Summer Budget 2015 – Landlords Reactions

I have just sent the following reply to my MP:

Thank you for your letter It confirmed that your previous letter was to advise me of the Labour Party’s position. In that earlier letter you wrote that the measure has support from the housing charity Shelter, that you do not oppose it in principle, but that you are yet to be convinced that this policy would do anything to tackle the affordability of housing for aspiring home owners, and that you hope the local council will be taking measures to mitigate the impact of increased homelessness due to this policy.

Shelter does not actually provide shelter for a single person. Its basic stance is anti-landlord, so it unthinkingly supports anything that it perceives as harmful to landlords.

Also, it is not in the council’s power to mitigate the impact of increased homelessness. That is Parliament’s job - and the best way would be by repealing Section 24.

Turning to your latest letter, I note a shift from the Labour Party’s position. You mention “the regular complaint that you hear on the doorstep is the concern that house prices remain too high for the majority of young people to be able to get onto the housing ladder”. Are you now convinced, unlike the Party, that “this policy would do anything to tackle the affordability of housing for aspiring home owners”? If so, what has convinced you?

You quote the Bank of England’s concern that “ the rapid growth of buy to let mortgages could pose a risk to the UK’s financial stability”, and go on to say that you “therefore appreciate the Government’s rationale for imposing tax relief restrictions”.

This concern was expressed in its Financial Stability Report Issue 37 of July 2015: http://www.bankofengland.co.uk/publications/Documents/fsr/2015/fsr37sec4.pdf

This report ended with: “Buy-to-let lending could pose a risk to financial stability. The actions of buy-to-let investors affect the broader housing and mortgage markets as individuals compete to buy the same pool of properties. ……. And in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.”

The last paragraph read “HM Treasury will consult on tools for the FPC related to buy-to-let lending later in 2015, with a view to building an in-depth evidence base on how the operation of the UK buy-to-let housing market may carry risks to financial stability. The FPC will continue to monitor this sector closely.”

In other words, the Treasury had no evidence as to how there may be a risk, if any.

There are a couple of things wrong with the report above. Firstly, “individuals compete to buy the same pool of properties”. There is some overlap, but relatively few owner-occupiers buy derelict buildings and re-habilitate them, or buy houses that are too big for families and turn them into HMOs, or buy off-plan and wait a year or two for the property to be built.

Secondly, “in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.” Experience after the credit crunch in 2007 showed that landlords did not choose to do this. They would not sell at a loss. If the market was illiquid, there would be no finance for a buyer. If prices were falling, aspiring buyers would not buy something that would lose value.

This section is so shallow and inaccurate that it screams propaganda. It is remarkable that this report was issued just as George Osborne was preparing to announce Clause 24. Osborne also used the Bank for supporting propaganda during the EU referendum campaign, for which he was taken to task by Jacob Rees-Mogg.

Even if the future growth of BTL mortgages did pose a risk, that is no justification for bankrupting people who bought property in previous years or decades by introducing a tax with retroactive effect. If Osborne really wanted to influence future behaviour he should have made the change apply to future purchases only. That is the normal procedure for tax changes.

Osborne really had three different motives. The first was to increase tax receipts to help eliminate the budget deficit, a policy that the new PM made him recant just before sacking him. (That was the last of his many U-turns.) The second was to steal the Green Party’s naive policy, to give young people the illusion that he was helping them onto the housing ladder. The third was to drive private landlords out of business to make room for the giant Build to Rent companies, many of which are donors to the Conservative Party. Their rents will be much higher than current levels in the PRS, and they will not be housing tenants on benefits. Indeed, two days after announcing Clause 24 last year, Osborne was on the TV news in connection with making planning approval automatic for building on brownfield sites. He wanted to make it easier for these developers.

You say that you accept that the PRS has played a large part in the increase in the number of dwellings [in England] between 1996 and 2013. In fact the PRS was responsible for the overwhelming majority (83%) of the increase from 20.3 million to 23.3 million.These 2.5 million dwellings increased the housing stock by more than 12% from the 1996 level. It brought the number of rental dwellings up from 2.0 million to 4.5 million, an increase of 125%.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/467800/Bulletin_12Aug2015_FINAL.pdf

Then you say that this report also stated that private renters spend 34% of their income, including benefits, on housing costs. Imagine what the percentage would have been if we had not more than doubled the supply. By the way what percentage should they pay?

I note that private renters pay only 5 percentage points more than the 29% that social renters spent on housing costs. That is in spite of the fact that social housing is heavily subsidised by the state.

You say that you hope that landlords would not try to pass this additional burden onto their tenants. Let’s call it what it is. It is not an additional burden, it is an iniquitous imposition. Private landlords who borrowed to buy properties in their own names will be the only people in the country who will have their major cost disallowed, and so will pay tax on fictitious income. I am concerned that you still seem to think that landlords have some sort of moral obligation to pay this unjust levy out of their own resources.

In any case, this viewpoint ignores the fact that it is the end-user who always pays the taxes that are imposed on goods or services. That is why Section 24 has been called the Tenant Tax. Consider what happens when the duty on beer or petrol is increased. The proprietor does not say he will bear this loss of income, he increases the price. The difference in our case is the enormity of the increase in tax. Would you expect a landlord to just give away most of his or her income? Let me give you an example, with real figures.

In an earlier email, I gave you a link to a submission to the Finance Bill Scrutiny Committee that you were a member of concerning the July budget. The author said that her tax would go up by 250%. I met her at the Tenant Tax summit in June, and she gave me permission to send you her figures. The spreadsheet is attached.

At present, her rental profit is £65,000, and she has no other income. In 2020/21, if all her rent receipts and costs, and therefore her real profit, remain exactly the same, her taxable profit will be deemed by HMRC to be £220,000. Her tax will go up by 256%, from £15,200 to £54,100. This will be 83% of her real profit.

The net income, which she needs for herself and her daughter to live on, will go down by 78% - from £49,800 to £10,900. But she will not be entitled to any benefits, because of her deemed income of nearly a quarter of a million.

To maintain her after-tax income of £49,800 she will have to increase her rents by 33% between now and March 2020. Not that she will be any better off herself from this.

Thanks to a ludicrous tax, her economically beneficial business of housing poor people has been undermined, and she faces bankruptcy unless she sells up or increases the rent. It is not a question of bearing an additional burden, it is a matter of economic life and death.

There are many other landlords facing the same fate. Some cannot sell because of negative equity. If they cannot increase rents by substantial percentages, HMRC will bankrupt them, and they will have nothing to show for years or decades of work.

Landlords have already stopped buying and renovating property, and the tradesmen they employed to do this are now short of work. Landlords have also stopped buying off-plan. It is no surprise to me that construction output declined in the year from July 2015. And this during an acute and chronic housing shortage.

In all the emails I have sent you I do not seem to have told you about the experience in Ireland. This was remiss of me, because there is nothing like a practical example for showing the effects of the levy. Interest was disallowed there between April 1998 and December 2001, and rents went up by nearly 50%.

“Certain restrictions were introduced on the deductibility of interest on borrowed money used on or after 3/4/1998, in the construction, purchase, or repair of rented residential premises in the State, or 7/5/1998 in the case of foreign residential premises. However, the relief for interest on borrowed money was restored for such interest accruing on or after 1 January 2002. There were some transitional arrangements in place in the interim period.”
Source: http://www.let.ie/articles/a-revenue-guide-to-rental-income under the heading “What is the position with regard to interest paid on borrowings”

Ronan Lyons of Trinity College Dublin published a report entitled “The spread of rents in Ireland, over time and space” http://www.ronanlyons.com/wp-content/uploads/2015/06/Public-and-Private-Renting-in-Ireland-Ronan-Lyons-chapter.pdf”

The graph on page 2 shows that the average monthly rent in Ireland in the third quarter of 1998 was 600 euros. The average had been climbing at a steady rate for 20 years, but it then accelerated, twice. It reached almost 900 euros in the third quarter of 2001, just before the deductibility of interest was restored as from January 2002.
So while interest was disallowed, rents increased by almost 50%.

The Irish government has repeated the error from April 2009 in a small way - by disallowing 25% of finance costs. This has made the homeless situation so bad there that the government are going to exempt landlords who will take benefit recipients again.

Those who do not learn from history…… are foolish indeed. I hope that the UK Government can learn from the Irish experiences before the damage is done, because the effect on poorer tenants will be irreversible.  Simply going back to normal tax principles will not be enough to create homes for them again.

I understand your reluctance, as a Labour MP, to appear to be championing the cause of capitalist landlords. But the fact is, you would not be fighting on behalf of landlords, you would be fighting on behalf of tenants, especially those in receipt of benefits who will be evicted in their thousands if Section 24 is not repealed. They will have to be housed by councils in “temporary” accommodation, at much greater cost.

You finished by inviting me to one of your constituency advice surgeries in order to discuss this issue in more depth. If by discussion you mean a debate as to the merits of Section 24, you will not be able to change my opinion. If you mean helping you to understand its faults, I cannot think of anything else to tell you. However, I am entirely at your disposal if you wish me to clarify anything. I would simply request that you first digest the information in this email and in the two I sent you last year and the one that the housing councillor forwarded to you. For convenience I will send you them again after this one.

Thank you for your attention to this matter. I understand that you are a very busy man, and that this is only one of many topics that you are dealing with on behalf of your constituents. However, it is no exaggeration to say that this one is of national importance. We need an effective Opposition to Section 24. I would be grateful if you would pass this information on to the other members of the Finance Bill Scrutiny Committee.

Kind regards

It is worth looking at an editorial in today's "City a.m." : http://www.cityam.com/248836/leave-buy-let-market-alone-britain-needs-more-landlords?utm_source=newsletter&utm_medium=email&utm_campaign=160906_CMU
A voice of reason. But is anyone listening?
In yesterday's London Evening Standard lots for ranting about greedy LLs and rent control - from Tenants. Not a word about through-the-nose taxation and Tenants paying a price for that.

http://www.belfasttelegraph.co.uk/business/news/market-reacting-to-buytolet-reforms-35024353.html

"Market reacting to Buy To Let reforms"

Just sent this to the new David Gauke, aka Jane Ellison, following stupid, ignorant comments in Parliament yesterday. If anyone else can send her a brief note about this 1 in 5, that would be great, as it would have more impact. You should put it for the attention of Jane Ellis and send it to:

public.enquiries@hmtreasury.gsi.gov.uk

You need to also give them your address and telephone number. My email is as follows:

Dear Ms Ellison

I read with interest your comments about 1 in 5 landlords being affected by the decision to disallow finance costs for 'private' landlords' businesses. I'm afraid that the statistic you quote, apart from being extremely speculative, is meaningless - as much as you may not mind 20% of landlords' businesses possibly going down the pan, by the nature of the change, it is landlords with large portfolios of properties who will be most affected. The Treasury needs to commission some work on this immediately, as it is quite likely that around 80% of rental properties will be affected (think: Pareto Principle).

Unfortunately, you are making the same mistake as your predecessor in repeating the falsity that this will not have a great impact on the private rental sector. As a portfolio landlord myself I have already increased rents in anticipation of being taxed on a profit I have not made (how can money I have paid to a mortgage lender, who financed my housing business be called my 'profit'? It's bizarre). Previously I very rarely increased rents - like many other portfolio landlords I preferred for the business to just tick over and didn't chase every penny. This has now changed and what is true for me is true for many. Landlords will have to keep increasing rents to hand over this tax on turnover.

How a Conservative Government could introduce this hard-left policy is incredible (in case you are not aware of this, George Osborne took the policy from the Green Party Manifesto and it had already been thoroughly rubbished by Professor Philip Booth at the Institute of Economic Affairs). Attacking one group of business people like this, who have taken risks to develop an essential service and also to provide themselves with an income and pension, is a shameful move by the Conservative Party. It will only have ill effects and exacerbate problems in the housing supply in this country.

I beg you to take heed of my words and begin a re-think on this (unless you feel you have to slavishly follow the absurd policies of your predecessor David Gauke and George Osborne's ill-considered and ill-thought out war on buy to let).

Yours sincerely

Dr Rosalind Beck

Not sure if it will help but sent this sick of these politicians speaking the same total crap and lies

Hello Jane

Further to your comments in parliament yesterday stating that only 1 in 5 landords will be affected by the reckless and unfair policy by George osbourne.

I would like to know where you are getting that figure from as I know many portfolio landlords who are going to be ruined by this policy seeing tax bill going up be as much as 200%.

How can it be fair that I am taxed on money that has been paid to a lender to finance my business. Myself and my business partners provide high quality housing to the less fortunate in society to the tune of hundreds of families if fully implemented and we stand still we won't last a year come 2021 as tax will be far greater than the profit we make ie financial Ruin how can this be fair and ok ? How can it be legal ? It is nothing short of a disgraceful sabotage of hard working business people to satisfy public opinion of our sector which is often miss guided at best ? The only other reason I can see is it is a school boy error that needs rectifying before we see carnage of epic proportions.

The only choice we have is to evict and stop letting to housing benefit / universal credit and focus on Eastern European workers ( of which there is strong demand )who will have the capacity to pay increased rents so I can pass them onto you to satisfy this ludicrous theft by your government

One question where will all these families be housed ? The council ? Don't think so and I am talking about 100s of families within one post code ? Replicate this around the country and you have a crisis on your hands as it is portfolio landlords who will be hit hardest, the more borrowing the more tax ? Crazy / bonkers doesn't cover this policy

I urge you and your colleagues to really study this Ill thought out assault before it is too late and lobby the current chancellor to see if he actually knows what he is doing as you are sitting on a ticking timebomb that is totally unnecessary and plain wrong

Feel free to respond and I will give you some workable examples including my own to show you just how bad and worrying this policy it is the stress this has caused me and my family has been immense

Sincerely
Steve Oneill
NW Landllord

Sent from my iPad

Reply to the comment left by "NW Landlord" at "07/09/2016 - 14:12":

Nice one, Steve. The more of these we can get to her the better.

No probs I agree and they need to be straight to the point and personal to each landlord affected real life examples of the devastation this is gunna cause

Reply to the comment left by "Dr Rosalind Beck ." at "07/09/2016 - 13:19":

Hi Ros

I've sent the email below for the attention of all three. I wonder if I will get the information I requested.

FAO Jane Ellison, David Gauke, Philip Hammond re the OBR's endorsement of the Treasury's assessment of the impact of Section 24

Dear Ms Ellison

In the House of Commons yesterday you said it was worth noting that the Office of Budget Responsibility had endorsed the assessment that "only 1 in 5 landlords are expected to pay more tax, we do not expect this to have a large impact on either house prices or rent levels due to the small proportion of the housing market affected”

The OBR was created by George Osborne in 2010. The three members of its Committee were chosen by George Osborne. I would like to know, please, what work the committee did in order to arrive at that conclusion, in support of the tax that George Osborne announced without any consultation, given that:

the National Landlords Association’s research showed that 600,000 landlords would have to exit the market,

the Institute of Chartered Accountants in England and Wales said that "It is likely that landlords will increase their rents to compensate for the loss of tax relief and the number of rental properties may decrease”,

when interest was disallowed in Ireland between April 1998 and December 2001, rents went up by nearly 50% and

sheer common sense says that if you impose a tax on something, it will be passed on to the end user.

Kind regards

Reply to the comment left by "Dr Rosalind Beck ." at "07/09/2016 - 13:19":

And I sent them some real figures, to make a change from their made-up ones.

FAO Jane Ellison, David Gauke, Philip Hammond A real world example of the effects of Section 24

I attach a spreadsheet showing the figures of a landlord I know who has given me permission to send it to you.  The tax calculations are correct but the percentages at the end are not worked out in the conventional way, so please ignore them.

At present, her rental profit is £65,000, and she has no other income.  In 2020/21, if all her rent receipts and costs,
 and therefore her real profit, remain exactly the same, her taxable profit will be deemed by HMRC to be £220,000
Her tax will go up by 256%, from £15,200 to £54,100.  This will be 83% of her real profit.
 
The net income, which she needs for herself and her daughter to live on, will go down by 78% -  from £49,800 to £10,900.  Could you live on that?

She will not be entitled to any benefits, because of her income will be deemed to be nearly a quarter of a million. 
 
To maintain her after tax income of £49,800 she will have to increase her rents by 33% between now and March 2020.
 Not that she will be any better off herself from this.   
 
Thanks to this tax, her economically and socially beneficial business of housing poor people has been undermined, and she faces bankruptcy unless she sells up
 or increases the rent. 
 
There are many other landlords facing the same fate.  Some cannot sell because of negative equity.  If they cannot increase rents by substantial percentages, HMRC will bankrupt them, and they will have nothing to show for years or decades of work. Many of them were hitherto the natural supporters of your Party.

I do not think that Section 24 is proportionate, contrary to the claim made in the House of Commons In July 2015, and again yesterday.

Kind regards

Sorry about the lines over-running, there is a glitch in my word processor.