Tax isn’t really my thing and although I had read a bit about landlords being annoyed about tax changes being introduced by the Chancellor, I had not thought much about it.
However over the weekend I read this post in the Telegraph.
It’s a worrying article.
What are the landlord tax changes being brought in?
It’s all a bit complicated, (and if you are going to be affected by the changes, you should speak to your accountant NOW). But the main points as I read it are (assuming the Telegraph article is correct):
- Landlords who own their properties with a large mortgage will pay more tax. A lot more tax. It could wipe out their profits entirely
- Wealthy landlords who do not have a mortgage will be unaffected
- The hardest hit are likely to be ‘modest, middle-class savers who have prudently chosen to invest in buy‑to‑let, often alongside pensions and Isas, as a means to supplement their income’
- Such landlords will either have to increase rents dramatically or sell their portfolio
The Telegraph article explains it neatly:
In effect, the Chancellor wants to tax landlords on their turnover rather than their profit, meaning that tax will be payable on nonexistent income. This explains why tax rates will, for some, exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.
Tenants groups such as Generation Rent are feeling quite pleased about all this – but should they?
It all depends on what the buy to let landlords who will be most affected, will do.
If they decide to carry on being a landlord
They will have to do something to reduce their tax liability. Maybe, if they have several properties, they will be able to sell some so as to make the remaining property / properties mortgage free.
Otherwise, or also, they will have to raise their rents. This will not be good for their hapless tenants, particularly as, even with the increased rental income, many landlords may still struggle to find enough money to pay for repair work. If indeed they have any money at all.
Mark Alexander of Property118 has announced that he will be moving to a Mediterranean Tax haven as otherwise the tax changes are likely to make him insolvent. I suspect he is not alone.
If they decide to sell up
Who will buy their property? Hopefully, it will be ‘real people’, families with children or young couples starting out in life. But will they be able to afford them? Only if the prices drop considerably.
If prices drop, this will be wonderful for the tenants lucky enough to buy (which will probably be a minority of tenants overall) but bad for the buy to let landlords with mortgages. They may well be forced to sell all their properties, which – unless they are snapped up by other more affluent landlords, will mean fewer rented properties available.
A substantial percentage of rented properties are owned by ‘small landlords’ – probably most of which are held on large mortgages.
Good or bad?
I don’t know whether the changes which will come as a result of the new tax rules will be good or bad. Depending on your perspective, it could be either.
However, a dramatic decrease in properties available to rent would be bad, as we do need a certain amount of rented property. Not everyone wants to, or is able to buy. But there is only (unless they really crack on with the housebuilding) a finite amount of housing available.
The question is I suppose – what is the best use for our housing? What is the best proportion of rented property to owner-occupied?
The rich get richer
What seems clear from the Telegraph article though, is that the modest landlords will be the ones being driven out. These are mostly working-class or middle-class people who have managed to buy one or two buy to let properties as an investment.
People who own their properties without a mortgage, in most cases the wealthy, will be unaffected – save that if rents go up as a result of this, they will benefit substantially.
So after these changes come into effect, only the wealthy will be able to be landlords (or remain living in this country). In the same way that only children from wealthy families can now afford to be students (without acquiring hideous debts).
Is this what we want for our society?
No consultation
These changes have been brought in, it seems, without any consultation. By this Conservative government – for whom many landlords voted.
It is something that will affect all of us.
Tenants may be feeling smug about it thinking it’s just a lot of wealthy landlords whinging about losing their tax breaks, but it sounds as if it’s not the wealthy landlords that will have the problem.
A reduction in the amount of rented property available coupled with a hike in rents does not sound like good news to tenants for me.
Good for Government?
However it may well prove good for the government – they want more property owners as the equity in their properties can be used to cover the cost of their owners care in old age.
Then also read this extract from Dan Wilson Craw’s article in the Independent
Faced with the prospect of never owning a home, and knowing that the state will cover the rent if they retire with no assets, it will begin to make sense to cancel your pension plan and give up on saving altogether.
That should terrify the government. A report by Capital Economics predicts that the housing benefit bill could reach £200bn by the time today’s A-level students retire in 2066 – up from £24.4bn today and worth a quarter of the entire 2015-16 Budget.
Which may provide some explanation for the government’s action.
Bubble bubble, toil and trouble
I predict that at some stage there is going to be a crash. Things are getting too unstable. But one thing about bubbles and crashes is that most people never see them coming.
Do you remember 1988? I was in Mexico that year and I remember sitting in the Embassy reading about the massive rush of people trying to buy a property before the MIRAS changes came in.
What happened then? No-one wanted to buy property after the deadline and there was a massive crash. Many of the people who had rushed to pay those high prices were left in negative equity and were unable to sell their properties for years.
I would be very wary about investing in buy to let for the time being if I were you …
And tenants should perhaps stop feeling smug and start feeling worried.
NB Landlords will find a petition against the planned tax changes here.
As a private tenant I am extremely worried Tessa. My landlords are decent fellas. They are a couple of accountants who will be right onto this. I dont know the size of their portfolio but if they need to act to protect it then I’m “In the clarts” as they say in the North East.
I had a rent increase in April so they cant do one until next April. Their only option would be serving me with an S21 and I incur another £2,000 – £3,000 relocation costs like last time my landlord decided he wanted to sell and realise his assets.
Another sign that this government is for the wealthy only, like every Conservative government
My objection to these changes is on a point of principle that they create a situation where landlords (who are running a business) can be required to pay tax even when the business has made a loss. Related to that is the fact that the changes are complex enough that a typical landlord will not know the impact until the tax bill arrives, or their accountant explains the new rules.
I know many landlords who are now preparing to sell rental properties as the business wasn’t profitable for them historically (especially compared to the management overhead) and this removes the last reason not to sell. This may well benefit some owner-occupier buyers and good luck to them, but unfortunately it may dampen rental supply which is unlikely to do much to bring rent levels down. The likes of Generation Rent who cheer these changes appear not to have realised it will reduce supply, nudge rents upwards, and make it harder for landlords to improve properties re energy efficiency etc (especially as all those tax breaks went too a while back).
There are some benefits, including calming Buy To Let which is growing at an alarming rate, but the changes are complex, taxing revenue not profits, and as Tessa points out it hurts smaller landlords (especially those with salaries) and has no impact at all on the wealthiest landlords.
I expect there are a lot of Conservative-voting landlords who are irritated that this was clearly planned before the election but not mentioned in the Tory manifesto. I doubt that was an accident.
“where landlords (who are running a business)”
Quite a selective bunch, aren’t you. Oppose regulations as you’re simple investors and not real businesses, but then claim to be a business when it comes to taxation.
“it will reduce supply, nudge rents upward”
Are the landlords going to demolish their properties rather than sell? Just means there’ll be fewer renters and more buyers. Naturally, rent seekers such as BTLers will be aghast as such a prospect. All your incomes belong to us!
The claim that LLs are simple investors is not accurate. People who are simple investers invest in investment funds.
Bringing a new property into condition fit for rental involves serious investment, and kitchens, bathrooms, carpets and curtains don’t replace themselves every few years.
Also, the Inland Revenue maintains that LLs are treated as businesses.
Credit is difficult and many renters cannot buy for that reason.
Also, crude rhetoric about “rent-seekers” doesn’t help anyone.
I wouldn’t get too worried about your circumstances just yet Ben.
This is phased in gradually up until 2020.
I think rent increases will be phased in similarly or even slower.
Landlords will still want to keep good proven tenants if at all possible.
Although it always sounds hypocritical coming from a landlord but what will be the effect of this be on the poorest tenants?
Where are the consultations and impact assessments from CAB et al?
This is potentially far bigger than anything we’ve seen for a long time.
Public opinion is really swinging against BTL – just look at the comments on these articles in traditional right wing newspapers – Telegraph and the Daily Mail, including that article.
The can on housing has been kicked down the road for so long that when change finally happens, it is going to hurt everybody – negative equity, evictions. But it needs to change. I challenge you to find anyone renting who is actually happy with the situation.
“Public opinion is really swinging against BTL – just look at the comments on these articles in traditional right wing newspapers”
Not disputing the public opinion bit Matthew but most of the comments are made by the same little group of pathetic nutters that have been posting under multiple identities for years.
Well, absolutely to all.
The only people not affected by this farrago are moneyed-up landlords with no mortgages.
All the poor everyday sods who used BTL as an alternative to an unreliable, post-Maxwell pension are jammed into the mess and even people like Mark Alexander at property 118, a decent fella who I know and who is a mid-range portfolio landlord is getting driven out.
As Tessa says, and as you point out Matthew, Even the Telegraph and the Mail are jumping on this.
In many cases it will be homelessness units footing the bill where evicted families are involved, so once again, the taxpayer. Non Priority need tenants like me will be scrabbling around for a dwindling pool of available property.
At least Osborne’s plan has a unification element, in that everyone, landlords, tenants and agents are at risk of going down the same crapper, while the well heeled laugh all the way to the Bullingdon Club.
Me? Next year I’m out of London and out of this mess, even if I live in a caravan, at least I will be out of this mental, uncontrolled property fiasco.
As I said above, this is testament to how little understanding government has of the complexity of the housing nexus
These tax changes only effect properties held personally. If held by a company, all the interest payments can be set against the income. You will need to pay Corporation tax on the profits but can then take them as dividends.
You will still pay tax, but probably less.
There is also a move to allow pension funds to invest in portfolios of residential properties which tells you the direction that the government may be heading; large well organised companies with good quality accommodation paying corporation tax!
The trouble is, though, for most of us smaller landlords the cost of setting up a limited company and transferring our properties into it is prohibitive. CGT is payable so that will boost HMRC’s coffers even more, and what’s the betting that these small limited companies will also be hammered a few years down the line?
I agree that large companies owning property is probably where the Government wants to head, but whether they’ll be well organised and provide good quality accommodation remains to be seen. Owning a large development and managing the properties there is a different kettle of fish to renting out a motley collection of individual houses and flats dotted around the region or even the whole country – and that will be what comes onto the market when the smaller landlords sell up.
“though, for most of us smaller landlords the cost of setting up a limited company”
Problem? Aren’t you landlords supposed to be running a real business?
If it weeds out the chancers and amateurs and helps professionalise landlords, then that can only be a good thing.
Who says a “real” business has to be incorporated??
I know plenty of sole traders and partnerships who run real business and have no care to incorporate. I’m sure they wouldn’t appreciate being called unprofessional just because they don’t run a ltd co.
Oh, and I’m sure there are plenty of chancers and amateurs out there running ltd co’s.
@PT,
You’ve just made two contradictory statements there:
1. This get rids of competition.
2. Rents won’t rise because of it.
Economics doesn’t work like that.
Not at all. More properties will become owner-occupied rather than BTL rentals i.e. tenant demand will also be reduced.
PT – I have 5 properties in the North East and all run at a loss already but as this was a long term for pension I kept on going. The tenants are on benefits so won’t be able to buy so they will have to be evicted
There are no where near enough rental properties available so the strain on the market will not be noticeable.
Put that together with all the extra properties hitting the market forcing house prices down. You may think that is a good thing but properties are not selling at current prices so another property crash could ensue. Is that really good for anyone.
The market doesn’t care about you and your 5 houses as a pension. Yes a HPC would be ****in great. Take the entitled landlord speculator wasters out of the market.