First published November 2019. Edited for our website by Julie Hughes – Click here to download the original article in PDF format
In May 1961 John F Kennedy gave a speech that changed humanity’s outlook forever, moving us from an inward looking and belligerent earthbound irrelevance to an outward facing selfless species whose ability to collaborate for the common good far outweighed the differences that so often hold us back.
If only the same thinking was applied to solving the problems caused by poor government planning which failed to foresee (or conveniently ignored) the fact that people living longer coupled with falling birth rates – both a direct result of the introduction of the Welfare State in 1906 – would mean fewer and fewer people of working age having to support a larger population in the form of increasing amounts of health care and pensions.
That is not to belittle the introduction of the Welfare State of course – the aim of which was to improve health, education and employment; which, in my view, after the abolition of slavery was the greatest of all British social reforms…bar cricket!
However, add to the shrinking working population the chronic under-investment in both infrastructure and the public sector as a whole, plus the seemingly inevitable political pendulum swinging too far in the opposite direction for nothing better than outdated dogma each time the Left or Right finds itself in No 10, then it’s no wonder that governments of all persuasions find it easy to blame the Private Rental Sector (PRS) when it comes to their own short-sightedness and failed housing policies.
A Taxing time for Landlords
In his Summer 2015 Budget, the then Chancellor, George Osborne, announced proposals to restrict the amount of tax relief that buy-to-let (BTL) landlords could claim on their mortgage interest payments. His stated position being that he wanted to ‘professionalise’ the sector as ‘accidental’ landlords were inflating house prices and thus preventing first-time buyers getting on the property ladder.
And when he commended his Autumn 2015 Budget to the House, a 3% additional rate of Stamp Duty Land Tax (SDLT) on purchases such as buy to lets and second homes had been added to landlords’ cash flow woes.
It gets even worse!
For landlords who decide to sell their BTL property, there’s no concession on the capital gains tax (CGT) payable, being 18% (for gains falling into the basic rate) or 28% (for those in the higher/additional rate bands).
So what happens to highly geared landlords if the tax relief restriction and other measures push them into the 40%, 45% or 60% tax bands and turn their business into a loss-making venture, thus forcing them to sell, only to discover that due to high gearing they may not have enough free cash after the sale to pay the CGT.
And to make matters even worse, for sales happening after April 2020, the CGT bill could be payable within 30 days of the disposal leaving no time to release funds from elsewhere, assuming there are any of course. Sure, you could always remortgage the family home, but as your income has now dropped like a stone no prudent lender will let you!
By the way, the first monetary impact of S24 hit BTL landlords in their 2017/18 self-assessment with the tax paid at the end of last January; and with the second year fast approaching and the tax due by January 31st 2020 the pain will soon get acute, especially for higher-rate taxpayers making payments on account and the effect it will have on their ability to borrow.
If you’re calculating how you’ll be affected, then don’t forget that once you cross into the higher and advance tax bands (S24 alone will do that with its eyes closed and both hands tied behind its back!), you’ll lose child benefit, your personal savings allowance goes and the amount you can contribute to a pension is reduced.
Figure 1 – based on a property portfolio with £250,000 GRI, £120,000 finance expenses and £50,000 allowable expenses.
And lastly on the tax side, remember that non-mortgage interest expenses and the like are now only allowable in the tax year in which the money was actually spent regardless of whether that was a loss-making year or not, and thus cannot be carried forward.
Of course this is all before: –
– the tougher (but sensible) Prudential Regulation Authority (PRA) regulations insisting that BTL mortgage providers take a much more considered/tougher view before lending money to the sector, and
– the proposed abolition of S21 which, if enacted, will make it significantly harder to end a tenancy
Worst of all, when the landlord defaults as a result of all the above and the lender can’t gain possession, the whole thing gets held up in court!
Ultimately, the net effect of political ignorance, continuing knee-jerk reactions and the poorly thought through unintended consequences is that the State will have created an even bigger problem when it has to bear the massive financial burden of private landlords being forced out of the market and throwing those who benefit the most on to the streets or having to rely on cash starved local authorities who simply do not have the means to cope.
No wonder that David Miles (a former member of the Bank of England’s Monetary Policy Committee) said in a recent article for the RLA that; “The government’s approach to the private rented sector is incoherent”.
A different approach is sorely needed.
A force for good
Private Rental Sector landlords are rapidly taking over from public sector ones as the biggest supplier of social housing, and helping the former to build, run, and grow professional property businesses that sustain and nurture the communities they serve, which include halfway houses with pastoral care, student accommodation, regularly decorated and maintained family housing for life in the same way that local authorities used to do, through to those who can afford to buy but prefer to rent, is very much the way forward.
Putting that into context, the number of households in the rental sector rose by 25% to 4.5m, making it the second largest tenure in England, and is home to a fifth of all households. It’s also one of the most diverse, serving a wide range of different types of households across all incomes, including an increasing number of families, with some 35% having dependent children.
Divided we stand united we fall
So rather than demonising an entire sector and using the blunt instrument of taxation for the sake of vote winning political expediency, far better that we widen the discussion and start to work together in order to address the big issues in UK society, e.g. the NHS, education, racism, homelessness, etc., and how the PRS and Government could jointly use property to address them by working with local authorities and the like to stop them wasting their budgets on short term accommodation and use the savings to fund social care in a way that the founders of the Welfare State would most assuredly applaud as the progress and social good they had in mind in the first place.
Thus to paraphrase John F Kennedy’s words but not his sentiment and commitment to doing the right thing for right reasons; “We choose to work with landlords as professional property businesses in this and the coming decade and do the other things, not because they are easy, but because they are hard; because that goal will serve to organise and measure the best of our energies and skills, because that challenge is one that we and the PRS are willing to accept, are unwilling to postpone, and one we and the wider landlord community intend to win too”.
Founding Director of Less Tax 4 Landlords, Tony is a regular contributor here on our blog and across the landlord media in general.
Not afraid to challenge the status quo, Tony has a track record as an innovator and disrupter including embedding mortgage brokers in estate agents, helping set up the UK’s first mainstream fee-based financial planning business, and co-founding the UK’s first deregulated law firm.
Tony has also written for the Daily Telegraph, The Times, Professional Broker, Counter Terror Business and Landlord Investor Magazine. He is a regular industry commentator and panellist appearing with Andrew Neil, Iain Duncan-Smith, Kate Faulkner and David Smith (Economics Editor of The Sunday Times).
Details of Tony’s upcoming presentations can be found on our Events Page
Less Tax 4 Landlords is a specialist multi-disciplinary consultancy service that helps portfolio landlords maximise the commercial benefits of building, running, and growing a recognised professional property business. This is achieved by housing the following services under one roof: Business Planning, Tax Consultancy, Legal Work, Accountancy, Business Succession Planning, Personal Estate Succession Planning and at arm’s length, Financial Advice. By bringing together a wide range of services and expertise, we help you to maximise the value of your business both today and during your lifetime, and to create true inter-generational wealth.
Typically, Less Tax 4 Landlords can help you if you:
- Own rental property in personal names
- Are (or would otherwise be) a higher or advanced rate taxpayer
- Are a portfolio landlord with 4 or more properties and in excess of £50,000 Gross Rental Income, or you have the means, motivation and opportunity to get there and beyond with a protective structure in place
- Are looking to build, run, and grow a professional property business which is capable of being passed on intact to future generations
If you would like to find out if we can help you benefit financially from running a professional property business, take our free initial assessment here.