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?
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.