Budget 2015 Interest Tax Deduction Landords - Analysis of impact

phlash

Thrugelmir wrote: »

A market correction could easily leave many highly leveraged. Exposing them to the double whammy if the asset was non income bearing.

BTL as a model has been geared towards capital growth. Few borrowers have built on their empires on a self funding repayment model. The tax changes are significant. As reduces the attractiveness of the concept.

Given GO is committed to a level playing field across the taxation system. Doubt this will be the last measure to impact the sector. The length of time before full introduction will be interesting to monitor. Both from a lenders and borrowers perspective. Borrowers will act in a herd fashion. Once spooked will they stampede for the exit doors?

Cannot disagree with that being a risk.

Interestingly, it is the 'accidental Landords' 30-40 range who seem to have been contacting me since reading this blog.

Ie. The highly geared couple who got married and didn't/couldn't/wouldn't sell the first home due to market conditions present in the Housig Market post 2007.

cells

The changes are terrible because somehow the treasury seems to think it can simply dictate a certain cost is no longer going to count as a cost, they then go onto muddy the water by talking about tax relief on interest and limiting it to 20%. there is no tax relief on interest its a dam cost

I suspect they didn't apply it to companies as companies would take it to court. Not to mention the repricing of risk to FTSE100 companies would probably wipe billions of their value (if they can decide interest on homes isnt a cost whats next, interest on anything?)


Also the way it is done, to apply to just one type of investor in one type of asset class is very close to asset theft imo.

If they want to tax BTL more then do it in an honest way. One method would perhaps be to have a national private rental licence fee (MAybe £120 a year) which would bring in the same sort of tax ~£600m a year but be a lot fairer.

cells

You don't need to look at individuals you can look at houses.

£500k house with 5% yield bought with a 25% down 3.5% mortgage £2,000 fee on a two year fix

Annually:
£25,000 rent
-£14,125 in interest and mortgage fees
-£2,500 void and tenant finding fees
-£1,000 other
= £7,375 profit
£4,425 net profit after tax @40%

After the interest is not a cost farce
£25,000 rent
-£2,500 void and tenant finding
-£1,000 other
Tax on £21.5k @ 40% = £8,600
Tax credit on £14,125 to muddy the water @ 20% = £2,825
-£14,125 interest and fees

Total post tax = £1,600


So in this example if you are already a higher rate payer you go from a post tax profit of £4,425 to £1,600 which is a huge drop.

cells

one of the long term unintended consequences will surely be lower stamp duty tax take and lower economic activity?

This change will slowly but surely see BTL homes held under a corporate structure rather than sole trader (aka individuals). Well a company can hold a house for a thousand years but individuals landlords HAVE TO SELL at some stage if for nothing else but death (also a lot of other reasons). So in the hands of sole traders over the same period they may have sold and resold a BTL 50-100x paying each time stamp duty legals and agent fees

I think this change will make the UK have less owners and more renters in the decades to come which is probably the opposite of what the government especially a conservative government would want. In germany one big REIT owns 300,000 homes. They are not likely to sell those homes it will stay in their hands for a long long time and maybe it will be sold to other REITS etc in large chunks but owners will never get a look in so there will not be a conversion from rental property to owner

cells

Thrugelmir wrote: »

Given GO is committed to a level playing field across the taxation system. Doubt this will be the last measure to impact the sector. The length of time before full introduction will be interesting to monitor. Both from a lenders and borrowers perspective. Borrowers will act in a herd fashion. Once spooked will they stampede for the exit doors?

but what is happening is that company landlords are getting a 10% tax cut (corp tax going from 20% to 18%) while sole trader landlords are going to be taxed a LOT more at 40-45% and not be able to claim interest as a cost (gov estimates £600m additional tax take from sole trader landlords each year but I think it will be higher)

So whats likely in the Long run is a slow and steady shift in the UK from small time landlords to corporate landlords and potentially mega corporate landlords. In Germany the biggest corporate landlord owns an astonishing 300,000 homes and there are a number of such big corporate landlords.

Good or bad its hard to tell. Corporates will probably be more professional but they will possibly charge higher rents (as they will be paying for everything whereas sole traders often ignore their own time cost)

Also with corporate landlords imo they wont sell to jo public. Once a corporate buys a house and makes it a rental it will probably stay a rental for hundreds of years. A sole trader typically cant hold onto a BTL for more than maybe 30 years and is forced to sell (retirement/death/divorce/boredom/bad tenant/stress/etc) whereas a corporate could hold on to a house for a thousand years. So imo its a one way street with rentals growing and owner occupation falling as corporates buy but dont sell

This will surely also mean less stamp duty tax. Less legal and agent fees and less churn.

princeofpounds

I'm not sure avoiding a fall in stamp duty receipts should ever be a goal of taxation or housing policy!

Thrugelmir

cells wrote: »

but what is happening is that company landlords are getting a 10% tax cut (corp tax going from 20% to 18%) while sole trader landlords are going to be taxed a LOT more at 40-45% and not be able to claim interest as a cost (gov estimates £600m additional tax take from sole trader landlords each year but I think it will be higher)

Try obtaining BTL mortgages through a limited company set-up.

Treatment of dividends is also on the reform agenda. So may not be as attractive as it may seen.

Housing is a social issue. Less money spent on housing will release money elsewhere in the economy. A fact that GO won't be overlooking for obvious reasons.

As for Germany read up on post war history. Then you'll understand the fundamental differences in the market. The reconstruction of the West and life behind the wall to the East.

BTL as such didn't even exist until 1998. So still in it's infancy.

cells

Thrugelmir wrote: »

Try obtaining BTL mortgages through a limited company set-up.

Treatment of dividends is also on the reform agenda. So may not be as attractive as it may seen.

Housing is a social issue. Less money spent on housing will release money elsewhere in the economy. A fact that GO won't be overlooking for obvious reasons.

As for Germany read up on post war history. Then you'll understand the fundamental differences in the market. The reconstruction of the West and life behind the wall to the East.

BTL as such didn't even exist until 1998. So still in it's infancy.

big corporate wont go to an expensive bank and individually mortgage homes every two years

they will just issue their own paper and completely skip the banks altogether like the big REITs in Germany do.

That way they wont pay silly 4% interst and £2k fees every other year per property. Instead they will issue short term paper at maybe 2% interest

Graham_Devon

Reading on that property118 forum they appear to be spitting feathers. There also seem to be quite a few of them that are stating they will be bankrupt as a result of these changes.

It appears those who will be hit hardest are those who have gambled, more than invested. it's quite an eye opener to read that some of these landlords are making less than £20 profit a month from their houses. That's simply insane. But their plan was always capital appreciation.

Capital appreciation is a gamble itself, but some appear to have exposed themselves to crippling debts in order to take that gamble. How did they even get hold of such debts? I thought the banks were being cautious now?

Others don't seem to be having much of an impact at all. So as an outsider to all of this I'm interested in how for some it will see them bankrupt (apparently) though others it will hardly make any difference at all to them.

cells

princeofpounds wrote: »

I'm not sure avoiding a fall in stamp duty receipts should ever be a goal of taxation or housing policy!

Its not a goal but when they have bright ideas like this they tally up how much its going to cost or bring in, but I would bet that they have not at all thought about let alone considered that a shift from sole trader to corporate is going to mean rentals held for much much longer terms.

In the long term I suspect a shift to corporate ownership of the rental stock will bring in a lot less taxation (stamp duty, capital gains, and economic activity from agent and solicitor fees etc)