Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "James dengel" at "14/07/2015 - 10:34":

James,

New rules come in play in under 2 years time from April 2017 although, you will be paying 5% extra tax from 2017 but still it is massive shock to someone with large portfolio.

2018, 10% extra, 2019, 15%, and 2020 full 20%. So if your interest payments are around £200k that"s whopping £40k equivalent to decent employed accountants salary!

Where would landlords would find this money, especially in depressed market and when interest rates are high and there is no extra income, how would landlords discipline themselves to save that, sort of money even if they could.

As this tax is payable even if your business is running at loss.

hmrc already spent a £1m .......

that was the full budget allocated for this !

"Operational impact (£m) (HM Revenue and Customs (HMRC) or other) The additional costs for HMRC for implementing this change are estimated to be in the region of £420,000 for the IT changes and £150,000 for customer information and support. Compliance will be carried out in accordance with HMRC's compliance strategy, with an indicative cost of around £500,000 - £1 million for resource, training and guidance."

https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

Interestingly the paper referred to above has a contact number and e-mail address. Maybe someone could contact the relevant person to ask for clarifiaction on the large number of points raised in this thread.

"If you have any questions about this change, please contact Megan Shaw on Telephone: 03000 585628, email:megan.shaw@hmrc.gsi.gov.uk "

Reply to the comment left by "Simon Lever" at "14/07/2015 - 11:21":

Need a bit of advice. I am about to purchase 2 BTL properties, and exchange in couple of weeks. But kept on hold due to recent budget announcements.

I am in 37, 40% rate tax payer, self employed IT contractor with own Ltd company.

Currently I own a house (75% LTV re-payment basis ) and 3 BTL all within a mile distance of future cross rail (2020) in Berkshire area.

75% LTV on all houses @ 3% interest only avg. All self managed by me. Monthly gross rents for 3 BTL is £3200 and non-mortgage expenses of £300.

Due to recent budget changes I would be able to claim only 20% tax relief on £1400 monthly interest that I pay for all the properties.

I've a feeling that even the 20% tax relief will be removed sometime after 2020 or so. Like others I am too in a dilemma on what to do, and future of BTL landlords with mortgage.

Shall I purchase either 1 or 2 properties or none...

The area is of high demand and rental increase around 10% in last 2 years.

Worried about high taxes and less / negative cashflow due to high taxes, and future interest rate hikes, meagre rental hikes.

On other end I am thinking as we;ve 4 more years for full tax relief deduction, property prices might increase around 25% more due to arrival of cross rail and I can sell a couple of them if they aren't giving me a positive cash flow.

confused.... confused......

Reply to the comment left by "Simon Lever" at "14/07/2015 - 11:21":

i think we all need to email megan with our concerns and questions

If you have any questions about this change, please contact Megan Shaw on Telephone: 03000 585628, email:megan.shaw@hmrc.gsi.gov.uk “

Reply to the comment left by "unahb1 " at "14/07/2015 - 11:27":

Have you considered buying them in a company?

The Budget rules on tax are not finalised yet so it is impossible for anybody to provide absolute advice at this time.

If you do buy them in a company then you will have to start again in respect of applying for mortgages.

Personally, I'd buy them in a company, but please do not construe that as advice.
.

If you dont need the cash out every month then purchase in a ltd Company . I did it in 2005 for 6 of my properties ....when people said it was not worth while . However I now have hardly any LTV and huge directors loan pot which I can take back tax free when I retire. I have always had the attitude of rather paying corp tax rather than a mortgage.

I still have 4 others which were too much CG to transfer.....so I plan to pay them off now.

Reply to the comment left by "Simon Dewsberry" at "14/07/2015 - 11:31":

DONE - SEE TEMPLATE LETTER BELOW - FEEL FREE TO USE ALL OR ANY PART 😀

Dear Megan

In this letter I will share my concerns in relation to the summer budget 2015, in particular the impact on lending institutions and people like me who invest into buy-to-let property. I believe the impact is far wider reaching than may have been considered and could well lead to another banking crisis, as I will go on to explain below.

My understanding of the logic behind the budget announcement is to reduce incentive for highly geared buy to let transactions, which the Bank of England recently reported to be a risk to the economy. I broadly agree with that and understand the Chancellors desire to reduce those risks. However, the consequences of the budget are that an established private landlord using a high gearing business model could now end up falling into the 45% tax bracket even if his rental portfolio is only breaking even and even if he has little or no other income or resources with which to service that increased tax burden. Please see the example below:-

SCENARIO AS OF TODAY

Rental income: £300,000 per annum

Mortgage interest: £200,000

Other legitimate expenses: £100,000 (e.g. insurance, letting, management, maintenance etc.)

Taxable income = zero.

SAME SCENARIO AS OF 2020

Rental income: £300,000 per annum

Legitimate expenses excluding interest: £100,000

Net taxable income = £200,000

Net cashflow is still zero but tax is payable on £200,000 less a tax credit of £40,000 due to the 20% relief on the £200,000 of mortgage interest.

Given that net cashflow is zero, where is the landlord expected to find the money to pay the extra tax from?

The position worsens when interest rates increase.

It gets worse!

Until now, buy-to-let mortgage underwriting and associated lending criteria has been based on the current tax system, which has not made provision for this extra tax. Many thousands of established professional landlords have based their business models on the current tax system and lending criteria. If these landlords are now allowed to fail we could be looking at another credit crisis, plus of course a further negative impact on the housing crisis..

Worse still

General consensus is that highly geared landlords will be able to pay down their debt by selling some of their properties. However, the very nature of a highly geared property investment strategy means that in several cases the net sale proceeds would be insufficient to pay the CGT due to outstanding mortgage liabilities having significantly exceeded the original purchase price of assets, due to refinancing in line with property values during the property boom which has occurred since the early/mid 90’s. There is no CGT rollover relief available to private landlords on residential property so they cannot convert to a corporate structure either without incurring CGT. Accordingly, many are trapped into an inevitable bankruptcy scenario by the budget announcements. The net losers (in addition to these landlords) will be the banks and society as a whole due to the losses incurred on forced sales, the reducing supply of quality rental property and the associated demand led rental inflation.

The Chancellor said that he wishes to make it easier for people to become homeowners. A significant exodus from the Private Rental Sector may well facilitate this in terms of reducing property values but it will not create any more housing. In fact, it may well reduce incentive to develop new housing. This is because over the last two decades a significant proportion of new build housing stock has been purchased by landlords, thus driving up the profits of developers to a point where it makes developing new builds viable. A reduction in the appetite for buy-to-let investment, combined with a reduction in property prices, may well have the effect of reducing property developer profits, and hence incentive to build new homes. Another knock on consequence of this is that a reduction in new developments would result in less new social housing being built.

My suggestions

It would be politically very awkward for the Chancellor to do a u-turn at this point, albeit not impossible. However, the following concessions (particularly option 1 below) may be equally effective to deal with the Chancellors objectives whilst negating the necessity to openly backtrack. This would help to avoid both negative repercussions and unintended consequences of the Summer 2015 Budget:-

Option 1) announce that the new tax rules only apply to new debt as of 2017 or

Option 2) introduce CGT rollover for residential investment property in order to allow landlords with large portfolio’s to roll their assets into a corporate structure or

Option 3) declare a CGT amnesty for BTL landlords for a given period which will still have the effect of reducing the size of the PRS (albeit with some reduction in property values due to the possible scale of transactions) but with reduced negative consequences in terms of insolvency induced forced sales and the knock on effects to banks and property developers.

I look forward to your reply.

BUDGET..I believe we should keep it simple and clear in responding to our governement MPs etc.
Media reporting keeps mentioning tax bands 45% ..40% ... confusing the issue.. The reduction in allowance for interest is in fact nothing to do with ones tax band.
Interest costs for our finance were 100% allowable. This is to drop in stages to 20% for all of us irrespective of our tax bands.This is not widely understood ..probably even by MPs....and dare i say it also not yet by some landlords.
Two effects arise that are fundamentally unjust.....
A..... Many of us run at break even ..very marginal profit or even a loss now ....Under these new rules we will be effectively treated as making a profit when we havent .and then be taxed on that" supposed" profit. A completely new, unfair and unjust concept and reality. Yep a turnover tax!!
B. This very major change in taxation rules is for us..effectively highly retrospective.
Retrospective change in law..or tax rules is generally considered both unjust and difficult to pass into law. As we are already committed and most mortgages have significant redemption penalties it would be extremely difficult and costly for us to exit the market ie sell in just 2 years.( beginning of new policy)... Such a scenario would lead to forced sales anyway in a market sector ( lower end typically ) which is likely to be falling...We must highlight and fight on the three issues...
... the magnitude of the change 100% to 20% effect...and its appliance to all..not just 40/45% taxpayers ...and its highly retrospective effects..together with the "tax on turnover" effect ...AND link all this to the economy and business in general.

By doing so we might focus on two goals.....
1. Ensure that people NOT making a "real" profit..can not be treated as having made profit. A whole new paradigm!..and a scarey shift in tax culture for ALL business people!
2. The new rules ( amended as per 1 above ..hopefully ) should..to be fair..apply to new purchases only.and therefore not be retrospective...or we should be given more time..say five years not two... to make adjustments allowing for redemption penalty issues and perhaps avoiding a "forced sale" falling market scenario,

IF these messages are not made abundantly clear then we may have to live with it because the media arent reporting it accurately and we arent going to get much support without keeping its unfairness ( retrospective effect)..and the new tax paradigm ( turnover tax) at the forefront.

We might also usefully remind the government that real estate with all its connected services and industries from trades people, buildres and finacial and service sectors is the biggest single employer in our economy.Killing a significant sector of the market will have serious repurcussions well beyond us landlords.

I wonder how many business people in general will be as confident in the future of the conservative party if they new and fully understood this new paradigm and the precedent it sets. I also wonder if there is a possible legal class action here on both the retrospectivity angle and perhaps even more clearly on the taxing landlords who havent actually made a profit. Realising that many do make a profit..this is still potentially a good angle for us all in stopping this madness.

Reply to the comment left by "unahb1 " at "14/07/2015 - 11:27":

Unahab1, you are not buying in Reading are you? As I have already purchased 3 in last couple of months and I am in the process of buying additional 2 again in Reading Just like you I am not sure whether to proceed or not.