Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "Gentle Landlord" at "27/07/2015 - 22:00":

Hi Gentle. I don't think we should worry about that. They can read as much as they like about what we're planning. It'll wind them up no end. Although as I pointed out, since landlords and tenants are in a symbiotic relationship, and many of them, perhaps like High Yield, are probably tenants (the ones hoping to buy some day...) they haven't yet twigged that the sh*t is going to hit the fan for them too in terms of their rents and maybe losing their homes (well done Shelter! All that money you get - how well you spend it. NB I gave £500 last week to MSF, to actually help with the homeless).
I'm quite interested in the '1000 families.' It's like having one of those conversations up the pub when you're a bit pissed; so it is a bit repetitive. But it's a bit of light entertainment. I'll go and get a glass of wine and maybe I'll start going on about them as well.

Reply to the comment left by "Ros ." at "27/07/2015 - 22:09":

Yes Ros, if he/she had stayed here, they would have probably started pontificating about illuminati and new world order and other conspiracy theories next. As you mentioned in a previous post, members from their website really think they are the intelligentsia. I think they spend a lot of time criticising Osborne on their site, although they used to use a derogatory term for him which is a play on his middle name – Gideon, replacing the last 3 letters with iot. So very surprising to see them now praising him, because they think he suddenly cares about them with this budget..

Reply to the comment left by "BTL INVESTOR SCOTLAND" at "27/07/2015 - 07:28":

Following my earlier post today, I have done some work on my questions and answers. Here is my first draft. I have a few questions to add so this is work in progress. Let me know what other questions you think would be helpful to add to this list.

All you need to know about the Government’s plans to restrict finance cost relief for individual landlords

What is the proposal and when was it announced?

The proposal was announced in the Chancellor’s Summer Budget on 8 July 2015 and it will restrict relief for finance costs on residential properties owned by individual landlords to the basic rate of income tax. Finance costs include mortgage interest and interest on loans. Property Companies and Institutions who hold residential properties are not affected by the proposal.

In plain English, what does this mean?

In business, it is normal for tax to be applied on profit. The Government proposes to break this practice and require landlords to pay tax based on part of their costs. In most cases, finance costs will be the landlord’s largest cost. No other business is taxed in this way. Individual landlords who provide valuable housing across the UK are being unfairly discriminated against.

What is the Government’s policy objective

The Government say that their policy objective is to make the tax system fairer. The Chancellor has said that landlords are taxed more favourably than home owners. Both the Institute for Fiscal Studies and the Conservative’s favourite think tank, Policy Exchange, have warned that this is not correct. Unlike home owners, landlords are taxed on rental income and capital gains.

When will the measure be introduced?

The measure will be introduced gradually from 6 April 2017 over 4 years. Although the implementation of the proposal is to be phased, it is already causing uncertainty for landlords and tenants.

Who is likely to be affected?
The Government say that individuals that receive rental income on residential property in the UK and elsewhere and incur finance costs will be affected. We believe that the proposal will not only affect landlords as there will be many unintended social and economic consequencies of this ill thought out proposal.

How might landlords be affected?

Many landlords will pay more tax as a result of the proposal. For some, the additional tax will not impact on the viability of their businesses. However, for many landlords who have borrowed substantially to invest in their property business, the consequences will be serious. As a result of the proposal, some landlords who are basic rate tax payers, will become higher rate tax payers; others will lose their personal tax allowance because of the unfair way that the Government will calculate taxable income; in many cases, landlords will pay more in tax in connection with their property business than they make in net profit; in many cases, landlords who make a loss from their property business will still be faced with huge tax bills. We cannot understand how the Chancellor considers his changes to result in a fairer tax system. The implications for some landlords are such that they will need to sell properties to reduce the tax they pay on their finance costs. There is concern that many landlords will be declared bankrupt as their tax bills will exceed their taxable income. The situation will get worse when interest rates increase.

Can you show some examples of the impact on landlords?

The Government’s proposal is quite complicated and we can’t go into too much detail here. We can however give 2 very simple examples to illustrate the issue.

Exampe 1 : Joe is a teacher and has only one buy to let property. He is a 40% taxpayer. His rental income is £7,200 per annum; his mortgage costs are £2,500; and his repairs and other tax deductible costs are £1000. Under the current tax system, Joe would pay £1,480 tax. Under the proposed tax system, Joe would pay £1,900 tax, an increase of £500. For Joe, the new tax system still results in him making a ‘real profit’ but his effective rate of tax on ‘real profit’ increases from 40% to 53.5%.

Example 2: Dave and Margaret are married and together run a sizeable buy to let business. Properties have been acquired over a period of nearly three decades. Their rental income is £600,000; their mortgage costs are £350,000; and their repair and other tax deductible costs are £200,000. Their net rental profit is £50,000. They each have a personal tax allowance of £11,000 so their taxable income is £28,000. Under the current tax system, Dave and Margaret will pay £5,600 tax. Under the proposed tax system, because Dave and Margaret will not be able to offset all of their mortgage costs against their rental income, their taxable income will increase to £400,000 and the actual tax they would pay would be £77,800. This is £27,800 more than they actually make in profit from their rental business. Their effective tax rate on ‘real profit’ is 155.6%. Under the new system, Dave and Margaret are now higher rate tax payers. For Dave and Margaret, the Government’s proposal is catastrophic as their business is no longer sustainable as the tax they pay exceeds their ‘real profit’.

How many landlords will be affected?

The Government has stated that 1 in 5 landlords will be affected but has supplied no evidence to demonstrate how they have arrived at this number. However, it is not clear how many properties will be affected. Many property businesses will own more than one property so the proportion of the private rented supply affected could be very high.

How will the proposal affect the private rented sector?

For decades, the private rented sector has been providing much needed homes to meet a growing demand for flexible accommodation. A healthy supply of rental properties keeps rents down and tax relief on mortgage interest payments is a key way for the Government to incentivise investment. As a result of the Chancellor’s Summer Budget , landlords like Dave and Margaret will probably need to sell properties to reduce their mortgage debt to ensure that they are not faced with unsustainable tax bills. There is a risk that some landlords will be declared bankrupt as their tax bills will exceed their profit. In cases of bankruptcy, rental properties will be repossessed by lenders and this will further reduce supply. Investment in the private rented sector is likely to decline and the supply of rental properties will not meet the growing demand.

How might tenants will be affected by the proposal?

A fall in the supply of private rental properties will result in rents increasing. An interim survey of 1,146 landlords by the Residential Landlords Association (RLA) has revealed that 65% of landlords are already considering rent increases to mitigate the impact of the Government’s rental property tax levy. If landlords decide to sell to avoid unaffordable tax bills, they will want to sell with vacant possession and tenants will be forced to move as a result of the Government’s tax policy. Some tenants may find themselves homeless if lenders repossess landlords’ properties. We are concerned that the supply of rental properties available to those on benefits will fall and that this will result in people having to move into temporary, unsuitable bed and breakfast accommodation at considerable expense to the public purse.

Has the Government considered the impact on tenants?

It would appear not. The Government’s impact assessment is silent on how tenants may be affected. We have asked the Government to consider the impact on tenants.

Will the proposal have any impact on home owners?

There is a risk that the housing market will be flooded with houses for sale as landlords try to withdraw from the market or as a result of lenders repossessing houses from landlords. This could lead to a collapse in house prices, resulting in owners being in negative equity and having difficulty selling if they wish or need to move.

Will the proposal reduce demand for housing?

The Government say that the proposal could marginally reduce the demand for housing. We cannot see how this will be the case. Demand is influenced by demographic factors and household formation rates and all the available evidence points to population and household growth in the UK.

What has been said in the media about the proposal?

We are actively campaigning to raise awareness of the issue and in particular the unintended social and economic consequences of the proposal.

The Residential Landlords Association has said ‘ The reality is that the Chancellor’s belief that rental property is taxed more favourably than home owners is simply not correct. Rather than supporting the sector to provide the vital homes needed to support a flexible labour market, todays Finance Bill will choke off supply and drive up rents.’

The Scottish Association of Landlords has said ‘this is a shocking decision by the Chancellor of the Exchequer which unfairly discriminates against landlords. As a result of this increase cost and risk to landlords, you may see some within the sector feeling they are forced to increase their rent levels which would obviously have a huge negative impact on tenants.’

The Institute of Fiscal Studies (IFS) has pointed out ‘the Budget red book states that the current tax system supports landlords over and above ordinary homeowners and that this puts investing in a rental property at an advantage.’ In response to this claim the IFS has said ‘This line of argument is plain wrong. Rental property is taxed more heavily than owner occupied property’.

What do you want the Government to do?

We want the Government to withdraw its proposal to restrict finance cost relief for individual landlords. We want the Government to take stock, to listen to all relevant stakeholders and to bring forward revised proposals for consultation to are aimed at meeting sensible policy objectives and help address the country’s housing needs.

We want the Government to think about the housing market more holistically and while the private rented sector remains such an important tenure, the Government needs a more balanced approach towards landlord taxation.

If I am concerned about the proposal, what can I do?

We are writing to the Chancellor and our local MPs to express our concerns. We suggest you do the same. We have set up an e-petition to try to get the issue debated in Parliament. You can sign the e-petition at XXX.

Great work BTL!

Excellent work, BTL I S!

Just a couple of typos: How might tenants will be affected by the proposal?

bring forward revised proposals for consultation to are aimed at meeting sensible policy .....

Excellent BTL.

May I suggest some additional points.

Under the heading 'How might tenants will be affected by the proposal?'

- In order to find the money to pay the tax many Landlords in high value areas in London and the South East will be forced to focus on HMO's and multi-lets as this will be the only way they can afford to pay the tax and stay in business.

Also job mobility:

- UK has a very mobile workforce. Eg, BOSS says to Frank, 'Hey, can you go to the Singapore office for a year to sort out the XYZ dept?', Frank replies, 'Probably not boss. I would have rented outr my house for the year that I am out in Singapore but I can't afford to do that now cause of the tax. Sorry Gov!'
- Places like London and for example student towns are places where people only come for a short time and have no intention in buying. Who will provide these homes?

The UK Needs a storong and vibrant rented sector:
- Are we heading for a PRS operated only by large corporates? Do tenants really want to ring a call centre in the Phillipines to explain that they need a leaky tap fixed? There is simply no incentive for private individuals to invest in the PRS. I know new investments can be done through a Ltd co but you still have to extract profits from the company and with the new dividend tax, this has become more expensive. The fact is that if 40% tax payers want to invest in property, they are better off staying out of the PRS and focusing on buying commercial rental property in their own name. (Which are unaffected by these daft rules). So who will provide the UK PRS with housing?

Reply to the comment left by "BTL INVESTOR SCOTLAND" at "27/07/2015 - 23:39":

Awesome!

Reply to the comment left by "BTL INVESTOR SCOTLAND" at "27/07/2015 - 23:39":

As always, great work BTL. Really really great. I hope we can use a good proportion of this in the site (meeting with Gary today).

I think Steve Sanders has made some interesting points too about the labour market flexibility.

I would genuinely (and I'm not being vindictive) like to see Mr Osborne's face when he eventually reads this material and realises the true potential outcomes of his proposed change.

Reply to the comment left by "BTL INVESTOR SCOTLAND" at "27/07/2015 - 23:39":

It is clear how much thought and hard work has gone into that, well done, it is very much appreciated.
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Reply to the comment left by "BTL INVESTOR SCOTLAND" at "27/07/2015 - 23:39":

This is fantastic, BTL.

Are you able to add that the recovery of the economy was largely down to confidence and investment, in particular in the housing market? This Budget has already dented confidence and it is likely we'll head into another recession as a result (you've mentioned negative equity, etc).