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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Maria O'Neill
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Sign Up20:20 PM, 12th October 2015, About 9 years ago
Repose received to my email about proposed tax changes for landlords
Dear Mrs O'Neill
I am writing on behalf of the Chairman’s Office, who has asked me to thank you for your email. It is good of you to get in touch and make us aware of your thoughts.
The current tax system supports landlords over and above ordinary homeowners. Landlords can deduct costs they incur when calculating the tax they pay on their rental income. A large portion of those costs are interest payments on the mortgage. Mortgage Interest Relief was withdrawn from homeowners 15 years ago. However, landlords still receive the relief. The ability to deduct these costs puts investing in a rental property at an advantage.
Tax relief for finance costs is particularly beneficial for wealthier landlords with larger incomes, as every £1 of finance cost they incur allows them to pay 40p or 45p less tax. It is worth noting that the Bank of England has also noted in the recent Financial Stability Report that the rapid growth of buy to let mortgages could pose a risk to the UK's financial stability.
With the above in mind I think it is right that the Government restricts the relief on finance costs that landlords of residential property can get to the basic rate of income tax. To mitigate against the changes, the restriction will be phased in over 4 years, starting from April 2017. This will reduce the distorting effect the tax treatment of property has on investment and mean individual landlords are not treated differently based on the rate of income tax that they pay. It will also shift the balance between landlords and homeowners.
Thank you, once again, for taking the time and trouble to get in touch.
Yours sincerely,
Shannon Holland-Houghton
Office of the Party Chairman
Conservative Campaign Headquarters
Dr Rosalind Beck
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Sign Up21:55 PM, 12th October 2015, About 9 years ago
Reply to the comment left by "Maria O'Neill" at "12/10/2015 - 20:20":
If I were you, Maria, I would at least send off a short letter, saying that as we are to receive the same treatment as owner-occupiers - regardless of the fact that we are providing a housing service just as the council or Housing Associations or incorporated landlords do - that can she please suggest an addition to the Finance Bill to give us the same treatment as owner-occupiers vis-a-vis capital gains tax, and also to extend the rent-a-room relief or whatever it is called to us also as it is available to owner-occupiers - so that we, too would not pay tax on the first £7,000 odd of rental income for each separate house we own.
I would tell her that this addition should be suggested urgently as the Finance Bill is currently still in Committee stage....
It won't take long to send that off. And if you like you can tell her to put that in her pipe and smoke it (just joking).
Claudio Valentini
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Sign Up9:15 AM, 13th October 2015, About 9 years ago
Reply to the comment left by "Ros ." at "12/10/2015 - 21:55":
Ros, As Winston Churchill once said "Never give up!"...
However, it's clear that the party line is set. Think about it; There's not going to be a backbench rebellion over Landlord's wealth and wellbeing is there, so I would suggest that Maria saves her ink!
Even though we may have a very small sword, and as Mark pointed out at the beginning of this thread, I feel we need to wave the blade toward the unintended consequences and the social implications of clause 24.
It's only if we can score a direct hit with many small pointy swords on a point such as this that we may be able to create an "Oh! Sh*t, we hadn't thought of that" moment in the policy makers minds, and maybe then we have some chance of getting a stay of execution on some of clause 24.
I have meeting with my MP on Friday - I plan to get straight to the point. It's not about me - if I have a problem I can sell up - it's about the tenants. When I have to sell where are they going to live? And the implication to the Policy makers is 'This has happened on your watch' and to the MPs 'You let them get away with it!'
Dr Rosalind Beck
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Sign Up9:34 AM, 13th October 2015, About 9 years ago
Hi Claudio.
I agree that we have to argue on the 'tenants' angle' now. I have started a letter along these lines which I will aim to disseminate as widely as possible to MPs. Personally, I would still answer silly nonsensical emails from MPs, as it doesn't take long and if we all do this all the time, then there is more collective noise.
Good luck with your meeting with your MP. I also showed mine the calculations of what this tax means for me and how I would move to being just above the 'making a loss' category with a 3% increase in interest rates - he was suitably shocked. And I showed him Richard Dyson's article the 'Alice in Wonderland tax' and that also was very effective - he was suitably impressed that a Telegraph financial journalist would call it a 'lunatic tax' we might expect from a third world dictatorship.
neils26
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Sign Up17:05 PM, 15th October 2015, About 9 years ago
I live in the Chancellor's constituency and have already exchanged email with him on this issue (well I assume it was him typing a reply to me)
Don't know if I should paste apparantly personal email here, but he's convinced he's right !
Anyway I just sent him a link to this thread, suggesting he read it carefully. Also posted Mark's potential solution as a p.s.
>>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. <<
Simon Lever - Chartered Accountant helping clients get the best returns from their properties
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Sign Up11:29 AM, 17th October 2015, About 9 years ago
Reply to the comment left by "Maria O'Neill" at "12/10/2015 - 20:20":
Unfortunately you have been fobbed off.
Shannon Holland-Houghton graduated from Warwick university this summer with a degree in Politics and International Studies and managed to get an "absolutely incredible job down south in London. It is the sort of job I've been dreaming about since I was choosing my GCSE options, right at the heart of politics, and I am so proud of myself to be on the ladder already working for a political party."
She ran a blog on theWarwick University web site here: http://studentblogs.warwick.ac.uk/pais2
Ranting at her may get rid of your frustrations but she has no power and is the lowest of the low in the Conservative Party and is only copying and pasting their stock replies.
Claudio Valentini
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Sign Up12:07 PM, 19th October 2015, About 9 years ago
I met with Sir Eric Pickles at his constituency surgery last Friday and I promised Mark I would give feedback through this forum.
I approached the meeting on three fronts in what was a swift 10 minute meeting;
1. How restricting finance cost relief redefines the conventions of the taxation landscape, with some back up from Richard Dyson’s articles about clause 24 from the Daily Telegraph.
2. What this change would mean personally, using one property as an example where today I make a modest profit but by 2020 I will make a loss, and by scaling these losses up against my small portfolio showing how I will end up having to pay for the privilege of running a socially useful letting enterprise by 2020.
3. By not only concentrating on my own personal circumstances, as I do have the luxury to sell up or raise rents, I also pointed out the potential unintended consequences of clause 24 in the wider sense, in terms of property disposals, rent rises and the possible eviction of some of the more vulnerable tenants in the PRS today and how a simple amendment to the finance bill could prevent the destabilisation of the PRS moving forward, if the finance bill were to concentrate solely on all new BTL purchases from 2017 onwards.
He was largely non-committal and quite cool throughout the entire meeting and only ventured to say three things at the end.
1. I have 4 years to put my rents up
2. I am not going about things in the right way by calling David Cameron a lair – in fact I suggested that this was a rhetorical question “Is David Cameron a liar?” in the context of his pre-election pledge of no tax increases and how did Sir Eric think I would have considered casting my vote if these topics had been published in the last Conservative manifesto?
Sir Eric stood by his previous comment!
3. He did say he will have a go for me and requested my slides.
That was it. No empathy. No emotion. No debate. Although he said he would have a go I didn’t really get the impression that he was altogether too sympathetic.
I do feel the party lines are becoming increasingly drawn on this and I don’t expect too many M.Ps will stick their heads above the parapets and lobby for the wellbeing of the landlord community.
Meanwhile, I would welcome any suggestions to help me to continue to mobilise the messages
Luke P
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Sign Up13:50 PM, 19th October 2015, About 9 years ago
Governments should be scared of the electorate, not the electorate scared of its Government!
How frustrating of him to have you in and out without so much as a little empathy.
My local MP was similarly uninterested/un-informed, but has since decided to pay more attention as the debate hots up (I met with him very soon after the announcement) and have been forwarding him some of the easy to understand, better presented arguments that I have happened across in recent times.
My invite to a private dinner with him, a minister (yet to be announced) and one or two other party colleagues to be held at The Carlton Club arrived this morning. Looking forward to 'rattling a few cages' up close and personal with the powers that be...
Michael Fickling
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Sign Up15:32 PM, 19th October 2015, About 9 years ago
Heres a suggestion..we draft a standard letter for all our MP s ..short and impactive saying A. The conseravtives have effectively created a turnover tax here since finance interest is typically 75% of our costs and after this change by them..we can only claim 25% of that NOT ! 100% of it as we do now.They therefore lose our votes and ourconfidence as the "party of busines"s. .as theyve created a whole new business tax paradigm here.....B>>..every time we serve notices to quit on tenants due to this conservative policy..we add a short note to the tenant explaining that its the conservative party that have forced them out. That should cost them about two million votes. Perhaps that might be of more interest to them!!
Jon Pipllman
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Sign Up15:50 PM, 19th October 2015, About 9 years ago
>Luke P
Check that they aren't expecting you to pay for the bill!