14:48 PM, 2nd October 2015, About 9 years ago 73
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The one thing that struck me is that my MP did not understand how Restrictions on Finance Cost Relief for Individual Landlords works in practice.
It was only when he understood that, after I gave him a very simple and relevant example, that he could begin to comprehend the unintended consequences.
When I explained that I had met Sean Rath and Megan Shaw at The Treasury he seemed bemused why no amendments had been tabled. I confessed that my presentation to him was probably more polished that I had previously given. That was because I had prepared a 20 minutes presentation for Mr Freeman whereas my preparations for my meeting at The Treasury were for sound bites on the basis that I was expecting to be one of many contributing to a much larger group discussion. As it transpired, the meeting was only attended by me, a policy adviser The Treasury and Megan Shaw and her boss from HMRC.
Towards the end of our meeting Mr Freeman asked me to write to him and to reiterate my presentation. I am sharing that letter below ….
“Dear Mr Freeman
Thank you for granting me surgery time at Attleborough Town Hall today. I am a lifelong supporter of the Conservative party and a private landlord operating in your constituency, hence it was a pleasure to meet you in person.
My objective was to persuade you to lobby The Finance Bill Committee to table an amendment to clause 24 of The Finance Bill, in order to prevent unintended consequences which I subsequently went on to explain during our meeting. Thank you for explaining why you are unable to lobby the Finance Bill Committee.
Nevertheless, you asked me to summarise our 20 minute meeting in writing so that you are better placed to raise the matters we discussed politically with your colleagues at Westminster.
First I provided an example of how Restrictions on Finance Cost Relief for Individual Landlords actually works in practice.
We used an example of a flat in Attleborough rented to a single parent who works 16 hours per week and claims various benefits including Working Tax Credits and Local Housing Allowance. Her rent is £500 a month which provides her landlord with a gross 6% per annum return, i.e. £6,000 per annum.
Her landlord budgets £1,000 per annum for management, maintenance and compliance and the remaining £5,000 a year of rent is used to service his mortgage, for which he has very prudently fixed the interest rate for the next 10 years. Therefore, the landlord makes no cashflow profit from this property. His long term strategy is that rents will rise and his profits will increase on that basis, and that he will also benefit from capital appreciation in order to fund his retirement and long term healthcare if and when required, such that he is less likely to need to rely upon state support later in life.
The finance cost restrictions mean that by the year 2020 the £5,000 a year being spent on mortgage interest will be added to any other taxable income and that he will be liable for tax at the prevailing rate for this “notional income” based on the appropriate income tax band.
I then went on to explain that the landlord could own 20 properties in your constituency and a further 20 properties elsewhere. By 2020 he will be taxed on £200,000 of profit which he has never actually had, i.e. 40 X £5,000 of finance costs. Given that he is already a higher rate tax payer, his tax at 45% will increase by £90,000 but he will receive 20% tax relief on the £200,000 of finance costs, ie. £40,000 thus reducing his additional tax burden to £50,000. A key point here is this; he has not received the profit upon which this tax is payable, it was a legitimate expense of his business. Accordingly, his business model is no longer viable. He cannot pay tax on profits he’s never actually received, it is ridiculous that anybody would expect that to be possible. If he had known this could happen then it would have been extremely unlikely he would ever have made the decision to buy the rental properties as investments. Nevertheless, he must now deal with the consequences in order to avoid becoming insolvent. His decision in that regard is to sell the properties to people who can afford to buy them for owner occupation. Fortunately there is pent up demand so that is unlikely to pose a problem.
None of his tenants are in a position to buy these properties as they do not qualify for mortgages for a variety of reasons including income and credit status. The very realistic scenario I posted to you is how you would provide housing for the 20 displaced tenants in your constituency. I think that is when the penny dropped for you in terms of the unintended consequences I had initially referred to. You don’t have the available social housing. Temporary B&B style accommodation would become strained, expensive and inappropriate in for anything other than a short period of time. The real problem though is that you will not only be facing this problem for the tenants of just one landlord in your constituency unless changes are made. The restrictions on finance cost relief for individual landlords will affect 1 in 5 landlords in your constituency, and in fact the whole of the UK, according to the Impact Statement prepared by the OBR.
I then went on to explain that a campaign group I am working for had submitted Freedom of Information requests to HMRC asking how many properties and how many tenancies would be affected. The responses to both questions is that such data is not available. This is clear evidence that the unintended consequences of the tax change cannot possibly have been considered with factual data by the OBR. Accordingly I have made the following prediction based on mathematical logic …..
We know the balance outstanding on buy-to-let mortgages that have been granted to individual landlords is around £200 billion. Based on the 80/20 rule (Pareto Theory) it is likely that 20% of landlords are responsible for 80% of this debt, i.e. £160 billion. This also ties into the Impact Statement that 1 in 5 landlords will be affected by clause 24 of The Finance Bill. I have no statistical data on what the average LTV ratio is on buy-to-let mortgages, but if we suppose it is 80% that means that £200 billion of rental property could be affected by the unintended consequences to landlords, tenants and housing needs as I have described above by the year 2020.
I think we are generally in agreement that to avoid the unintended consequences, The Finance Bill could be amended so that Restrictions on Finance Cost Relief for Individual Landlords are only imposed to new buy-to-let purchases post April 2017. This would affect new investment decisions, but will not affect historic business decisions made by existing landlords, thus leading to the potential unintended consequences and mass disposals of PRS stock due to Government policy rendering buy-to-let as being not viable for many existing individual landlords. Such an amendment would have the effect of taking the froth out of the buy-to-let market, because it would discourage accidental landlords who do not have the financial resource to adequately maintain their properties from entering the market. However, it will not discourage future investment in the sector from those with the financial wherewithal, because they will form limited companies, which are subject to far more robust underwriting requirements in terms of debt, and unaffected by finance cost restrictions. Coupled with the increased regulatory powers granted to the Bank of England to influence and regulate mortgage lending criteria this should have the affect of leveling the playing field to the extent that Government deems necessary.
I completely support the notion of home ownership wherever appropriate. However, we must also remain mindful that home ownership is unrealistic for a growing percentage of the UK population due to their ability to borrow, requirement for job mobility and housing whilst in education etc. Accordingly, I urge Government to consider that destabilisation of the PRS, which has the prospects of leading to a reduction in supply of rental accommodation, is highly likely to result in significant issues in terms of homelessness and associated pressure on the welfare system.
In five years time I do not want to see you being confronted at your surgeries by an angry mob of homeless people, evicted as tenants by individual landlords who have been left with no choice other than to sell their properties due to this tax change.
The only solutions to the housing crisis generally are to build more and/or managing population growth.
If Government wishes to raise additional tax revenue, the introduction of a form of CGT on residential housing conforms with the taxation policies widely accepted by many other countries. If such a tax could be coupled with tax incentives for provable maintenance and home improvements then that could also have a significant impact on black market labour too.
By the way, just eight days before the election David Cameron promised not to increase tax, George Osbourne made his boss a liar within 100 days by introducing this tax change which wasn’t even mention in the party manifesto.
I shall now leave these matters in your hands.
Yours sincerely
Mark Alexander”
Related Open Letters >>> http://www.property118.com/category/open-letter-to-mp/
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NW Landlord
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Sign Up10:14 AM, 5th October 2015, About 9 years ago
Reply to the comment left by "G Cox" at "05/10/2015 - 10:04":
What are u on about ? Interest on mortgages is a legitimate expense it is a cost simple. How can you pay tax on money that u have paid out to service your mortgage and most lenders do not lend to limited companies and the ones that do are expensive
Harry Chunk
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Sign Up10:20 AM, 5th October 2015, About 9 years ago
Well done Mark, at least someone is championing our cause.
Just to say I recently had a property become vacant for reletting. I had numerous applicants and interviewed the best three. One was on housing benefit but I agreed to see her at the bequest of the agent, I don't normally accept HB, but I was told she was a nice lady and had rented with them for a long time. She was a single mother with four children ranging between 5 and 17. The three younger children came with her. Very nice lady who told me after the last budget her landlord had decided to sell up and had given her notice which had two weeks to go so quite desperate. The 5 year old then starts launching himself off stair 7 onto the hallway floor, not just once but four times before she asked him to stop. He still carried on until I had to say that he wouldn't be living in this house.
The next person only wanted the house for 12 months as they were looking to buy somewhere, had three children at private school. They had also been given notice by their landlord who was selling.
Finally accepted a man and wife with one child who came up with all the
right references and ticked all the right boxes for me anyway. They had also been given notice by their landlord who was selling.
I think we are going to be seeing a lot more people displaced by landlords selling, unnerved by the last budget and the vitriol show to landlords by the have not brigade and their cohorts. There is also a mountain of red tape being introduced making being a landlord onerous all swayed in favour of the tenant.
I have been a landlord for 20 years and am seriously considering my options, it might be Belgium here I come.
Michael Fickling
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Sign Up10:22 AM, 5th October 2015, About 9 years ago
I believe we need to really emphasise the number of tenants who will be evicted. If every other landlord serves one or two families with notices to quit thats several hundred thousand people..maybe a million or more..still chasing rental property,,,with several hundred thousand less rentals left available as landlords exit the market..The double leverage can not be avoided if the government continues with this. Ive already served notice on one unfortunate family as i simply cant take the risk of only beginning to unload properties from 2017.Where is the government going to get new rental stock from for all these displaced tenants?????
NW Landlord
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Sign Up10:25 AM, 5th October 2015, About 9 years ago
Michael I am exactly the same me and my business partner are selling around 10-15 family homes over the next five years maybe a few more making a lot of tenants homeless in areas where there is a shortage anyway it's going to be the end user ie the tenants that will suffer
john lown
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Sign Up10:26 AM, 5th October 2015, About 9 years ago
Hello Mark,
excellent appraisal of the proposed situation. The unintended consequences are indeed very real. In our area of South Devon housing stock that is let out to that sector will become second homes for holidays, leaving the current tenants homeless and the local authority with a growing problem.
Clearly the people making these policies have little experience of business and have probably risked no more than a train ticket in their lives.
in short - you would not run a business like it..
John.
Mark Alexander - Founder of Property118
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Sign Up10:42 AM, 5th October 2015, About 9 years ago
Reply to the comment left by "G Cox" at "05/10/2015 - 10:04":
Your comment is complete and utter tosh!
There should be no difference in tax treatment of finance costs between a rental property being owned in a company structure or by a landlord in his own name.
Why should individual landlords have to refinance into a company structure just to save tax? Would it be fair if the restrictions had only been applied to companies so that all corporate landlords had to pay to refinance their properties into their own personal names just to qualify for the same expenses deductions as every other business in the UK?
.
Claudio Valentini
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Sign Up11:03 AM, 5th October 2015, About 9 years ago
Thank you Mark,
I’m seeing my M.P. Sir Eric Pickles on the 16th and all the resource you’ve compiled will be really helpful for this meeting - the challenge is getting the message down to a bite size chunk you can deliver in 5-10 minutes.
As for changing government policy, well I’m a bit of a cynic on this. I don’t think the Government has any intention on doing that whatsoever and here’s why I think that way;
1. Whichever way we turn on this we're going to get clobbered by HMRC; This is a brilliant piece of political taxation strategy probably thought up by a treasury whizz kid against a constituency that nobody cares about and doesn’t pull any electoral votes. Everyone hates a Landlord – just read the press and listen to the media. The only messages you seem to read and hear about are that rapacious Landlords provide sub-standard accommodation at exorbitant rents and evict tenants to profit on rising rents and property prices at a moments notice. As a constituency we are a soft target, un-liked and uncared about, so if the treasury wants to clobber us nobody is going to bat an eyelid. The treasury knows we have nowhere to turn so what can we do?
a. Stay on under the new rules – get clobbered on personal tax
b. Sell up – get clobbered with Capital Gains Tax
c. Incorporate into a limited company – get clobbered with SDLT and CGT
2. Big business is moving into PRS – Why? Home-owning peaked at 69% in 2001 and is now declining. Meanwhile, the private rented sector has grown on average by 5.4% per year since 1999 and now accounts for 19.4% of households. Read this article in the Economist and see why this is an opportunity for big business, but first you have to get the existing ‘cottage industry’ out of the way. What better way to do that than by changing the tax rules in order to create “a fairer tax system for all”. Merde de Boueff I know, but the brilliance of this wheeze is that it gets support from the left and the right, it makes some tax receipts on the way and then turns the BTL industry into something that the Government can better control (and milk for donations. By the way, who bank-rolls the Conservative Party? Would that be big business perchance?)
http://www.economist.com/news/britain/21665060-institutional-investors-are-showing-renewed-interest-rental-market-build-it-and-they-will?fsrc=scn/tw/te/pe/ed/builditandtheywillrent
I’m not a defeatist and I think we should (and I will) challenge our local Politicians to hear our argument but like King Canute who demonstrated he had little control over the elements "our secular power is vain compared to the supreme power of God” or in this case a politicised HMRC.
It is not all negative though and this change of landscape potentially opens up new opportunities for us Landlords. For me, it will require some consolidation of my small portfolio, to get the LTV down from 63% to something more manageable, selling up and taking some of the equity out of the least well performing properties, paying the CGT on these sales and then incorporating a limited company to rebuild a new portfolio of BTLs with a plan to manage these moving forward or exit at some future point in time with maybe a portfolio sale to the new big business entrants. My only concern is that the treasury whizz kids who thought up the previous wheeze are just waiting for us Landlords to do something like this, and having got us at the front end will aim to get us again at the back end.
Still, it’s a risk getting out of bed in the morning…
This maybe puts my plans back 5 years compared to the old rules, but as many readers to this forum will attest, BTL was never a get rich quick scheme and property is a long term investment.
Jason McClean - The Home Insurer
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Sign Up11:09 AM, 5th October 2015, About 9 years ago
Well said Mark. It's great we are all targeting our MPS. What about sending a similar letter to George Osborne and the Treasury, requesting responses?
G Cox
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Sign Up11:17 AM, 5th October 2015, About 9 years ago
I am a financial economist of 30 years standing and your comment is offensive and quite unnecessarily so.
It illustrates why you efforts are poorly directed; being a product of what appears to be a blinkered part of the BTL community and incidentally a very rich community judging by the examples you choose to use and I can assure you primarily rich because the financial environment has very accidentally favoured highly leveraged BTL .
To favour the latter against future BTL investors with your idea of sparing the existing borrowers, when you all have done so well by accident, just because you leveraged and other BTL investors did not or could not confirms my impression of the size of your blinkers
To gain traction you need un-blinkered expert advise to get the PR right.
I suspect George thinks most are lucky free loaders with their financial 'engineering' proceeds when crystallized( now or after inheritance) mostly spent abroad or on foreign products to the detriment of the UK .
You have not responded to my point that higher rate tax relief does not apply to interest costs inside companies and hence is no cash flow drain today on the Exchequer .
Why don't you focus on getting roll-over relief?
Signing out from this and all future discussion and leave you to enjoy your 'good riddance's.
PS I am max. leveraged on my BTLs.
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Sign Up12:06 PM, 5th October 2015, About 9 years ago
Reply to the comment left by "Claudio Valentini" at "05/10/2015 - 11:03":
So well said thank you
we all have to change and find our way out of this Cottage Industry and if you want t grow as I do? go into a LTD CO
The facts are if you have a million pound investment business you still have a million pound investment business I
The skills you have learned can still be used in the new LTD CO situation
who knows if you build a large Ltd Co this could be the best thing that ever happened to you
I hope to see the back of Landlords who look upon this business or pin money a lot should not be in business because they don't understand business this is highlighted by the number of Landlords who just don't understand this new tax situation
I do believe we need a new CBI arrangement for Co Landlords who can drive up standards in our business and who have some clout to challenge Govts of all shades in the future
I am up to the challenge yes this is a set back we will lose this battle but we can still win the war of success n building a better future fr ourselves and families
Don't forget if you want to pass down property to your family in years to come iits easier in a LTD CO where you can give your shares to your children and grandchildren
The other thing we have is a window of time to try and avoid te new rules it could have been worse the lot could have gone now
and where would we all be then
Im optimistic that good will come from this bad situation