty-seven written landlord testimonials at the foot of this e-mail.
The Treasury has also chosen to criticise the case studies of Dr Rosalind Beck’s report as “very rare cases” and “not representative of the circumstances of the majority of landlords”. Perhaps then, in addition to furnishing your team with further testimonials, I should draw your attention to the PDF document attached to this e-mail containing all 85 submissions of written evidence to the Finance Bill Committee. Of those submissions – ignored by the Finance Bill Committee as it railroaded through a tax change absent from the Conservative Party’s manifesto – Dr Beck’s case studies are representative of the overwhelming majority: Of the 85 written submissions to the Committee, 68 were against Section 24. Only 2 were in favour of the tax change, while the remaining 15 concerned other aspects of the Finance Bill. Does your department actually care about people losing their homes?
Through your reply, the Treasury has also demonstrated its profound ignorance, both of Ireland’s equivalent tax change and the respective severity of Section 24. You have incorrectly presumed Section 24 to be less severe by overlooking the following significant fact. The Irish government abolished tax relief for finance costs altogether for new purchases only: existing mortgage holders were still permitted to deduct full finance costs from their tax liability. This fact was confirmed by the Irish tax change’s prime architect, Peter Bacon, author of the Bacon report. Yet in spite of this compromise to decency and the welfare of tenants (one which the United Kingdom government has not made) Irish average rents still rose by 50% during the three years proceeding immediately from the change. As a result this law was repealed as of 1st January 2002. In 2009 the Irish government introduced an even more lenient 25% disallowance upon the deductibility of finance costs. Yet even this revised measure led to increased homelessness and the Irish government restoring the 100% tax deductibility of mortgage interest in its 2017 Budget http://www.telegraph.co.uk/investing/buy-to-let/irelands-scrapping-of-buy-to-let-tax-is-warning-to-britain/ .
Section 24 is a measure of far greater severity than its Irish equivalent because, unlike the Irish measure, its application will be retroactive. The Treasury has applied its criteria to the borrowing of all individual landlords, irrespective of the age of their mortgages. This means that many more landlords (and thus by definition many more tenants) will be impacted by Section 24 than as was the case with the non-retroactive Irish equivalent. It also means that the overwhelming majority of UK landlords affected by Section 24, will be people to have had the rug pulled from beneath their feet, due to having borrowed under a different set of tax conditions prior to the Government’s betrayal of them after the 2015 election; in the days when deemed taxable profit was actual net profit, as opposed to a perverse amalgamation of profit and business costs.
The “policy objective of levelling the playing field” to which your reply subsequently refers has been widely discredited. It was for example commented upon by Professor Phillip Booth of the Institute of Economic Affairs as “an elementary undergraduate public finance error that should not be made in the Treasury.” Given the exemption to corporate rental providers which Section 24 provides, and which you yourself have referred to, Section 24 achieves the complete opposite of “levelling the playing field.” Section 24 gifts corporate rental providers – a significant number of whom are noted donors to the Conservative Party – an artificial protectionist advantage over their smaller competitors, while doing so at the expense of millions of tenants.
In your concluding paragraph you invoke demand and supply as a dampening force upon the ability of landlords to increase rents in response to Section 24. Yet you do so without consideration of the following: a) landlords are already doing just that, as per their own testimony and that of local councils, b) what the determinants of demand and supply in the rental sector actually are, and c) that the equilibrium of demand and supply for rental property is in reality an argument against Section 24, not one in favour of it.
The demand for rental accommodation – along with the ability of the sector as a whole to sustain rising rents – is high and growing, due to the increasing mobility of the United Kingdom labour market, coupled with the country’s consistently growing population, fuelled by immigration and the generally higher birth rates of immigrant families. This upward pressure on prices will also be further exacerbated by those landlords worst hit by Section 24 choosing to evict their tenants and sell, thereby reducing the overall supply of rental properties. The forces of demand and supply are already primed for rents to rise in response to the proposal and implementation of Section 24.
Though Section 24 has already triggered the removal of rental property from the marketplace, it has not and will not dampen the real and substantial demand for rental accommodation, and thus the reason for landlords’ presence in the first place. Young workers yet to decide upon a long-term career/employer, temporary and transitory labour, migrant workers residing in the country on a temporary basis, divorcing/divorced adults, single parents balancing part-time work with childcare, people on benefits or low incomes due to illness, disability, drug/alcohol addiction, or various other sources of misfortune. For the millions of people for whom buying a home is non-viable and/or unaffordable (irrespective of the turns of the housing market) greater landlord taxation will simply equate to higher rents, reduced choice, an increased risk of eviction, and a more substantial dependence upon already over-subscribed social housing.
P.S. Below are the landlord testimonials I promised earlier…
From the Axe the Tenant Tax Facebook Page: https://www.facebook.com/clause24/posts/1287685751274426
John Saunders: “I have a tenant that has already moved on last month when I said the rent held for last two yrs will now start to go up. I have other long term tenants. ( 8 yrs plus) that will get the same news. There rent is calculated as full market. Minus 10 agent fees as I rent direct. Then minus £30 per month for being a good tenant. Not sure I can continue this discount as the tax per property will increase approx £2000 per year..They will loose out and so will I. As I can’t put rents up 20%. time to sell coming soon maybe. So that be my pension gone.”
Martin Pitick: “The tax was unannounced in their manifesto. Instead, we all attacked Miliband’s rent control pledge. My tenants pay the market rate on entry but receive no further increases (some for many years). They will all now receive massive rises in an attempt to offset the tax hike. The scary thing is that many landlords with a mix of employment and a couple of mortgaged BTLs will fall into higher rate tax which will leave them barely covering their own costs. By the time they find out what a toxic lump their mortgages are on their accounts everyone will be trying to sell and their will be a wealth transfer to the non-leveraged BTL players who will be only too happy to step in. It’s a very vindictive tax which has no effect on corporates or the rich BTL players. Given the difficulty I face and the plan I have to follow with my small portfolio I cant see how anyone with more than a handful of properties isn’t going to go to the wall and loose their pensions. You can’t just dispose overnight. The Conservatives will feel that in the marginals across the country from landlords and their tenants who will know why rents are increasing or their landlord is disposing.”
Colin Wright: “The majority of my tenants claim housing benefit. Some have been living in my houses for 10 years + and all are long standing with no top-ups asked for. I charge rent based on LHA. Rents are therefore well below market value. Several months ago I wrote to all tenants advising that rent increases are necessary and some houses will be sold. One family (who were in my house for 4 years) have already moved out and gone to live with family as they could not afford any increase at all. Another has asked for Notice hoping to be rehoused with council (good luck with that!). Some so far have agreed to a 15% rent increase which still falls below market rent value. Others have just phoned me in a panic. The vacated houses will be sold but with the capital gains tax at 28% are not going to clear mortgages of other houses. So in conclusion, people and being made homeless, others who already live on a shoe string budget are having to suffer higher rents and my pension plan is in jeopardy!
My thoughts on the Conservative party? I would rather not put into words!”
Lee Gough: “I have left the country. Increased rents and selling when vacant. Also would never vote Tory again.”
Chris Walters: “I own 39 properties full time management / repairs / Lettings etc by self and wife for last 14 years.
Owned first property 38 years!
Never increased rent to an existing tenant EVER!
Roughy 50% on some form of benefit due to limited employment contracts etc.
Longest serving tenant 9 years.
Some of my tenants are tradespeople who I provide some work for e.g. gardening / decorating / roofing.
My plan is to downsize at fastest rate possible to take into account Capital Gains Tax etc.
Always voted Conservative but will NEVER vote for them again.
Tenants told of the situation we are all facing and can’t believe what an ill thought out idea it is.
In total I provide housing for approx 70 people.
God help us all if this ridiculous Tax isn’t stopped.”
Andrew McDonagh: “Will increase rents, and have put on hold any more purchases.”
Amanda Walker-Fernley: “As tenants have handed their notice in we have converted to serviced accommodation and we’re making overpayments to reduce mortgages. Further down the line we will have to increase rents on the remainder which aren’t suitable for SA.”
Tim Donovan: “Will undoubtedly have to increase rents. Other small time landlords I know are looking into tax avoidance schemes. It would not surprise me if some are looking into tax evasion schemes, simply because the tax rules are unfair and stacked against small time investors. Good job Osborne, making it easier for rich cash buyers to get richer, while making the rest of us into struggling criminals.”
Colin Wicks: “I’ve been a landlord for 18 years without selling any of my properties in all that time. My rents are below market rate. So what happens from here on, well, my rents will go up, and I will sell some of my properties to reduce the tax take of section 24.”
Mark Alexander: “My wife and I have relocated to Malta to enable us to sell some of our properties and pay CGT only on increases in value since April 2015. We have sold three properties so far when tenants have moved out. We plan to serve Section 13 notices to several tenants in Feb 2017 to bring their rents in line with market values as of April 2017. We have only previously increased rents when tenants change. We will incorporate our rental property business partnership in April 2018 as that is the best timing for us. In our case we will be using our expat status to sell our properties to our own company as opposed to claiming Section 162 incorporation relief, as that is more beneficial to us due to CGT on latent gains that would otherwise have arisen. As our partnership will have been trading for three years as of April 2018 we will also qualify for SDLT relief at the point of incorporation under schedule 15 of the finance act 2003. To avoid the costs of refinancing we will transfer the beneficial interests in our business to our company using a Declaration of Trust designed specifically for this purpose by Cotswold Barristers. We sought QC’s opinion on this from Giles Goodfellow QC at Pump Tax chambers. He confirmed the structure is effective and will not affect the security of our mortgage lenders in any way. Cotswold Barristers checked our mortgage T&C’s to confirm we would not be in breach. As we now have the assurances of two barristers, who have put their professional credibility and PI insurance on the line, we are confident in our decisions. We now recommend people in a similar position to us to contact Cotswold Barristers. We do not receive commission from them as that is prohibited under Bar Council rules. My wife and I have also incorporated our Consultancy practice which specialises in property, finance, tax and law and will now remit our dividend income to Malta and pay only 5% tax. Screw the British Government, they forced us into this and they will now lose revenue as a result of it!”
Sam Jackson: “I have 36 properties and by year 4 will either have had to sell or go bankrupt as my tax liability will increase ten fold. My tenants have mostly been with me for five years plus and they love their homes I have not increased their rents. Their lives will be greatly affected as even if another landlord did buy my properties it’s likely the rent will go up and they won’t be able to afford the increases. So many people’s lives disrupted and affected over night by disgusting tax law that should not be made retrospective. I will not vote Conservative ever again I cannot believe they are allowing this to go forward I will be increasing rents and looking to sell. I have no choice but to do this, it is not something I want to do. The tenants I have told are devastated and worried and want to know who they can write to . I’m going to do a draft letter for all of them to sign and send and even provide them with the envelope as I believe our power here is through the tenants as they are the ones whose lives will be so badly affected.”
Phil McKuhen: “Very similar to same but with just 17 properties. I have no idea how to tell my tenants. I know they can’t pay more as 90% are dss, and have big top ups now. As I have said a quarter have care needs linked to there properties that have been adapted by social services. But at the end of the day I will have to downsize to protect the few I keep. Hopefully sell 10 and pay the mortgages off on the other 7. It’s so wrong to be putting people homes at risk because a new rule knackers business decisions I made over a decade ago.”
Paul Rawson: “10 properties. This is simple. If I can’t get the rents up to cover the tax change I will sell up. Can’t run at a loss.”
Lou Valdini: “Re-mortgaged with a view to buying more BTL, but as a direct result of a combination of changes to CGT and s.24, I have not invested, but sold one property in London (went to an older couple downsizing, not a first time buyer!). I’ve also removed another from the rental market altogether due to size of the mortgage v rental income, which shouldn’t make any sense whatsoever, except if I had continued renting, I would have ended up paying a huge amount of tax I am not paying today. Better to live there as my main home while I consider my options! What a ridiculous situation Osborne and Cameron have left the rental market in!”
David Meek: “Had several property refurbishments lined up which have just been cancelled which were intended for new tenants. Just finished our last one which now being sold instead. Regretfully had to issue an eviction to a tenant with many more in the pipeline.”
John Mcgowan: “We have already sent out letters telling our lovely tenants that we will be forced to increase our rents soon due to Clause 24 (Tenant tax) luckily our rents are all below the average market level at the moment but we will be reluctantly increasing them over the coming months. Furthermore we will be selling one property a year making people homeless out of necessity or be bankrupted. We won’t be buying anymore unless in a company wrapper. This Tory government is the worst one since the end of the second world war and we will never ever vote tory again unless they show contrition by reversing their unfair tax grab.”
Rob Lamb: “9 properties. Have give notice to all tenants to expect substantial increases in rents from early next year, solely due to the new tenant tax being introduced. If they wish to complain I have included a draft letter and the address of the chancellor and my local MP. This is a totally unfair and misguided tax.”
Tarun Bithal: “Came out of employment because PAYE earnings are not worth the effort due to the way Section 24 penalises BTL income, which unfortunately makes it pointless to earn in any other capacity due to the excessive tax burden.”
From Property118: https://www.property118.com/section-24-forced/92078/#comments
Carol Duckfield: “Tenants no longer enjoy level rents during my tenancies as has previously been the case
Reviewed rents in April increases of 2-11% introduced and accepted by tenants. On re-letting maximising returns one re-let with 22% increase and another going to be marketed at 40% increase. Looking to maximise returns by apply room rates rather than property as a whole so feel sorry for families as unikely to rent to them going forward”
Cautious Landlord: “Rents up minimum 10% already. No impact on quality tenant retention.
Annual rent reviews across the board for the first time ever.
Every void now treated as an opportunity to jack the rent up to the maximum.
No more below market value rents for long standing tenants.
All remaining DSS tenant rents (only 3 left) to be increased to maximum LHA until such time as convenient to evict to then get market rent from working people.
Restructure to reduce total tax burden to lower than that before section 24 (hopefully).
Never voting for Conservatives again.”
Michael Barnes: “I have sold one of four properties joint-owned with my wife to prevent our being pushed into the 40% tax bands; started my exit from the sector 5 years earlier than planned.
I stopped voting Tory because of their ‘Right to Buy’ policy. I (foolishly) voted Tory last time because I was worried that LibDems would form a coalition with Labour. It will be LibDems next time.”
Grumpy Doug: “All rents increased 5% last September and likewise for next September. The houses are all in great shape and below market values still so I’m hoping to achieve approx. 20 – 25% uplift by 2020.
Both my wife and I jacked in our other jobs last year and started our “retirement” 5+ years early. It wasn’t part of the plan but S24 forced our hands. The incremental tax hit would have been painful.
Won’t be selling or buying any time soon as we’re at the optimal point of income/costs.
Now paying CONSIDERABLY LESS TAX – well done George you plonker !!
Quite enjoying life and will wait and see what the current lot do before deciding on next steps.”
James Fraser: “Yep. Run-down houses aren’t getting developed. 10-year tenancies getting their first (substantial) rent rises. Considering evicting and selling the first two out of 20-odd properties, both housing single Mums. Another single mum facing rent difficulties with the new rises is also battling cancer. I would do ANYTHING not to hurt this person but if I don’t raise rent I have to sell. All my rents hugely BMV – won’t be any more! Also have to start giving up other work/incomes to deliberately derelict my wealth to mitigate tax. After 30 years as party member and campaigning for them, wont be voting Conservative again until this is repealed, and even then may never forgive them. Insanity prevails!”
DC: “My partner and I had 9 BTL properties, sold one in June, have a second one under offer. We have both given up our part-time jobs and will survive on my pension and the little income we derive from our rentals. We put rents up across the board last November where we were able and did so for the first time for tenants during their tenancies. We have just increased all rents where possible again this November.
Both of us have always voted Tory over past 36 years until the most recent local elections where we voted differently!! Unless the Tories do a u-turn on the Tenant Tax we will never vote Tory again.
Selling our main residential home and bought elsewhere in a much cheaper area. Been hit for the extra 3% Stamp Duty in the process so will see whether we will get the overpayment back in the next month or so when our sale completes.
This was not our plan and we wanted to grow our portfolio but it’s now all about survival.”
D D: “Due to fears around the potential impact for us of s24 we have started implimenting our exit strategy for our jointly owned properties a few years earlier than planned – and I will be selling one I own in my own name next because of tax advice received thus obliging the eviction of a long term tenant. I would I have kept this property til last due to the preferential mortage terms on it and the excellence, age and vulnerability of my current long term tenant were it not for s24”
Tricia Collick: “I have 4 properties, mostly small flats, my husband and I share another 3 and he has 1. (2 of which were formerly our prinipal residences,)
So even between us, we are not BIG landlords.
I am disabled and he is retired, so no income other than pensions and properties.
Even so, this unfair law may push us to sell up.
One mortgage is fixed for a number of years, so penalty clauses if I sell now !
I have £100,000 of losses to carry forward (from many years) so it won’t effect us immediately but gives us time to plan , unlike others who I feel badly for.
So much for the stupid people who think being a landlord is a way of making a huge profit, it is more a way of providing those less fortunate souls a home because the councils don’t.
Rents only ever increased before when tenants changed (so not often) but this will change now. We may slowly sell our small portfolio.
I will wait and see what Theresa Mays government do before I decide to change my voting habits away from the Tories, after all, this was conceived by Osborne taking advice from a very inexperienced source and they may even look at the Irish reversal of this stupid idea and decide against it (I live in hope) as they have their hands full with Brexit at the moment and I can’t contemplate what the stupid Labour party might do to the British economy).
Nevertheless , some damage has already been done to poor tenants with rent rises.”
Paul Trumper: “We now have 28 properties remaining in our portfolio having recently sold two with another 3 for sale. We have been landlords for 15 years with our longest tenants having been with us for 13 years. We go to great lengths to work with our tenants to ensure they are well looked after and that our properties are extremely well maintained. We have invested heavily and upgraded all our older properties with new heating systems, insulation, double glazing etc. and consider ourselves to be caring and responsible landlords.
As a result of these attacks on PRL our long term business plan is shot full of holes and meaningless. We have put in place an exit strategy which requires us to sell 14 properties over the next 2 to 3 years and pay off the mortgages on the remaining 14. Whilst this will have significant Capital Gains Tax implications it will leave the remaining properties unencumbered thereby negating the tax on mortgage interest,
The net result of the attack on PRL by George Osbourne is that all tenants are being provided with a copy of Axe the Tenant Tax article and 14 long standing families will lose their family homes.
Will I vote for the Conservatives again – NO never again. However whats the alternative given Labours attitude towards Private Residential Landlords!!!!!!”
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