Summer Budget 2015 – Landlords Reactions

Reply to the comment left by "KATHY MILLER" at "17/12/2015 - 23:55":

Hi Kathy

I am afraid you are right about the source of Osborne’s inspiration - David Kingman’s report, http://www.if.org.uk/wp-content/uploads/2013/11/Why-BTL-Equals-Big-Tax-Rip-off.pdf which is based on ignorance of the subject.

Ed Howker wrote an emotional foreword. He claimed “MIRAS remains for buy-to-let landlords who deduct mortgage interest payments from their tax bills”. This is not true.

If we deducted 100% of our interest from tax calculated at 20%, 40% or even 45% of our rent we would indeed be getting a “tax break”. But we don’t – we deduct interest paid from income received and pay tax on the result, just like any other enterprise in the country.

He then goes on to assert “Landlords also benefit from a tax allowance to ensure they maintain the standards of their properties which is worth 10% of their annual net rental income. The allowance is designed to cover the depreciation of furniture and fixtures but there is convincing evidence that landlords are claiming the allowance but not doing the repairs. Studies find that one in four tenants who have asked landlords to fix their properties are ignored. Here, the tax policy that is designed to maintain housing standards simply cuts tax bills for wealthy landlords.”

Although he correctly states it is to cover furniture and fixtures, he then confuses it with “repairs, to fix properties” and then deliberately mis-states that the policy is “designed to maintain housing standards”.

The 10% wear and tear allowance is a capital allowance that all businesses get in order to take account of depreciation of their assets. It was the Inland Revenue that changed the basis in the 80’s from replacement cost to 10% of rent – landlords did not bring this about.

The cost of repairs is a deductible expense for all properties, quite separate from the 10% wear and tear allowance on the contents - which only applies to furnished properties. If a landlord carries out repairs their cost is deducted from his rental income; if he doesn’t carry any out, there is no deduction.

In any case it is absurd to suggest that one in four landlords would allow his property to fall into a state of disrepair.

Then Howker states “Indeed, economically, buy-to-let investors should not imagine they are small-business owners. They are much less useful to the economy, rarely employing anyone who would not be employed by owner-occupiers to service their homes and deriving their income from gambling on house price rises.”

There are eight points to make here.

1. I have never seen this claim before - that your activity is not economically useful unless you employ someone. Many workers are sole traders, who employ nobody.

2. There is a small army of tradesmen throughout the country who earn their living, partly if not wholly, by doing work on rented properties.

3. Providing temporary or long-term accommodation to people who want it seems pretty useful to me.

4. By borrowing to buy properties, landlords increased the supply of money, and thus the size of the economy. The vendor of the property then has the money to spend or lend.

5. By financing developers, landlords have increased the supply of housing. The English Housing Survey on a government website: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/453668/Bulletin_12Aug2015_FINAL.pdf
credits the private rented sector for the overwhelming majority of the increase in the number of dwellings between 1996 and 2013, at the foot of page 1. It reads: "From 1996 to 2013, the total number of dwellings in England increased steadily from 20.3 million in 1996 to 23.3 million in 2013. Much of this was due to the notable growth in private rented housing which more than doubled in size from 2.0 million to 4.5 million over this period."

Thus 2.5 million out of the 3 million increase was thanks to the PRS. That is 83%.

6. Landlords have bought derelict or otherwise undesirable properties and restored them, increasing the supply of habitable properties. They have bought large properties in towns and cities that owner-occupiers did not want, and converted them to HMO’s, thereby increasing the capacity of housing.

7. For every £1 spent on housing construction an extra £2.09 was generated in the economy.

8. As regards the word ”business” ,Clause 24 describes letting as a business 17 times.

He goes on “Worse, the special treatment of landlords places first-time buyers at a disadvantage. This paper reveals good evidence that first-time buyers are losing out – paying more tax, enduring weaker mortgage terms and finding that buy-to-let investors are not encouraging more house building but pushing up the price of housing and skewing the types of homes that are built. Britain is getting good at building investment flats and worse at building family homes.”

This is more nonsense. Landlords pay tax on rental income and capital gains; owner-occupiers don’t pay any tax.

And contrary to his assertion, landlords have indeed encouraged more building. They can only buy what developers choose to build. Building flats on brownfield sites in towns and cities is a very productive way of using land in areas that would not attract house buyers.
And that was just the foreword. If tax policy is based hogwash like this, then I despair.

Reply to the comment left by "Appalled Landlord" at "18/12/2015 - 22:28":

David Kingman’s Executive Summary starts with “Landlords receive a public subsidy worth up to £5 billion in tax relief per year. This is relief that they are able to claim for their business expenses, including the 10% “wear and tear” allowance and interest relief on mortgages.”

If this is a public subsidy, then every enterprise in the country gets a public subsidy. But it is not a subsidy. Deducting interest from income to find the profit is just normal accounting. Deducting an allowance to take account of depreciation is a normal adjustment to the accounting profit to find the taxable profit.

It gets worse: “Landlords are allowed to claim 10% of gross rent per property as a “wear and tear allowance”, without having to prove what they spent the money on.” Yes, it is an arithmetic calculation, introduced by the Inland Revenue, and the result may be less than the cost of replacements in a given year.

And “This creates a perverse incentive for landlords to claim the money without making any repairs to their property.” Perverse? Incentive? The 10% allowance for depreciation of the contents has got absolutely nothing to do with repairs to a property.

“The growth of buy-to-let hasn’t significantly increased the overall supply of housing. The “BTL boom” has mostly just led to increased competition between landlords and first time buyers for our existing housing stock instead.”

This is just not true. 2.5 million out of the 3 million increase in the number of dwellings in England from 1996 to 2013 was due to the PRS. That is 83%.

“BTL pushes up prices. There is clear evidence showing that the growth of BTL increases overall house prices for everyone, including first-time buyers.” He doesn’t produce any evidence in the Executive Summary.

However, in the main body of his report, David Kingman states: “A study published by the National Housing and Planning Advice Unit (NHPAU) in 2008 argued that, based on their model of UK house price inflation, the BTL sector was responsible for increasing average house prices by up to 7% between 1996 and 2007 through the additional competition which BTL landlords added to the market. The authors note that average house prices would probably still have risen by 130% in real terms during this period for a range of different reasons.”

In fact the NHPAU study said 150%, not 130%: :http://webarchive.nationalarchives.gov.uk/20120919132719/http://www.communities.gov.uk/documents/507390/pdf/684943.pdf
On page 20 it states “For instance, since 1996Q3 house prices increased in real terms by 150 per cent [up to 2007Q2]”.

So BTL was responsible for less than one-twentieth of the increase in prices in that period. In the same period BTL created a million or more new properties (see above). To claim that BTL pushes up prices is a gross distortion of the facts.

Also in the body of Kingman’s report is this paragraph: “The following are all considered to be revenue expenses, meaning that landlords are able to claim tax relief against them:
• Interest on property loans
• Maintenance and repairs (but not improvements)
• Letting agents’ fees
• Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
• Accountants’ fees
• Buildings and contents insurance
• Utility bills paid by the landlord (such as gas, water and electricity)
• Rent, ground rent and service charges
• Council Tax
• Property maintenance services, such as cleaning or gardening
• Other direct costs of letting the property, such as phone calls, stationery, advertising or travelling to and from the property.
• Specific bad debts (rent arrears)
As the figures presented below will show, the most significant of these forms of tax relief is that on mortgage interest.”

As an accountant, I agree that they are revenue expenses, like they are in any type of business and in every company. But it is pure sophistry to say that we can claim tax relief against them, just because they are deducted from receipts to find the taxable profit.

And it is politically motivated nonsense to select one of these legitimate business expenses and say it should be disallowed for people who bought property in their own names.

This has brought me to a good word to describe everything that the government has said or written about Clause 24, - sophistry, which can be defined as:

the use of reasoning or arguments that sound correct but are actually false, or

a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone.

Reply to the comment left by "Appalled Landlord" at "18/12/2015 - 22:34":

Kingman’s recommendations are:

“Reduce the ability of landlords to deduct their mortgage interest against tax, because this allowance is regressive and distortive

Abolish the wear and tear allowance and only allow landlords to claim for individual items on a renewals basis

Greatly reduce the period of exemption covered by the 36-month rule on capital gains tax, ideally to as little as six months

Curtail lettings relief

Deduct capital gains tax at source during property transactions, as happens in other European countries (notably France)

Build more housing to reduce housing costs for young people”

It is no surprise in such a poor piece of work that there is no attempt to predict the effect of the first recommendation.

His conclusion starts “This report has demonstrated conclusively that the generous tax relief which is given to private landlords causes serious distortions within the UK housing market.”

This is garbage. My conclusion is:

BTL has increased housing stock by 2.5 million between 1996 and 2013.

It is only responsible for 5% of the price increase between 1996 and 2007.

Deducting finance costs is not a tax relief.

Disallowing them for existing businesses is iniquitous and will be damaging for the economy.

Reply to the comment left by "KATHY MILLER" at "18/12/2015 - 21:49":

" Scheme gives discounts of up to 70 per cent to all 1.3million families

Read more: http://www.dailymail.co.uk/news/article-3319804/New-right-buy-boom-1-000-people-week-signing-housing-association-sell-ahead-launch-new-scheme.html#ixzz3uiQjhAiT "

Call me dim, but isn't that a massive benefit to those lucky few that have decent homes they are wishing to buy (nowt wrong with that) but why at such a massive discount, to the detriment of everyone else? How does it provide more homes to those in far worse conditions? This is akin to gerrymandering.

Reply to the comment left by "KATHY MILLER" at "18/12/2015 - 21:49":

Hi Kathy

Thanks for posting this:www.dailymail.co.uk/news/article-3319804/New-right-buy-boom-1-000-people-week-signing-housing-association-sell-ahead-launch-new-scheme.html

The article says “The scheme gives discounts of up to 70 per cent to all 1.3million families living in housing association properties.
Mr Clark has agreed a deal with the housing associations which own the properties over the sell-off.
It will involve taxpayers covering the cost of the discount offered to tenants, while associations keeping the proceeds of the sale to build more homes.
Officials say the policy will be paid for from sales of the most expensive council homes when they become vacant.”

A gift to sitting tenants at the cost of a reduction in desperately needed social housing. Madness.

Reply to the comment left by "Appalled Landlord" at "18/12/2015 - 22:38":

Hi Appalled.
This could be quite big news that Kathy has found the source of GO's madness. Perhaps Richard Dyson should be informed of this as I doubt if he knows. He could also be given all your arguments refuting the report. I also love your use of the word 'sophistry' together with the definition. It shall be the new mot du jour.

Excellent rebuttal of, as you say sophistry!

As 23% of lots were left unsold at the last BJB auction - an open market fair value, so BTL isn't pushing prices up.or depriving other buyers.

Would PRS housing providers better serve UK residents by
@ putting their money under the bed
@ leaving it stashed in bank at 0.05%
@ gambling on Stocks
@ tax avoiding schemes like buying woodlands
@ blowing it all on round the world cruises (then penury- the state will pay)
OR
Facilitating new building and renovations? ( your point 5&6)

Wear and tear is on furnished only?

Would a Select Committee hearing come to a more enlightened conclusion? Or where should this go?

Jonathan,

To get your tax bill down why not switch your very best properties to short term lets.I intend to switch at least a third of my properties to holiday/short term lets and am currently upgrading them to a very high standard.Housing benefit tenants will be replaced with tourists.I will get the full tax breaks and probably triple my income.This will massively help my cashflow and profitability now that BTL is being killed off.The Government will end up with rising housing costs.It will be hard for the Government to argue that holiday lets are not a business because the downside is that it will be more labor intensive.

Just come across this article in Inside Housing

A select committee of MPs has announced an inquiry into the causes of homelessness.

The Communities and Local Government committee, which is chaired by Labour MP Clive Betts, is seeking evidence on a range of topics associated with homelessness (see box).

It will look at steps taken or needed to tackle homelessness, the relationship between homelessness and the availability of social housing.

Mr Betts said: “Reports suggest homelessness is on the increase.

“As a committee, we will want to examine the causes of homelessness, the steps to tackle homelessness, and how issues of social housing are having an impact on homelessness numbers.”

MPs are requesting evidence on the following:

Differing causes of homelessness for households, couples and single people
Steps to tackle homelessness
The relationship between homelessness and the availability of social housing
Measures taken by local authorities to deal with the homeless
The implications of the statutory duty of care, and possible extension to those in danger of homelessness, particularly single people
Different approaches to homelessness in big cities and in non-metropolitan areas
The re-establishment of the cross government Ministerial Working Group on Preventing and Tackling Homelessness
How levels of homelessness are monitored and reported
The effectiveness of current legislative framework in England with a review of the different approaches taken in Scotland and Wales

The committee will also look at the way homelessness is currently monitored and reported. This follows the UK Statistics Authority this week stripping two homelessness data sets produced by the government of ‘national statistics’ status, due to their being ‘misleading.’

Mr Betts said: “Is government recording and presenting a true picture of those in unsuitable housing or sleeping rough?””

Written evidence to the committee should be submitted by 8 February 2016.

And another article that the Government should take notice of as 86% of properties sold under RtB are not being replaced

Nearly 3,000 homes were sold under the Right to Buy in July to September with 423 replacement homes started.

Government statistics published today show there were 2,941 homes sold under Right to Buy (RTB) in England in the second quarter of 2014/15, a 3% increase on the 2,847 sold during the same period the previous year. A total of 423 replacement homes were started during July to September.

In total there have been 35,229 sales under the scheme since the previous coalition government increased Right to Buy discounts in 2012. During the same period there have been 4,117 replacement homes started.

Ministers have previously promised that every “additional home sold” under Right to Buy would be replaced. “Additional” mean homes that the government believes would not have been sold had Right to Buy discounts not been increased under the reinvigorated scheme.

Councils have three years to replace homes sold under the scheme, or receipts are returned to the government. Today’s data shows there were 307 homes started in April to June this year, compared to 442 sales in the same period three years ago (April to June 2012). In July to September this year there were 423 starts, compared to 1,041 sales in July to September 2012.

The current Conservative government is now seeking to expand the Right to Buy to 1.3m housing association tenants via a voluntary deal agreed with the National Housing Federation.