118 Landlords Panic and try lobbying MP's yet again

brit1234

The more militant arm of landlord websites "Property 118" is throwing their toys out of the pram yet again and lobbying MPs to try and reverse the Budgets start of removal landlords tax advantages over 1st time buyers.

Their leader Mark Alexander famous for losing landlords hundreds of thousands pounds with their failed West Brom legal action is now starting this new campaign with a lobbying campaign aimed at Tory MPs. Here is his letter starting off his campaign.

Dear Mr Freeman
I have been a Conservative voter for my whole life and have used the influence of my property forum and blogs (200,000 subscribers) to encourage my peers to vote the same way.

I would very much like to meet with you to discuss my concerns regarding the budget, in particular the impact on lending institutions and a hardcore of Conservative voters who invest into buy-to-let property. I believe the impact is far more wide 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. 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 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 may be equally effective to deal with the Chancellors objectives whilst negating the necessity to openly backtrack in order to avoid the 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 and hope we can schedule a meeting sooner rather than later.
Yours sincerely

http://www.property118.com/open-letter-george-freeman-mp-conservative/76353/

As a potential first time buyer these changes are finally good news for first time buyers. It starts to address the present imbalances between first time buyers and landlords giving us a chance. A number of us have been campaigning hard the last few years for these changes and finally the government have taken notice.

What are your views, first time buyers, renters, landlords or home owners?

cells

It is quite a significant change

Taking an example of a £10k pa rental income property with £5k pa mortgage plus 10% wear and tear, you get

Currently
£3.2k net post tax (+£500 W&T bonus) if you are a lower rate payer
£2.4k net post tax (+£500 W&T bonus) if you are a higher rate payer

New System (assuming on average £500 wear and tear costs arise)
£3.6k net post tax
£1.7k net post tax

So for a higher rate payer including the wear and tear changes it means going from £2.9k net post tax to £1.7k net post tax which is a near halving of take home net profit which is very significant

personally I find it very odd that the government has decided or is even able to dictate that one type of cost is not a cost. I suppose the next step is to just say that mortgage interest is not a cost and just do away with the 20% "tax credit".

Its quite disappointing the way its been done to arbitrarily decide one type of cost is not a cost. If you want more taxes then put in a higher tax rate


PS what happens to companies how do they deal with interest as a cost now?

antrobus

cells wrote: »

....personally I find it very odd that the government has decided or is even able to dictate that one type of cost is not a cost. I suppose the next step is to just say that mortgage interest is not a cost and just do away with the 20% "tax credit"....

It's what happened with MIRAS.

cells wrote: »

..PS what happens to companies how do they deal with interest as a cost now?

Same as before, as far as I'm aware. At least incorporation has been touted as a 'loophole' in the new rules.

stator

I think it's fantastic. :beer: on me!
It's no surprise that the greedy slumlords are complaining that the government is taking away their method of picking money from the pockets of the poor.

padington

It's a brilliant political move. Taxing landlords more , taxing homeowners less and boosting wages more than labour promised to do.

Labour are dead in the water now. Osbourne just won the 2020 election.

... And the market will factor this in, negating the damage the BTL tax could have done.

Genius.

daveyjp

There's five years to 2020. Plenty of time for any unhappy landlords to sell their properties.

padington

daveyjp wrote: »

There's five years to 2020. Plenty of time for any unhappy landlords to sell their properties.

Oh they will, prices will go down for sure ( unless global storms continue to make us look even more attractively safe), there should be a dip but then normal punters will start coming into the market. Bringing them up again. Owning is a no brainier and with a free 7.5k lodger tax bonus, it's even a better idea now and as wages are on the up there will be a golden second chance Sunday for lots of normal people to become owners, that's a good thing.

Also for every Chuck Norris or Purch who pull out the game, there will be more chance these characters use their acumen and wealth to create and innovate or invest more hard cash in real innovation. This gives UK more of a chance of punching higher than ever and could have unprecedented benefits to society at large.

Osbornes budget was a strategical masterpiece and has set Britain in a solid direction for the medium to long term.

Graham_Devon

padington wrote: »

Oh they will, prices will go down for sure ( unless global storms continue to make us look even more attractively safe), there should be a dip but then normal punters will start coming into the market. Bringing them up again. Owning is a no brainier and with a free 7.5k lodger tax bonus, it's even a better idea now and as wages are on the up there will be a golden second chance Sunday for lots of normal people to become owners, that's a good thing.

Also for every Chuck Norris or Purch who pull out the game, there will be more chance these characters use their acumen and wealth to create and innovate or invest more hard cash in real innovation. This gives UK more of a chance of punching higher than ever and could have unprecedented benefits to society at large.

Osbornes budget was a strategical masterpiece and has set Britain in a solid direction for the medium to long term.

Bit weird when a staunch tory is saying "hell, yer, they implemented labours policies, go tories!"

If they are labour policies they are utterly idiotic.

Yet if a tory implements them, its a masterpiece.

ruggedtoast

The squealing of the buy to let piggies is music to my ears. And from a Tory Chancellor too. Miracles do happen.

Edit. I love the total codswallop in the example, where the poor landlord toils and slaves for his tenants without making one penny of profit . They should be knighted not taxed!

brit1234

I think the Tories saw how well Labour did in ground zero of the housing crisis (London), the parties are finally working out that decent housing policy wins more votes than supporting Landlords.

Here in London there was a massive campaign against Labour by estate agents due to their housing policy, it failed. Housing is becoming the main issue and I don't think property 118 are going to change that.

padington

Graham_Devon wrote: »

Bit weird when a staunch tory is saying "hell, yer, they implemented labours policies, go tories!"

If they are labour policies they are utterly idiotic.

Yet if a tory implements them, its a masterpiece.

I'm not a staunch Tory. My natural sensibilities are actually socialist (in the sense of having a maximum wage) but we live in a fragmented global market place. Socialism can't exist in such a place without loosing its best people or being so authoritarian it's a horrible place to live. So from there you have to be a realist which requires looking at how you can maximise opportunities for all in other more creative ways.

Taxing houses over 2 million pounds would have helped no one really. Milliband had no vision, he was actually a political lightweight when it came down to it in so many ways.

Did you vote for Milliband ?