You might also be interested in
Replies (20)
Please login or register to join the discussion.
BTL Interest Relief
The point is BTL is not really a business. It is speculative capital investment in an appreciating asset - the land and the house. Accordingly, BTL should be treated the same as other speculative capital investments - antiques, gold bullion, stocks and shares, artwork etc - so no deduction for interest at all.
BTL Is not generally treated as a business for tax. For example, the usual CGT and IHT reliefs are not available. Before 1996, BTL was not treated as a normal business for Income Tax either but was subject to the special rules of Schedule A which limited the deduction for mortgage interest.
This year's Budget provisions are a reasonable start to levelling the playing field between BTL landlords and owner/occupiers and may also mean some BTL landlords may have to introduce more equity or,if they can't do that, sell up (which may result in a welcome decrease in house price inflation).
Be careful what you wish for
The point is BTL is not really a business. It is speculative capital investment in an appreciating asset - the land and the house. Accordingly, BTL should be treated the same as other speculative capital investments - antiques, gold bullion, stocks and shares, artwork etc - so no deduction for interest at all. BTL Is not generally treated as a business for tax. For example, the usual CGT and IHT reliefs are not available. Before 1996, BTL was not treated as a normal business for Income Tax either but was subject to the special rules of Schedule A which limited the deduction for mortgage interest. This year's Budget provisions are a reasonable start to levelling the playing field between BTL landlords and owner/occupiers and may also mean some BTL landlords may have to introduce more equity or,if they can't do that, sell up (which may result in a welcome decrease in house price inflation).
But does nothing for the overall supply of housing, it merely removes one property available to rent to replace with one available for sale. Does not help those who cannot buy, the pool of rental properties reduces.
The question of not being a business is also slightly moot, there can be a fair bit of work involved- we used to have two full time employees re maintenance, albeit they covered our commercial portfolio as well, we now have one.
This change is coupled with borrowings on investment properties being now over shorter terms and often now requiring capital and interest payments, not just interest only, which of course means that repayments have to be funded out of after tax cashflow. The sea change in how the banks lend has changed the landscape. In cities like Edinburgh the model barely works with an LTV over circa 40%; one of the reason we have been selling into the market over the last two /three years. I know a few who like us have sold up/reduced holdings, we are not the only ones. These days its all student accommodation or similar or if the right location furnished holiday letting apartments; up the town is awash with these, each one that has moved reduced the housing stock..
Add the strong possibility, certainly in Scotland, of rent controls, three year leases etc, and what does it really mean. It means residential letting probably moving to within the corporate sector (Nationwide used to have a rental division) giving full relief for interest, indexation on gains etc. The landlords will get bigger and bigger and more and more impersonal as deep pockets will be needed to cover cashflow shortfalls.
We previously owned 61 flats we let out at competitive rents, we were I believe good landlords, treated our tenants well,etc. We are now down to 6 flats. Apart from those tenants who bought from us the rest needed to find new accommodation, those 6 flats ought to be sold by year end, we will be out of the residential market. This legislation of course did not push us to this route, but it was always at the back of our minds as a clear and present danger.
IMHO the writing has been on the wall for a while re residential property as an asset class, gross yields are pretty low , say 4.3%, take away registration, insurance, gas safety etc, then repairs, letting fees. From this cover interest, pay tax, meet repayment. There was never much of an income, you are correct, it was a play on capital values. To cap the irony re housing supply, we built these properties, previously there were not 61 flats but two derelict buildings. So given the numbers how many developers are still going to build to rent residential now? I suspect we will now be more inclined to keep our commercial property as just that, commercial property.
This is yet more knee jerk populist legislation, does nothing to address supply (possibly detracts) and may well end up counter productive to the real aim, more houses irrespective of tenure.
Note of interest- My day job is as FD of a property group.
But what if it's not capital speculation?
The point is BTL is not really a business. It is speculative capital investment in an appreciating asset - the land and the house.
Have to disagree with the above. We live in an expanding university town where a few landlords dominate the lettings (mainly student) market. I've spoken to a couple of them (and a few of the smaller ones too) in the last few years, they've all said that they're on interest-only mortgages purely to maximise income, appreciating asset values are just a bonus.
I would definitely argue that it's a business, it's a very competitive market place with students demanding far higher standards than we were used to in our day and the University building more accommodation themselves. The risk of not letting that property at the moment is considerable and the yields (if they had to buy new properties at current market prices) are not that great either.
I'm not a fan of these dominant landlords but I feel that the removal of the tax relief (at higher rates) is extremely unfair on them.
I also have another client who earns £1m+ as a solicitor, he happens to own 2 properties also which are heavily mortgaged. This is going to hit him tremendously.
What I really object to though is the wording of Mr Osborne........."The better-off the landlord, the more tax relief they get". Well of course they do, in the same way that if I earn £50k as an accountant then I'll get a higher rate of tax relief when I buy my calculator (sorry, I mean pay my monthly cloud software subscription, accountants don't use calculators anymore) than another accountant earning £20k, there's nothing wrong with that is there? Funny how it's never mentioned "that the better off the landlord (or substitute any profession that they care to attack at that particular time), the more tax they pay"
This isn't even a political thing, I actually like George Osborne and have always voted Tory, I'm just very disappointed in this budget which appears to attack the successful small business.
To be honest
I also have another client who earns £1m+ as a solicitor, he happens to own 2 properties also which are heavily mortgaged. This is going to hit him tremendously.
This wasn't a good example to get my sympathy vote!
@ Vaughan
I think that probably typifies the problem with the general public's perception these days, and I believe it's as much to do with the media (most of which is tabloid and headline grabbing) as anything.
Someone who is successful and good at their job, takes risks and works hard, and as a result earns a lot of money, is not congratulated and looked up to, instead the public want to kick them and make them out to be bad people. It's not too dissimilar to bullying the clever kid at school, and then stealing 45% of his lunch, plus another say 100% effective (tax) amount if they happen to own a KitKat, if you're following the analogy!
This is a difficult one to judge. Henry Williamson makes many good points. I'm fortunate to be living in a big house in the London suburbs and have seen a huge capital appreciation in part because affluent middle-aged people have been able to purchase additional properties subsidized by the tax payer.
Meanwhile I have three adult children who have almost no hope of getting on the property ladder in London any time soon because house prices are so high. This budget measure is not going to solve the problem of lack of housing, especially affordable housing, but it may encourage some to sell properties and deter others from buying properties and, so, take some heat out of current prices.
The other side of the argument is that the allowance permitted people who are not 'wealthy' (like Joe in the example) but may have some disposable monthly cash to invest in property. A consequence of removing this allowance may result in wealthy people and businesses with available cash to mop up any property disposals with the effect that it concentrates wealth in the hands of the already wealthy.
Also, it has to be a concern to the Chancellor that the decision to allow people to invest there own pensions will see many more BTL landlords and this measure makes BTL investing a little less attractive (though still a better prospects than many annuity products).
Lots will be forced to sell.
A good wheeze to force little upstart oiks to sell their BTLs to the big property investment companies of Ozzie's elite mates at discount prices.
I get what's going on, here. There's no incentive to become a higher-rate taxpayer anymore (unless you are £1M+) so the rest of us might as well give up work and go on the dole...
Example 2 is indicative of the problem. That sort of scenario should be reclassified as a business as opposed to a BTL as the individuals concerned have established themselves in the business of buy to let and occupy their daily life in working in that framework no different then any other businessman running his own self employed entity. Consequently HMRC should have exempted them from the new provisions
H Pinczewski
@Sheepy306
That's neither what I said or meant. My sympathy is simply finite and I choose to use it elsewhere.
It's not like stealing or bullying at all. I do accept that it maybe a little like sniggering when the supposedly clever kid left his KitKat in the sun and the chocolate melted though.
Why not incorporate
Rebecca's example 2 shows how this rule will be devastating to those with big, highly geared BTL empires. But surely the new rule can easily be avoided by incorporating? Then the question of 40% or 45% tax relief goes away. OK you will have a one-off SDLT hit from transferring the portfolio into a limited company and you will need the agreement of the lenders to transfer the loans; but having done that, the problem goes away.
Possible S162 issues
Rebecca's example 2 shows how this rule will be devastating to those with big, highly geared BTL empires. But surely the new rule can easily be avoided by incorporating? Then the question of 40% or 45% tax relief goes away. OK you will have a one-off SDLT hit from transferring the portfolio into a limited company and you will need the agreement of the lenders to transfer the loans; but having done that, the problem goes away.
Incorporating under s162 surely only really works where the pregnant gains are less than the new shares to be issued. Yet the impetus here is for those with higher borrowings (the changes impact them the most) which suggests lower equity, accordingly triggering CGT may be an issue and of course no cash becomes available to meet said CGT via the incorporation route without taking some consideration ,which itself increases the CGT due.
There is also the possibility of HMRC revisiting whether a letting "business" qualifies for incorporation relief through the courts, though to date they appear to have accepted the decision (was it Ramsey?).
I think Portia made a post a few days ago re structure, using an LLP as an intermediate, but I think it still boils down to what gain needs rolled as against value of new shares that can be issued, those who leveraged additional borrowing via revaluations over the years, possibly to enable further purchases and who have not amortised the debt, could be in a very painful position.
p.s. What I am more concerned about here is contagion into the commercial property sector at a later date. Leasing commercial property good, leasing residential property bad ( to paraphrase Orwell) and possibly at a later date into other business activities.Pandora's box is well and truly opened.
Saved from a time bomb
Just one other thought on example 2 above... Could be argued that George Osborne has saved any real life John and Julies from disaster as they are sitting on a time bomb. If their interest bill is £350K and they are only making £50K when interest rates are the lowest they have ever been in history, then when interest rates return to nearer the long term average (as they must do eventually), they are looking at devastating losses. Their interest bill could easily double to £700K leaving them with losses before tax of £300K p.a.; and if my calculations are right, despite these losses they would still have tax to pay of £7,800.
If Mr Osborne has forced them out of 'business' now then he could have done them a big favour!
Furnished Holiday Lets
FHLs are businesses for many tax purposes, though the reported on the property income pages.
The Budget states:
The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax
For yesterday's announcement, does apply to a FHL property?
I think not, so the financing of qualifying holiday properties will still be eligible for usual business finance cost relief, even if additional finance has been raised on the landlord's on home? (subject to the income tax relief caps)
Any pointers on this?
FHL looks ok, for now!!!!
FHLs are businesses for many tax purposes, though the reported on the property income pages.
The Budget states:
The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax
For yesterday's announcement, does apply to a FHL property?
I think not, so the financing of qualifying holiday properties will still be eligible for usual business finance cost relief, even if additional finance has been raised on the landlord's on home? (subject to the income tax relief caps)
Any pointers on this?
Excerpt from Tin.
"Who is likely to be affected? Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting. "
https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...
Have just phoned an FHL operator this morningto remind them it is now more important than ever to keep good records re occupancy.
FHL thanks to DJKL
Cheers for this. Claw back of capital allowances, restricted finance relief, and no Wear & Tear allowance on failing FHL. Good advice DJHL
FHLs are businesses for many tax purposes, though the reported on the property income pages.
The Budget states:
The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax
For yesterday's announcement, does apply to a FHL property?
I think not, so the financing of qualifying holiday properties will still be eligible for usual business finance cost relief, even if additional finance has been raised on the landlord's on home? (subject to the income tax relief caps)
Any pointers on this?
Excerpt from Tin.
"Who is likely to be affected? Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting. "
https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...
Have just phoned an FHL operator this morningto remind them it is now more important than ever to keep good records re occupancy.
Take It Up with HMRC
I've taken this whole thing up with the policy maker and my local MP, and the policy maker has now referred my comments to the Treasury for further consideration. Have to say the HMRC person has been very prompt with her replies, for which many thanks!
This change does nothing to 'level the playing field', it purely and simply penalises professional landlords. People who say it isn't a business clearly have no concept of how much time and effort it takes to run any sort of larger portfolio (not to mention the large financial risks too).
Yields in London are already quite low. What do you think will happen to rents if these changes come in? Someone will have to pay the bill, and that someone will end up being the tenants as the landlord cannot magic money out of thin air- mortgage interest is an actual cost that has to be paid, something that seems to have slipped the minds of those designing these new rules.
Incorporation, in most cases, just isn't feasible. Connecting transactions will make the SDLT bill so large as to make it impossible to fund, not to mention the possibility of CGT on top.
The abolition of the 10% wear and tear allowance has been coming for a long time, and although the press release reasoning is flawed, at heart scrapping this isn't a terrible idea. For one thing it will increase the figure shown on the SA302 as profit making it easier for mortgage companies to make lending decisions- now if only HMRC will amend the SA302 to show net profit before deduction of carry forward losses, then show the losses coming off...
I'd strongly encourage all those who act for landlords to get them to take this up with their MP before it gets passed into law.
Buy to Let debate
I have quite a few young professional clients who will be affected by this.
Part of the " problem" with ordinary professionals buying one or two properties to let out is that many working in London simply cannot afford to live in the properties they own - so rent out and live in a cheaper area to commute.
Also with the pension industry showing a public face that looks like a " piggy bank" for those removing annual fees each year on ever diminishing returns, a buy to let often looks like a safer investment. perhaps this is the fault of the tabloids mis-representing the work of the financial industry.
So combine high house prices near work with a nervous view of the governance of one's savings for an increasingly expensive and uncertain old age, and we have the current debate about the morality of being a landlord.
Rental properties are needed as not all can or wish to buy.
Landlords are more often responsible service providers.
If we demonise landlords and push them away from the market, who will take the risks involved in a property portfolio, not to mention the high capital investment needed to purchase without mortgage. Will the government step in to fill the much needed rental portfolio ? You cannot create a void with no plans to fill it. If all the buy to rent properties come onto the market at once, where are the mortgage lenders willing to lend - the difficulties of obtaining a mortgage in the current climate are well known - and that is assuming that the former tenants are willing and able to step inn and purchase.
So rather than level the property market will this not simply make rental properties more expensive and harder to obtain - the poorer end of the housing market suffers and with housing benefit restrictions could this be the start of "slums" again ?
I thought a Tory government would avoid tinkering with " micro-markets" - taxes should be levied at an overall income "pot" for each individual, with the taxpayer's freedom to engage in any legal business opportunity or employment suited to his/her skills.
This kind of tinkering with how people earn their money is what leads to an overcomplicated tax system trying to change people's behaviour. If a practice is unacceptable morally, outlaw it - don,t tax it and make it the province of the wealthy !
That's that then.
So now this tax has wiped out any profit I was earning on these properties looks like I'd better sell everything now before the flood of properties go on the market forcing all the house prices to drop. If I sell now I can move into rented accommodation and wait for the dust to settle. On no, wait, there is no rented accommodation anymore.........
Defer CGT on incorporation with Moyne Ramsey case
I refer to the Moyne Ramsey case.
In a company buy to let is a business but as an individual it is not. Tax law at its best!
I can foresee a lot of incorporations using the Moyne Ramsy case.