Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "Ros ." at "22/07/2015 - 08:48":

Re OECD BEPS Action 4 - to clarify, I should have used the word limit.

The lack of limit to interest/debt cost deducted from tax in the UK is an issue, where unlimited interest/debt can be deducted from income to result in little or no tax.
If interest/debt costs were, EG, only 15% of turnover, then it would likely be 100% tax deductible in most countries. If it was 150% of turnover, then it may not all be tax deductible.

So the lack of a limit on the amount/ratio of interest/debt UK allows to be deducted may be an issue.

Countries which already have fixed ratio rules include Germany, Italy, Norway, Portugal and Spain with a limit of 30% of taxable EBITDA and France with 25%.

BEPS' main target is to identify legal loopholes that allow excessive legal tax avoidance and to try to establish some sort of international tax standards.

BEPS itself is targeting large, and/or international and/or group companies, as some legally move group costs about to lower tax jurisdictions ("price transfers") but Action 4 has highlighted the lack of limit on interest/debt costs deduction in the UK.

Important for smaller companies - the discussion draft considers "whether countries should be able to introduce a threshold or exception to exclude small entities from the new rules".

So, BEPS is not targeted at small companies - but there is a chance it may open Pandora's box related to unlimited interest/debt cost tax deduction in the UK, so it may be something to be aware of.

If interested, google:
OECD and BEPS and "Action 4"

Reply to the comment left by "Vero streetflat" at "22/07/2015 - 10:55":

Good points Vero. Osborne’s new proposed measure is specifically targeting landlords who are (1) non-incorporated and (2) involved in the residential sector (as opposed to all sectors). If he had said what we are proposing is to change mortgage interest relief to be restricted to 70% or 75% as in France, Germany or Spain then it would be more understandable.

Dear Mr Osborne,

Further to your announcement on 8th Of July 2015 in which you stipulated that from April 2017 you will no longer allow buy to let landlords to deduct mortgage interest from rental profits (gross rent) instead you will restrict this to basic rate.

I believe there are fundamental issues with this announcement namely, someone currently in basic rate tax bracket could be pushed into higher rate of tax based on gross income which was effectively an expense.

Old Rule Example:

£35000 (employment income).

£70000 Rental Income

£20000 ( Repairs, management charges, improvements).

£50000 (interest payments)

Result: No income from property received therefore no tax due and I have lived off my income from employment income.

New Rule Example: (Assuming 2020).

£35000. (employment income taxed at source).

£70000 Rental Income.

£20000 (Repairs, management charges, improvements).

Therefore my income from £35000 has now risen to £85000 despite the fact I have made no profits whatsoever. As such I would be required to pay the tax which as follows:

Tax on additional £50000 (gross rental) first £15000 taxed @ 20% = £3000. I have added £15000 at the top of aforementioned salary to maximise my basic rate threshold. (in 2020)

Remaining £35000 taxed @ 40% = £14000. Therefore total tax £17000. I will then claim 20% tax relief at 20% of £50000 = £10000.

Therefore my final liability in this example would lead me to pay £7000 tax. (£17000 - £10000 basic rate tax relief) considering I have made no profits at all, as such I would be expected to pay from my own net disposable income where I have already paid a tax. I feel that such measure would be grossly unfair and this certainly does not create "level playing field" between first time buyers and buy to let owners for following reasons:

Owner occupiers are currently not paying any Capital Gains Tax when the dispose of their property, nor are they taking any risks by taking buy to let property which comes with number of responsibilities namely, Referencing New Tenants, Gas Safety checks, EPC, Deposit Protection,Rental Arrears, Mortgage Payments to Lender regardless of whether tenant paid or not, Tax Returns, Repairs and dealing with day to day queries/problems with tenants.

In a nutshell, Buy To Let is a business like any other therefore tax treatment should be same as any other business. I am sure that you are aware that, Buy To Let landlords have been main supporters for your party and have hugely contributed to "Conservative'S Victory"

The Institute for Fiscal Studies quoted your own words …..

“The Budget red book states that this means that “the current tax system supports landlords over and above ordinary homeowners” and that it “puts investing in a rental property at an advantage”.
In response the IFS stated ….

“This line of argument is plain wrong. Rental property is taxed more heavily than owner occupied property. There is a big problem in the property market making it difficult for young people to buy, and pushing up rents. The problem is a lack of supply. This change will not solve that problem”

Over the last two decades the development of new housing stock has been heavily supported through buy-to-let landlord purchases. Disincentivising buy-to-let investment will have a knock on effect to the development of social and low cost housing, which runs in tandem with most new developments.

Given that so many buy-to-let landlords will end up paying more tax than they are making in profit and that CGT is likely to render them insolvent if they sell up; how will this impact the banks balance sheets? At the moment the arrears book on BTL lending is comparatively strong against other forms of secured debt such as homeowner mortgages. The new taxation policy is likely to have a significant negative impact on this. The makings of a potentially banking crisis?

I can appreciate it might prove difficult for you to do U turn on your already announced forthcoming taxation due to political repercussions however you could take following measures to reduce drastic impact :

1) New Taxation applied only to new debt from April 2017.

2) Transfer of existing buy to let properties into Ltd Company without any tax detriment.

3) Introduce CGT rollover for residential investment property in order to allow landlords with large portfolios to roll their assets into a corporate structure.

I am sure, you will give this matter a considerable attention prior to transpiring it into fully blown legislation and I would urge that,travesty of justice is overturned.

Yours Sincerely

Well said and beautifully illustrated Gentle Landlord. Well done..

Reply to the comment left by "Gentle Landlord" at "22/07/2015 - 13:06":

Very good letter.

Please also post on http://www.property118.com/emails-to-george-osborne-chancellor-of-the-exchequer/76666/
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Some of comments and phrases I picked up from this forum in above posting. I particularly like hard work from Ros.

I have spoken to Simon Lever and he is very knowledgeable accountant...please do not hammer Ltd companies at this stage as this may draw Mr Osborne's attention to this sector as he may single out Buy To Let Landlords who are in fact holding properties in Ltd company which in turn could backfire on landlords who are holding properties in their personal name.

As Ltd company is potentially a way out for people who hold properties in their own name at this stage. This strategy does not mean you have to transfer properties into Ltd company to benefit! If you speak to Simon he may fill you in.

** Links to Simon Lever's member profile added by moderator **

The following article has just been published in Financial Adviser: ** key points highlighted in bold **

Chancellor George Osborne has said the Bank of England could be given directional powers over the buy-to-let market this year.

He was speaking after the Bank of England’s financial stability report, which was published earlier this month, stated the UK’s buy-to-let housing market could pose a threat to the economy because of looser lending standards.

Mr Osborne told the Treasury Select Committee that he would be responding to the Bank’s requests for more powers in this market, as they currently have for owner-occupied mortgages.

He said some of the changes introduced in the Budget would address this - including the cut in tax relief private landlords receive on their mortgage interest payments, cutting it from 40 per cent or 45 per cent to 20 per cent by April 2020.

Mr Osborne said: “By reducing the tax relief available we are moving towards levelling the playing field between someone buying a house for their family’s use and someone buying it to let.

“The financial policy committee has identified buy-to-let mortages as something they wanted to have oversight over and make recommendations on.

“I agreed we would pass on oversight and give them powers to look at the buy-to-let market and make recommendations. That is in train.

“We are looking at directional powers as well. We will make an announcement in the next couple of months and it is happening this year.”

The FPC was recently given powers to set limits on loan-to-value and debt-to-income ratios for the first time to protect the UK’s financial system but these only apply to owner-occupied mortgages.

But this month’s financial stability report said: “Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness.

“And in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.

“This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs.”

Bank of England governor Mark Carney has suggested interest rates could begin increasing at the turn of the year.

Mr Osborne also responded to concerns about the low-inflation environment the UK is currently in.

He said: “Deflation would be a challenge in any economy but I am confident our monetary policy is robust and can deal with anything thrown at it.

“I don’t think we face that challenge today. The monetary policy has not asked for any tools that it doesn’t have.”

My first reaction: The changes to mortgage interest relief will in themselves add massively to the cost of debt servicing regardless of rising interest rates but the two together will combine to create a lethal cocktail.

Reply to the comment left by "Seething Landlord" at "22/07/2015 - 14:29":

Clearly the BoE has recognised some of the knock on effects of the Budget proposals.

It does not say whether they agree with them or not and it is not clear from this article whether the BoE have considered all of the knock on implications that have been discussed on this forum.

What this article does seem to suggest though is that the Budget proposals are pretty much a fait accompli 🙁
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Reply to the comment left by "Seething Landlord" at "22/07/2015 - 14:29":

“And in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages."

But the budget proposal will trigger the very downswing that they are afraid of! They need to be made to understand that.

Reply to the comment left by "Appalled Landlord" at "22/07/2015 - 15:16":

Agreed, the challenge is convincing them of that.
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