Standard and Poor’s predicts landlords to make net loss after S24

by Property 118

3 months ago

Standard and Poor’s predicts landlords to make net loss after S24

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Standard and Poor’s predicts landlords to make net loss after S24

A Standard and Poor’s (S&P) Global report into the effects of Section 24 mortgage interest relief restrictions is predicting over 60% of landlords who purchase property between 2014 and 2016 will make a net loss on those properties by the time the restrictions are fully applied in 2021.

However, S&P only predicted 4% of landlords with property purchase between 2002 to 2016 would make an overall net loss, but that overall profits would be reduced by a fifth.

The report predicts: “If rents cannot be increased 60.4% of the loans originated in 2014, 2015 and 2016 will become loss making by the time the tax changes become fully effective. This figure rises to 62.5% of loans for those buying in the South East and London over this period.”

S&P say landlords face a perfect storm of increased regulation, reduced tax relief and the potential of interest rate rises.

There is also concerned that Section 24 will make landlords even more susceptible to interest rate rises. S&P assess that if the Bank Base Rate were to increase by 1% in 2021 then 6.8% of BTL property would make a net loss and if the rate increased by 2% this figure would rise to 17.8% loss making properties.

Alastair Bigley, credit analyst for S&P said: “The proportions of loss making loans will increase as the tax system becomes less generous between now and 2021.

“We view a fire sale scenario, where large amounts of BTL property is placed for sale, which in turn could affect the wider housing market quickly and disproportionately, as unlikely.

“We believe the phased introduction of the full impact of changes in income tax treatments will give borrowers time to adjust their strategies to the new landscape.”

Comments

money manager

3 months ago

"There is also concerned that". Why the "concern", it's obvious to anyone with more brain cells than a gnat which does of course excuse Osbourne, Gaulke and a few others.

Appalled Landlord

3 months ago

Mr Bigley seems to have swallowed the Treasury propaganda from the era of Osborne and Gauke. The tax system was not generous, it just followed generally accepted accounting principles. S 24 is not a reduction in generosity, it is a departure from GAAP.

Furthermore, applying it to loans on properties purchased years or even decades previously is a departure from normal grandfathering procedure.

Martin Roberts

3 months ago

Obviously no business can run at a loss for long, so rent increases and/or Section 21 notices to leave.

More proof that all landlords are wicked monsters.

I'm all for calling it the 'Tenant Tax'.

Maybe not exactly on the subject but...
Tax return without applying 10% wear & tear was already much higher. We increased the rent in May 2017. This year we have to increase again... I doubt one can do it without limits..

Appalled Landlord

3 months ago

The report is called “Buy-To-Letdown? Recent RMBS Loans Will Struggle With The Perfect Storm Of Regulation And Tax Hikes”: https://www.capitaliq.com/CIQDotNet/CreditResearch/RenderArticle.aspx?articleId=1984365&SctArtId=447150&from=CM&nsl_code=LIME&sourceObjectId=10392033&sourceRevId=1&fee_ind=N&exp_date=20280124-16:27:35

I have sent the following email to the authors

Dear Mr Bigley

The errors in the report make me concerned about the accuracy of its results.

Firstly, you state in the overview that “The new tax regime will make BTL viability highly sensitive to rate rises. By 2021 only 80 pence of any £1 of interest cost suffered by investors in servicing a loan will be tax-deductible.”

I have never seen this claim before, although I have seen people write the reverse - that 80% of finance costs are going to be disallowed in the UK., based on a misunderstanding of the 20% tax credit.

(Whoever wrote your overview may have been thinking of Ireland where only 75% of finance costs were allowed between 2009 and last year. Due to the resulting increase in homelessness, the Irish government started to phase deductibility back in again last April at an additional 5% each year, making it currently 80%. Coincidentally it was last April when the UK government started to phase deductibility out at 25% a year, so the increase in homelessness here will be much more dramatic.)

In fact none of the mortgage interest will be tax-deductible in the UK by 2021. Tax will be calculated on rent receipts minus those costs that will continue to be allowed such as agents’ commission, repairs and maintenance etc. This net figure will be added to the landlord’s other income and tax will be calculated on the total. Then a credit of up to 20% of the finance costs will be deducted from the calculated tax to find the amount payable.

Your example follows this calculation but still contains an error. I don’t mean the wrong figure used in the calculation of the £1,000 loss, or the “financing allowance of 20% of the rental income” instead 20% of the finance costs. I mean that you have deducted too much. The interest exceeds the deemed profit so the “relief” is restricted to 20% of the latter, or £1,800; the rental loss will be £2,800. Are you aware of the rules for calculating the relief?

This example uses the higher tax rate of 40%. Have you included landlords who are paying 45% - or 60% as they lose the personal allowance?

Your conclusion is that only 4% of BTL loans will give rise to after-tax rental losses by 2021, although they include more than 60% of loans taken out between 2014 and 2016.

But a property does not need to become loss-making after tax to force a sale. I know people who will pay tax of 83% and 93%, respectively, of the real profit from their portfolios in 2021. The former has no other source of income. What have you included for people like that who will be made bankrupt by HMRC and have their properties re-possessed because they will neither be able to pay tax on fictional profit, nor sell the properties for more than the value of their loans?

The first paragraph of the overview ends with “The proportions of loss-making loans will increase as the tax system becomes less generous between now and 2021”

You seem to have assimilated Treasury propaganda from the era of Osborne and Gauke.
The tax system was not generous, it just followed generally accepted accounting principles, as with any other enterprise in the country.. Section 24 of the Finance (No. 2) act 2015 is not a reduction in generosity, it is a departure from GAAP.

Furthermore, applying it to loans on properties purchased years or even decades previously is a departure from the normal grandfathering procedure..

Finally, your report starts with the phrase “The so-called "war on buy-to-let" . I have not seen the various tax attacks described as a war before but, as with any war, the damage they will cause people is incalculable.

Kind regards

Old Mrs Landlord

3 months ago

Reply to the comment left by Appalled Landlord at 26/01/2018 - 19:50Excellent critique of the report Mr, Appalled, let's hope the authors take it on board and revise their figures. I also note no mention has been made of landlords who have refinanced and withdrawn equity to purchase other properties. Although of course no calculation is possible as individual cases differ, the impact of the tax changes will be exacerbated for landlords in this position.

Appalled Landlord

3 months ago

Reply to the comment left by Old Mrs Landlord at 27/01/2018 - 10:30
Thanks OML
The prestigious Financial Times has an article on the report under the headline ‘Sixty per cent of older buy-to-let loans will become loss making’ in inverted commas as if it had been copied from the report. In fact it is the exact opposite of what the report said. You can’t believe anything you read these days.
https://www.ft.com/content/d80a8176-0112-11e8-9650-9c0ad2d7c5b5

Old Mrs Landlord

3 months ago

I think you are right, AL, they either haven't read the report properly or are simply careless. Furthermore, the "older" loans referred to turn out to be from 2014-2016, while what I would think of as older, pre-2008 loans are said to be OK. As someone castigated at school as innumerate, even I can see the glaring inaccuracies promulgated. The press these days seems to be nothing but a vehicle for naked propaganda rather than proper investigative journalism and you are wise not to take any of it as truth.


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