Summer Budget 2015 – Landlords Reactions

http://www.accountancyage.com/aa/news/2423102/tax-advisers-braced-for-mortgage-bound-buy-to-let-investors

It looks like other publications are picking up on the report in the telegraph

Reply to the comment left by "Matthew Dervin" at "25/08/2015 - 09:19":

I've just put a link to the petition in the comments box.

James Tallis luckily HMRC self assessments are due end October (paper ones anyway) - ie BEFORE the Nov consent - so hopefully more awareness and "real" information will be readily available as we approach that time and LLs will stop believing the government's spin of standard 20% tax payers will not be affected (which sadly is what I keep hearing from individuals I know). Every LL will be pushed up a tax band and be worse off. But this is primarily what Ros, Connie, Mark, "just say so to George" website campaign and many others are all very actively working towards - awareness - and with that should hopefully come a U turn to protect the hard work they have built up over the last 20 years or so.

Darren Bell - Mark Lancaster has already responded to my letter promising to reply when he's had a response from GO as has already had constituents contacting him about this matter. For your meeting, there was an article by Danielle Withers, (MK property market blogger) who quotes 19% of residential property in MK is privately rented and population is rising by 4,176 persons per year but only 1,522 properties being built - so not only will this affect LLs but tenants too as these changes could push up rents, reduce rental properties available etc.

I've been hounding my MP again (who's been waiting for a reply from HMT) with the following 2 emails:

"Andrew,

It has been a month since I last heard from you, I have you had a response from HM Treasury. Some other Landlords who I know have through their own MPs received “stock” responses from David Gauke, Financial Secretary to the Treasury.

An online campaign is gathering momentum as more and more Landlords and Tenants are awakening to the ramifications of this proposal (who wording is deliberately phrased to cloak the real impact). An online petition has now over 18,000 signatories.

Other respected bodies have also commented on the proposal

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, 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 (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 is quoted as saying: “If you are trying to tax profit you have to give relief for the cost of earning it.”

I notice that from the “Register of Members Interests” that you are also a Landlord albeit of a commercial property but it might be instructive to see the effect if these proposals were applied to your commercial property. I can’t give any actual figures as these are not disclosed but if I make the following assumptions:

1. Property value £200,000
2. Mortgage on the property £140,000 at an interest rate of 4%pa (interest only) giving an interest cost of £5,600
3. Rental income @ 5% yield = £10,000 pa
4. Other costs (insurance, maintenance, etc.) = £2,000

The “actual profit” is £10,000-£5,600-£2,000 = £2,400 on which you would pay 40% tax i.e. £960 (I am further assuming that as an MP your salary makes you a higher rate taxpayer, and that the rental profit is taken as your own personal income).
Under the proposed new rules your profit for tax purposes would be deemed to be £10,000-£2,000 = £8,000 which would be taxed at 40% equalling £3,200 less a basic rate allowance on the mortgage interest of 20% x £5,600 = £1,120 resulting in a total tax payable of £3,200-£1,120 = £2,080. This is payable out of your actual profit ( of £2,400 which hasn’t changed) and represents a tax rate of a staggering 86.7%.

If interest rates were to rise (as they are likely to) so that you were paying 5%; your actual profit would reduce to £1,000 but your tax bill would only drop to £1,800 i.e. you would be making a £800 annual loss!! The equivalent tax rate in this case is 180%.

I think you can see the unfairness of this proposal."

Which received the response:

"Thank you. I haven’t got my stock reply back yet but will chase. Thank you for the workings but if I was operating as a company I’d get relief on corporation not personal tax. Since most landlords I suspect are sole traders and not formed up in a company they are seeking higher rate relief which will exceed corporation tax. I’m obviously not an expert but that does seem quite generous. The Chancellor would probably also say that its inflationary since it’ll push up the cost of rental property. He will also likely cite relatively high yields plus the (though it can’t be relied on) prospect of capital gains.
Best wishes,
Andrew

To which I replied:

"Andrew,

I do look forward to having a face-to-face meeting with you. Given the likely response could we meet sooner rather than later whilst this proposal is still at committee stage?

To answer a couple of your points:
1. The mortgage interest relief at 40/45% is only as the direct result of some Landlords having their profits taxed at 40/45%. So in reality private Landlords are already being quite heavily taxed even before this measure is introduced.
2. In the past using a limited company was not attractive as:
a. finance was much more restrictive and what was available was at higher interest rates
b. there is much more administration with annual accounts to be filed, PAYE to be operated to pay oneself, etc. and now auto-enrolment
c. most advisors (because of the above reason recommended using the Sole Trader style to prospective Landlords)
3. Transferring properties into a limited company to avoid tax is fraught with difficulties and substantial costs:
a. SDLT would be payable
b. Capital Gains Tax may be payable (especially if a property has been held for a number of years)
c. mortgages will have to be redeemed possibly incurring early redemption charges
d. new mortgages (at higher corporate mortgage rates) would have to be set-up with inherent conveyancing fees, valuations fees, Lenders arrangements fees being incurred.

To compare a BTL Landlord with First Time Buyers is like comparing apples with oranges, the two are completely different. Yes it is true home owners do not receive mortgage interest relief, but then they do not have to pay tax on imputed rent, nor and CGT upon sale, they not benefit from the Help to Buy schemes, nor Help to buy ISAs. Nothing but a house crash will help FTBs, which would throw millions of existing home-owners into negative equity. What is really required is for many, many more homes to be built. As mentioned before this proposal will see fewer homes in the PRS resulting in rents being pushed even higher, tenants being evicted (particularly those on the frozen Housing Benefit) with the consequential social ramifications.

BTL landlords should not pay any more tax than having the same property held in a limited company, but already many Landlords are paying tax on their profits at 40% or 45% rather than a the Corporation Tax rate of 20% (soon to be 18%). These proposals make the tax system more complicated, increase the unfairness in the tax system, abandon the centuries old system of taxing actual profits rather than revenues.

This proposal does nothing to encourage people to make independent provision for supplementing their retirement incomes as the unsustainable State Pension is slowly eroded by inflation, and returns from other pension investments continue to diminish.

Landlords are not looking for any special treatment by the tax system just to be treated fairly. At the moment they are being unfairly treated, this proposal makes this dramatically more unfair. This proposal seems to be more politically motivated to placate the calls from Generation Rent, Shelter, and others by targeting what is become a despised group in society where taxation is “easy pickings”.

If this proposal cannot be thrown out then at least make it only applicable to new property purchases in the future, making it effectively retrospective is the cruellest thing the Chancellor can do.

To which he responded:

"Thank you. On para 3, I understand a long lead-in has been given to mitigate some of this but I doubt the new measures will be limited to only newly acquired properties. I’m inclined to agree with the point about comparing BTL and home owners – it was plainly daft to do so.
The unfairness point introduces an element of taxation philosophy. I suspect HMT will say that (1) under current BLT arrangements owners can gear their operation under relatively favourable terms (relative that is to other types of business) (2) yields (revenue and capital) have been high historically and thus subject to the attentions of the taxman.
I don’t want to seem unsympathetic and will critically appraise the Treasury response when I get it but I am not clear that there is an easy way forward for this.
Regards,
Andrew"

Reply to the comment left by "Barry Fitzpatrick" at "25/08/2015 - 12:38":

Hi Barry

You have made sterling efforts to get through to your MP, but he is still mesmerised by the so-called tax relief percentages, while ignoring the point that we are taxed on both the rental yields and the capital gains.

Maybe, if you were to follow the example of Jerry Jones and BTL I S and show him what effect there would be if his staffing cost were disallowed, and given only 20% “relief”, then he might finally understand the unfairness of what is planned for us.

Brilliant letters by both BTL and Barry, I shall be 'borrowing' parts of both (hopefully that's ok with you both) for my reply to my MP, who also sent me the standard reply from David Gauke.

At long last my MP (George Freeman) has responded.

Sadly though is was a very short email referring me to a PDF response from The Treasury, the very same response that many others have received.

I replied as follows:-

Dear Mr Freeman

Mark Alexander
.

Reply to the comment left by "Mark Alexander" at "25/08/2015 - 13:45":

PS - when he replies he will be getting a very similar email as the one Jerry sent to his MP.
.

Reply to the comment left by "Barry Fitzpatrick" at "25/08/2015 - 12:38":

Excellent efforts Barry. I think Appalled has had a good idea, which is to send yet another letter with the MP's staffing costs analogy. There's a kind-of 'blinding with gobbledy-gook' going on. But you got an important concession from him - the admission that comparing us with owner-occupiers is daft. It looks like that's something to build on If you can persuade this one MP, he may go on to persuade others. It would be great if you could continue and wear him down/beat him into submission.