Wednesday, 15 July 2015

Tories Kill Off Buy-To-Let

Treasury offices, Great George St.
Photo: Wikimedia Commons
The changes in tax credits may have made the headlines, but in fact private landlords were the biggest losers in last week's budget, when chancellor George Osborne changed the rules for the deductibility of mortgage interest for rental properties, effectively killing off the economics of buy-to-let.

From 2017, the amount of interest that landlords can claim in tax relief will be limited to the basic rate of tax – greatly increasing their tax bill.  The treasury described this as a way to "level the playing field for homebuyers and investors" - but in fact it does nothing of the kind.  It is simply a tax grab directed at landlords, greatly worsening the economics of renting property, and meaning that landlords will pay tax on money they have not even earned.

What has the Chancellor done?
The Chancellor says he has "leveled the playing field" between buy-to-let investors and homeowners, because the latter cannot set their tax off against their personal income. But, of course, in reality, neither can landlords. A flat or house is a small business, and mortgage interest is one of the costs of doing business. What landlords do, like any business, is offset their expenses (including mortgage payments) against their income, and then pay tax on whatever is left.

But from 2017 mortgage interest will no longer be a fully deductible business expense. So landlords will have to pay tax on their rentals even if they make a loss. This will turn many profitable businesses into loss-making ones, and must be the first time a British government has ever taxed its citizens on money they have not made.

In effect, the Chancellor will tax landlords on their turnover rather than their profit, meaning that tax will be payable on nonexistent income.

Who will be affected?
Landlords who own property, and have mortgages, but only those who own property personally in their own name, since the rules do not apply to limited companies. Only those landlords who pay more than 20% tax are affected - but since anyone earning over £40k a year nowadays finds themselves in the 40% tax bracket, that is likely to be most of them.  Landlords who are highly leveraged (ie have a lot of debt) are in the worst possible position.  Companies are not affected, so the big operations that own large portfolios of land and real estate, like the Duke of Westminster, will be fine. Phew! The mega-rich who have little or no debt will also be unaffected. 

Can't landlords get around this by transfering their properties into a limited company?
Yes and no. A transfer to a limited company would incur even more tax, in the form of stamp duty (greatly increased in the last budget just a few months ago) and also capital gains tax. So, the chancellor wins again.

How big is buy to let in the UK? Are they really outcompeting homeowners?
No. In 2015 buy-to-let lending accounted for around 15% of mortgages taken out. Another way of putting it is to say that homeowner lending accounts for 85% of the market.  So buy-to-let activity is a small part of the overall picture.

Was this is the Conservative manifesto?
It was not. There was no indication in the Tory manifesto that the Conservatives were planning to make it uneconomic for most small landlords to buy and rent property. The Chancellor did not put this to voters and he did not apparently even consult before announcing this new tax hike.

Why are the Tories going after small landlords?
Who knows? This comes from a supposedly pro-business party, who won the election largely on their economic credentials.  Presumably the Tories believe that landlords are a useful pot of cash to help them close the holes in their finances, and that few will weep for them. In this at least they are probably right - but if this is a populist move then why go after the little guy - why not go after the big land companies instead?

Why should anyone care about Landlords?
Because private landlords, like any business, provide a service, in this case a place to live. What this will do is make it much harder to make the economics of buy-to-let work, and will therefore inevitably reduce the availability of good quality rentals.  It may also drive up rents as landlords scramble to reduce their losses.

But won't this help to ease the housing shortage?
No.. The shortage of housing is caused by inexorably growing demand, especially in London and the South East, and little supply. If the government wants to reduce the shortage of housing, it has to do find a way to increase the overall supply.

When do the new rules come in?

This change will be phased in over a four-year period from April 2017.

To read a fuller explanation of how it will work, follow this link. And you can sign an online petition against it, here.

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