Summer Budget 2015 – Landlords Reactions

Interesting article today by Harvey Jones, Personal Finance Editor at the Sunday Express (page 55 - copied this morning as I enjoyed my morning coffee at Costa):
The heading: 'Factors that could push property over the edge.'
Extracts, with my thoughts in parentheses:
'the tax crackdown [I object to that word - it implies we are criminals who have been getting away with something and are now going to be stopped] could cost some amateur [sic] landlords thousands of pounds a year, persuading some to sell up while also scaring away new investors.'
[although some of the language is questionable, I think this shows that our message is beginning to filter through to the newspapers - in a drip, drip sort of way]

'This week, ratings agency Moody's warned that the crackdown could curb demand for buy to let, hitting house price growth. There are already signs that prices are falling with new figures from Nationwide showing a dip of 0.6% in July. European bureaucrats could be the ones to finally tip the housing market over the brink. From March next year the EU will introduce tough new lending rules across Europe that will make it harder to switch to a cheaper mortgage. The Mortgage Credit Directive could leave many people stranded on pricey standard variable rate mortgages because they cannot switch to a market-leading deal elsewhere. This is on top of already stringent UK regulations introduced last year, known as the Mortgage Market Review.'

I think he has made a very important observation here - that really nothing more needs to be done by the Government to 'take the heat out of the housing market as it has already been or is already being done. This should be one of our arguments.

Naturally, I felt duty-bound to reply to some of the points in the article, as part of my attempt to influence the finance journalists in the Press. This is my letter to him:

'Dear Harvey
I enjoyed reading your article in the Sunday Express today. I am a landlord who is going to be adversely affected if the 'tax relief' restriction on landlords is implemented, as announced in the Summer Budget. Many commentators, landlords and accountants have not yet understood the ramifications and how the measure will lead to widespread bankruptcies. This is because they have not examined how it will work in practice. As one of the group most affected, I have given the matter great thought and been writing to everyone I can think of in an attempt to raise awareness of this.

You made some very good points in your article showing that you have appreciated the implications more than most. I, and my fellow landlords, will be able to use some of what you have written in our campaign to get this reversed (our petition against the measure has already reached 10,000 in just over a week). The decision seems to be a knee-jerk reaction by the Chancellor to Mark Carney's statement the week before the Summer Budget that buy-to-let needed to be subject to tighter controls; as you say, the Mortgage Market Review and the Mortgage Credit Directive are going to have this effect anyway.

We - and I suspect Mark Carney - believe that the 'tax relief' measure will achieve nothing positive in this regard and is based on false assumptions and logic, notably those suggesting that it will in some way help first time buyers and create a 'level playing field.' Other comments have suggested the misleadingly named 'tax relief' is 'generous' to landlords. This is all wrong.

Immediately after the Budget announcement, some of the most influential economists and experts in the country rubbished the decision by the Chancellor and the reasoning behind it. I have here some key quotes - feel free to use them in an article:

a. On the 9th of July, Paul Johnson, Director of the Institute for Fiscal Studies gave his reaction to the Budget, available at

http://www.ifs.org.uk/uploads/publications/budgets/Budgets%202015/Summer/opening_remarks.pdf.

He said, “The tax treatment of rental housing will be made less attractive though. At present if you own a property which you let out to tenants you can set any mortgage interest costs against tax due on rent received. 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”. This line of argument is plain wrong. Rental property is taxed more heavily than owner occupied property.” He said that the solution to the housing shortage is simple: build more houses.

b. The think tank, the Policy Exchange, has confirmed this noting that: “In truth, the tax system massively favours home ownership – for one thing home owners do not have to pay capital gains tax on their principal residence, whereas buy to let landlords do on the rental properties they sell. Rental income is also taxed (and even more now).” (Source: http://www.policyexchange.org.uk/media-centre/blogs/category/item/additional-policy-exchange-analysis-of-summer-budget-2015 ).

c. Professor Philip Booth of the Institute of Economic Affairs, reporting to the Treasury Select Committee on the Summer Budget, said the decision 'doesn't make sense at all,' and that it doesn't address the problems of supply and planning restrictions.

d. Paul Johnson of the IFS also said (I write from memory from watching the Treasury Select Committee on BBC Parliament) that it implies a refusal to recognise that mortgage interest is a cost of running landlords' businesses and should be offsetable.

e. Professor Michael Devereux, professor of taxation at Oxford University also seemd bemused and is quoted in the Mail as saying: “If you are trying to tax profit you have to give relief for the cost of earning it.”

This is all clear and incontrovertible, but the Chancellor has still not reversed the decision.

On a separate point, you allude to the idea that 'amateur landlords' will be most affected. Our evidence (I speak as a member of the property portal Property118, which is spearheading the campaign against the proposal) is that professional and portfolio landlords will in fact be the most severely affected. We have produced examples of what it will mean for portfolio landlords. I am pasting two examples at the bottom of this email, both based on the information we have received from Megan Shaw at HMRC regarding how the proposal would work in practice (see below).

In the meantime, there are so many questions arising from the measure. How can it be fair to not allow one singled-out business to offset the costs of running that business? What will happen when many large landlords receive tax demands to pay huge tax bills on losses? And when, inevitably, many of these are made bankrupt (these are viable businesses which have in many cases operated for decades, but which the tax measure makes unsustainable overnight) what will happen to the houses and to the tenants?

Many of the houses are not suitable for first time buyers (ostensibly the justification for wiping out landlords' businesses), so will large corporations swoop down to grab them and dominate the market? Speaking for myself, many of my houses are in the south Wales valleys and not the type of areas to appeal to corporations, so if they are repossessed and there isn't the local market for 'first time buyers' will they be boarded up? Other of my houses are more of the HMO variety and house students; also not suitable for first time buyers. And in any case, why are these FTBs to be favoured over renters? Where would vast numbers of students live if it weren't for the private rental sector?

There are so many implications which have not been researched by the Government.

Anyway, if you would like more information from landlords who will be affected (and in many cases ruined) by this measure, please let me know and I can put you in contact with some. It would be nice if we could at least have a bit of a voice in the Press. So far, I have not seen a single account of what this measure will mean for real individual people.

Yours sincerely

Example 1:

Dave & Margaret are married and together run a sizeable buy-to-let property business.

Properties have been acquired over a period on nearly three decades and have always been purchased in their own names as opposed to a company based on advice from their accountants.
2016/17 Tax year 2020/21 Tax year
Rental income £600,000 £600,000
Expenses £200,000 £200,000
Mortgage interest £350,000 £0
Net rental profit £50,000 £400,000
Personal allowances £22,000 £0
Taxable income £28,000 £400,000
Basic rate tax (x2) £5,600 £17,200
40% tax £0 £85,600
45% tax £0 £45,000
Less new 20% tax relief N/A £70,000
Net tax liability £5,600 £77,800
Tax increase £0 £72,200
Effective tax rate on “real profit” 11.2% 155.6%

Although Dave and Margaret spend 80 hours a week between them to run the business (and their cash return is modest) that is because they have ploughed most of their returns into building and maintaining their properties and have taken risks to allow them to grow their business. They are a prudent couple and fixed their interest rates for 10 years earlier in 2015.

The reality they face

Their current business model becomes unsustainable.

They are tied into long term fixed rate mortgages with high redemption penalties.
Moving their portfolio into a company structure is not feasible after considering early repayment charges on their mortgages, SDLT, CGT, valuation fees, legal fees and lenders/brokers fees.

This is from the following webpage:
http://www.property118.com/how-the-budget-will-affect-private-landlords-example/76673/

Example 2:
Aunt Sally has a full time job earning £55,000 per annum. She is a 40% rate tax payer and has a buy to let landlord portfolio comprising 20 properties. She started investing in property 10 years ago. What is Aunt Sally going to do now?

Aunt Sally is in a quandary. She has heard about the budget proposal to change the way that landlords are taxed. Her rental income is currently £100,000, her mortgage costs are £40,000 and her other legitimate business costs are £40,000, leaving her with a gross rental profit of £20,000. Aunt Sally currently pays 4% interest on her £1M borrowings. She pays £8,000 tax on her rental profit, leaving a net profit of £12,000 after tax which she currently uses to fund her children going to university. Later in life, she plans to use her rental profit to supplement her pension.
Aunt Sally has calculated how much additional tax she would pay when the new tax system is introduced. She has worked out that the tax bill on her gross rental profits of £20,000 would rise from £8,000 to £19,000, leaving her with a net profit after tax of only £1,000. This is not much reward for the investment she has made in her property business and for the services she provides for the tenants in her 20 properties. Her effective rate of tax on her gross rental profit is 95%.

Aunt Sally is aware that interest rates are likely to go up soon. She has calculated that a 1% increase in interest rates would reduce her gross profit to £10,000. Under the new tax system, the amount of tax Aunt Sally would pay would exceed her gross profit so she would be operating her portfolio at a loss. Her once profitable property business would no longer be sustainable. As interest rates may go up by considerably more than this, she is very worried.

Aunt Sally knows that if she sells some or all of her properties she will face a significant capital gains tax bill because unlike homeowners, landlords are taxed on capital gains when they sell.

What should Aunt Sally do?

Give up, and sell her property portfolio now?
Sell some of her properties to reduce her mortgage costs and risk?
Put up rents to help her pay her higher tax bill?
Just get on with it and subsidise her portfolio from her earned income which has already been taxed?
Wait until her lenders call in her buy to let loans and be declared bankrupt?

From the webpage:
http://www.property118.com/what-is-aunt-sally-going-to-do-now/77263/#comment-61248

Excuse me, chaps, but I appear to be in some sort of Different Dimension or "intellectual bubble",

I am reading your later comments and you are making this far too complicated for the "Average Joe" or Local MP to understand.

The bottom line for simple BTL landlords is that you have 2 step problem to deal with.

1. BTL Landlords are being dragged kicking and screaming into a Higher Tax Band, when they don't deserve it.
2. They will be paying 32 pence Income Tax for every pound spent paying interest back to a bank, regardless of any profit made. (A Private Tenant Levy)

We are faced with a BTL mortgage "Levy" that has to be shown will be passed on to tenants,

They pay for EVERYTHING!

You MUST get them to do your complaining or it just won't work!

Because, If that doesn't work, we are doomed to failure.

We are up to Page 245/6 on this forum and we still havent got 10,000 signatures, we have to get 10 times that amount.

it looks a bit daunting, unless you keep it simple.

Attack through your tenants!

My weekly statements go out this coming Tuesday, they will also be getting a warning of a 32% rent increase spread over 4 years because of the new "Tory Private Rent Levy", with a link to the petition.

They have the voice that will be listened to.

My faith in politicians is at an all time low, as the party I promoted has stabbed me up the arse with a tax proposal I will be unable to pay.

That means I need to talk to the people, that will be affected worse. Ie: Your Tenants!

The Sunday Times ran a report by Martina Lees today. In this gross oversimplification and incorrect article the reporter simply says that buy-to-let landlords will struggle to re-mortgage. Additionally she suggests that the Bank of England could be given more powers to limit the number and size of buy-to-let mortgages.
The reporter then goes on to say incorrectly that only buy-to-let landlords paying over 2.5% would be affected and it would not really "start to bite" until the mortgage rates rise above 3.5%. This is both incorrect as we all no and grossly over simplified rubbish, poorly researched in order to sell a newspaper at minimum overhead.
There was no mention of the fact that this new tax regime, if implemented, will drive many landlords into bankruptcy, including prudent forward thinking ones and the social disaster that would ensue.
The article also mentions that London will have 20 landlord licensing schemes by 20/12/15!

I have just sent an email along similar lines to my one to the Express, but to 'Richard Davies,' who has apparently just been appointed as George Osborne's main economic adviser. He is an economist, so I wonder if he has the opposite views to all the economists we have been able to quote (they seem to be our only ally - but won't actually advocate as they're independent!).

Gary, I'm not as confident as you that the way to sort this is by frightening our tenants. My preferred method is to write to people with influence, in the hope that the message will eventually get through. I would like more people to write to their MPs and let me know when they have as, at the very minimum, every MP should be written to at least once, and this is just not happening, as far as I can see. I have only been informed of just over 30 MPs having been contacted out of 650.

On the other hand, I am hopeful that the Press may start turning on this; we're getting the odd sign that the message is filtering through.

We also have to hope the meeting at the Treasury on the 18th will come to something.

Reply to the comment left by "Ros ." at "09/08/2015 - 16:20":

I wrote to my MP, Steve Brine, a week ago and three Winchester councillors. None have replied.
Regards
Paul

Reply to the comment left by "Paul Shears" at "09/08/2015 - 16:24":

Thanks Paul. I have just put it on my spreadsheet.
Also, regarding Martina Lees, she wrote an inaccurate piece last week too and I emailed her, but she seems to have ignored me! Following on from what you just said (I haven't seen the Times today) I just adapted my letter to the Express and sent it to her. We have to keep up the pressure every day.

Hi All
In todays Sunday Times - an article in relation to migration highlights that "With one in eight people born overseas, there is little doubt we have gained from immigration in economic and cultural terms. We are witnessing huge legal migration" - written by Dr. Gerard Lyons who is chief economic adviser to the Mayor of London Boris Johnson.
This goes to show that its good for the economy of the country to have economic migration and that in order to facilitate this free movement of labour - there has to be a thriving private rental sector. Its a very short sighted Government who is trying to kill off this very important sector of the economy.

I have a very good relationship with all my tenants. (5% of my tenants are professional I say this with reservation.

They will not understand & will not be lending me their ears for longer than a few minutes.

No, matter what I say to them, they will only accept this as my sob story.

Reply to the comment left by "KATHY MILLER" at "09/08/2015 - 14:42":

Kathy....despite the fact that this budget has hit many hard.....me included.....It will in fact probably be remembered as the budget that gave most people on lower incomes a living wage....its the kind of budget I would have expected from labour . 🙂