Tax Writer Taxwriter Ltd
Columnist
istock_DragonImages

# Huge tax bills ahead for landlords

16th Oct 2015
Tax Writer Taxwriter Ltd
Columnist

The forthcoming restriction on tax relief for interest on property-related loans: down from the taxpayer’s marginal tax rate to 20%, has been misunderstood by some landlords, says Rebecca Cave.

The restriction of financing costs for individual landlords of residential property is not a simple reduction in tax rate, but a change from a deduction of interest, to a relief that reduces the tax payable. On Budget day Rebecca Benneyworth provided examples of Osborne’s planned reforms, which illustrate how a landlord with a substantial property portfolio could pay tax on 144% on the accounting profit from his lettings business.

The example below shows how a landlord who makes a loss from letting will pay income tax in 2020/21. Such a position is obviously unsustainable, so a change in the lettings business will be required, as discussed below.

Example

Helen is a single parent who earns £25,000. She is entitled to child benefit and pays tax at the basic rate. She lets out her former family home for £34,000, and rents a small flat. The let property has a large mortgage attached so the deductible interest is £36,000. Helen thinks she won’t be affected by the Summer Budget changes as her marginal tax rate in 2016/17 is only 20%.

Her income remains constant, but in 2020/21 her personal allowance is assumed to be £12,500, and the basic rate band: £37,500. However, in that year all of the interest she pays on her let property mortgage is disallowed as a deduction, and instead she receives a tax credit to set against her tax bill.

 2016/17 2020/21 Salary 25,000 25,000 Letting income 34,000 34,000 Interest deduction (34,000) nil Total net  income 25,000 59,000 Personal allowance (11,000) (12,500) Taxable income 14,000 46,500 Basic rate band limit 32,000 37,500 Property loss carried forward: (2,000) Tax charged @ 20% 2,800 7,500 Tax charged @ 40% - 3,600 Tax credit on interest at 20% (6,800) Total tax payable: 2,800 4,300

In 2020/21 Helen is a higher rate taxpayer and she loses most of her child benefit because her total income is over £50,000. The tax credit is calculated as 20% of the lower of:

•  Finance costs not deducted from income (£36,000)

• Profits of the property business (£34,000)

• Total income exceeding allowances (46,500)

Her lettings business has made an accounting loss of £2,000, but she pays tax of £4,300 of which £2,500 is deducted under PAYE. As her actual finance costs are £36,000 she will be able to carry forward a tax credit of £400 (20% x £2000) to set-off in a later year.

Solutions

Helen has little choice but to sell her only let property as she has no other resources from which to reduce her borrowings. Other landlords may be able to sell part of their property portfolio, or restructure their lettings business in one of the following directions:

• sell residential property and reinvest in commercial buildings

• let the residential property as furnished holiday lettings

• transfer the properties into a company.

Any of those options will allow a full deduction of interest and other finance costs from the rents received, but the transition will involve CGT and SDLT (LBTT in Scotland) costs. Also the mortgage provider must co-operate with the transfer of loans to a company, and it may require higher rates of interest on a corporate loan.

CGT liabilities

The sale of the properties, or transfer into a company controlled by the individual, will generate capital gains. CGT will be due unless those gains can be covered by a relief, or deferred using EIS or SITR (social investment tax relief). An investment under SEIS can also be used to exempt up to £50,000 of gain a year, where the maximum permitted (£100,000) is invested in SEIS shares.

Where there are a small number of properties carrying relatively low gains those could be transferred or sold gradually, and the gains covered by the taxpayer’s annual exemption for each year (£11,100 for 2015/16). Where a property is held in joint names the annual exemption of both owners can be set against their proportion of the gain.

If the entire property lettings business is transferred to a company in one go, in return for shares, incorporation relief (TCGA 1992, s 162) may be available to roll the gains into the value of those shares. Incorporation relief can apply to a significant property lettings business, as determined in the EM Ramsay case. No claim is required as incorporation relief is applied automatically if all the conditions are met, but it would be advisable to make a full disclosure on the tax return for the relevant year.

Land duties

Where the properties are transferred to a company, that company will have to find the funds to pay the SDLT or LBTT charges.

Where the property lettings business has been carried on by a family partnership there may be relief from SDLT / LBTT on the incorporation of that partnership. There is also an averaging relief that can be used to reduce the SDLT when there is a acquisition of multiple dwellings (FA 2003, Sch 6B).

Specialist SDLT/ LBTT advice will be required in all cases. Note: the anti-avoidance rules for LBTT in Scotland are different to those operating for SDLT in the rest of the UK.

Rebecca Cave is the author of Capital Gains Reliefs for SMEs and Entrepreneurs’ 2015/16.

Tags:

### Replies (67)

By carnmores
19th Oct 2015 10:53

the interest calculations are too simplistic

I would give tenants the right to share in CG that their rent payments help to generate ;-)

Thanks (1)
By cfield
19th Oct 2015 18:48

carnmores wrote:

I would give tenants the right to share in CG that their rent payments help to generate ;-)

If there's a slump in the housing market and the property loses value, should the tenants fork out for their share of the loss? ;-)

Thanks (1)
By squay
19th Oct 2015 10:44

An investment

An interesting article by Rebecca but lets not lose sight of the fact that many people let residential property as an investment for their retirement. So Helen pays a bit of tax. The mortgage won't last forever. Come retirement she will own a substantial asset. To say "she has no option but to sell" assumes she has bought the property and financed it just to provide herself with a tax free income. I have many clients in retirement with no mortgages doing very nicely with their letting incomes and paying "their fair share" of tax and have done so for many years.

Thanks (4)
By Michael C Feltham
19th Oct 2015 13:48

Excepting...........

squay wrote:

An interesting article by Rebecca but lets not lose sight of the fact that many people let residential property as an investment for their retirement. So Helen pays a bit of tax. The mortgage won't last forever. Come retirement she will own a substantial asset. To say "she has no option but to sell" assumes she has bought the property and financed it just to provide herself with a tax free income. I have many clients in retirement with no mortgages doing very nicely with their letting incomes and paying "their fair share" of tax and have done so for many years.

Except the boom in B2L was created by cheap base rates, low pension yields and the growth of interest only B2L mortgage products.

Which worked since the monthly payments were far lower: in the case of a repayment mortgage, the repayment portion was not and never ever could be tax-qualified. Therefore the B2L debtor wouls suffer paying income tax on the portion employed to repay the principal element.

Thanks (0)
By stepurhan
19th Oct 2015 10:52

Should sell anyway

I'm curious as to whether the figures used in the example have any basis in the real world. Because I can't help thinking that someone who is making a loss on a rental from the interest cost alone should have looked at selling the property already.

Thanks (8)
19th Oct 2015 11:18

Paying £36k in interest on property let for £34k?!

Indeed, these figures seem ludicrous. To be paying £36,000 in interest the mortgage would have to be £1 million at least, and would any lender lend a million pounds to someone with £25k income?  Or indeed lend a million pounds on a BTL investment which doesn't even cover the interest?  If she really can only let this £1million-plus property for £3,000 a month, something is very far wrong.

Thanks (3)
By moneymanager
20th Oct 2015 10:09

Propertyy value v rent

On October 2nd The Telegraph (laughs) did a two page spread on BTL and carried an advetorial featuring a flat in Battersea for £7.5 million!! or rentable for £2950 pcm?? Ohe exmples he cited were not investments but speculation.

Thanks (0)
By moneymanager
20th Oct 2015 21:01

Lending criteria

If you know how to lenders will advance far more to someone with no income.

Thanks (0)
By Brian Ogilvie
19th Oct 2015 11:18

The example is unrealistic not only in the context of the ration of interest to rents but also the ratio of interest to other income required to support the mortgage application - assuming typical BTL interest rates that is a mortgage of £600-800k .....on a salary of £25k !

Can I please have the name of the lender,may come in useful :)

Also no repairs,insurance,letting fees etc etc ?

Thanks (4)
19th Oct 2015 11:10

£36,000 interest

On what did she live before she rented out the property?  £36K interest but £25K income?

Thanks (2)
By North East Accountant
19th Oct 2015 11:21

Can she claim interest deduction is she becomes an LLP?

Thanks (0)
By Brian Ogilvie
19th Oct 2015 11:23

The new rules will apply equally to individuals,partners in a partnership,and members in LLPs

Thanks (1)
By Satwaki Chanda
19th Oct 2015 12:47

Restrictions on two levels for partnerships

There are two levels of restriction:

1. When the partnership borrows to fund the purchase - the interest is disallowed/restricted. It doesn't count because it is interest to finance a property;

2. When an individual partner borrows to fund his partnership contribution. This is distinct from 1 - and could have been used to get round the new rules, but the legislation doesn't allow it.

Thanks (0)
By Ian McTernan CTA
19th Oct 2015 11:28

Missing the point

Those posters stating the interest is high,etc are missing the point.  Maybe she used to have a much better paid job or bought out her ex husbands share on divorce, or any number of valid reasons to have the finance.

Maybe her interest rate is very high- in fact rising interest rates are a huge problem under this tax.

The point is that lettings will be the only business that has a real cost that will now be given only as a tax credit, completely unfairly and achieves the complete opposite of the stated aims.

As I have been in direct contact with the Treasury and my MP on this, and providing feedback on those discussions to various portal owners, I get the feeling the Govt rather wishes they hadn't ran with this stupid idea but to back down now would lose too much face, so they are ploughing on regardless.

You can get some crazy results with the new system with tax rates of 84% or more on actual profits, such as 300k rentals, 200k mortgage interest, 100k profit.  Under the new system tax is charged on 300k and you end up paying 80k or so tax on 100k profit, before taking into account any mortgage repayments!  If interest rates rise, so that interest is 300k, then you can pay tax of 60k on no profit at all.  I currently have a client with this ratio of income to mortgage interest, and it's a real live issue.

The new rules are even worse if you have losses carried forward from previous years- kiss them goodbye pretty quickly under the new rules as the losses are set against the income without accounting for the mortgage interest!!!

High interest to rental ratios are not uncommon, especially on London properties where yields tend to be quite low.

Thanks (12)
By kjevans
19th Oct 2015 11:45

Tax on turnover

It's appalling that any sole trader business can be taxed on turnover, even one as unpopular as landlords - it's not a passive investment. Who's the next target for turnover tax?

For many landlords, rental income is the only income and tax on turnover may put them into the higher tax bracket with no other income from which to pay the extra tax.

If this was one of your clients with a different type of business, suddenly being taxed on turnover (or with a business loan disallowed as an expense) , not profit, would you react in the same way, or is your gut feeling about landlords getting in the way of your accounting sense?

Thanks (1)
By js.btp
19th Oct 2015 11:39

Restricted interest

I have done a couple of calculations myself based on more realistic figures and keeping the personal allowance the same for comparison purposes and the tax comes out no different.  I have used rent received of £10,000 and interest of £4,000  and also rent received of £10,000 and interest of £12,000.  So maybe you need very extreme figures to make her story worth reading!!  Panic over for most I think!!

Thanks (1)
By kjevans
19th Oct 2015 11:43

Price drops

Sadly, many landlords who don't live in London and the South East have seen huge drops in the value of their properties of around 25 to 30 percent, meaning that selling is not an option - what was a 70% LTV 8-10 years ago is now around 100% (and where would all the tenants go - there is already a shortage of rental property?).

Thanks (1)
By Brian Ogilvie
19th Oct 2015 11:49

Missing the point

Ian:in contrast to you,my view is that the Government knew EXACTLY what it was doing when it announced this measure.Kill the market,and so force BTL landlords to sell before 2017 to allow properties to be snapped up by owner occupiers

Viewed as a ruthless piece of social engineering the notion sort of works .....yet why did they left the door open by not extending the rules to companies ? That's the mystery....

Thanks (2)
By petestar1969
19th Oct 2015 11:50

Well

I've been saying it for years - don't bother with buy to let..Its never been worth it really and just adds to the housing "crisis"

If you make a profit you pay tax

If you make a loss you can't do anything with it

Now it would seem making a loss may even give you a tax bill...

My advice to all BTL landlords would be sell up unless its an actual business, one or two properties just isn't worth it.

Invest the money in something that pays a better return...

Thanks (1)
By Mallock
19th Oct 2015 11:59

Don't be so pedantic

The example is used just to illustrate a point and extremes tend to be needed to emphasise the point clearly. I have clients who could well lose Child Benefit or a good proportion of it because of these rule changes. This is unfair and discriminatory taxation which takes no account of circumstances or income.

However a divorce settlement and the need to give up a well paid job to enable her to look after her children could rise to a situation such as that detailed. Unlikely but not impossible.

Thanks (3)
By Peter-S
19th Oct 2015 12:08

Extreme examples

The trouble with extreme examples is that it is hard to relate to them in real life, even though the basis of the facts may actually pan out. However, in this example since it is the former family home that the lady may be 'forced' to sell one assumes that there is an available claim to main residence relief including 18 months exemption for the final period of ownership and a potential further £40k exemption on top so whilst the circumstances may be unfortunate a cgt liability still suggests she is in profit. However, I a not supporting the new rules!

Thanks (1)
By Ninian
19th Oct 2015 12:17

CGT relief via EIS

As one who rarely deals with EIS may I ask a couple of questions:-

1) does the subscription to the company not have to be in 'cash' which would mean selling the property and buying it back?

Thanks (0)
By Satwaki Chanda
19th Oct 2015 12:42

Ninian - EIS reinvestment relief is different

The idea with reinvestment relief is to shelter a CGT charge on the property and reinvesting the proceeds in an EIS-type investment.

I think your question assumes that you have to somehow sell the property into a company which will then qualify for the relief, but this is not the case.

One needs to make the distinction between two types of asset:

1. The asset which is being sold; and

2. The EIS company into which the proceeds of the sale in 1 are being reinvested.

The asset in 1 can be almost anything - that is, capital assets that give rise to a CGT charge. The investment in 2 - is the one with the EIS-type conditions.

Property letting doesn't qualify for these types of company but it doesn't matter - the property letting activity relates to the asset in 1, not the asset in 2.

However, my concern about this type of relief is that one is exchanging a well earned gain on a relatively safe investment - the property let - for an investment that is really quite high risk, which could lose all your money. Not only that, when the EIS company does go bust you'd still have a CGT charge to pay but no funds.

Thanks (2)
By Paul Soper
19th Oct 2015 12:30

Optimistic?

I think Rebecca may be optimistic in her suggestion that incorporation relief may be available - the level of activity in the EM Ramsay case was sufficient that the landlord in question should have been paying Class 2 NIC and we know how popular that idea is.

However we do expect interest rates to rise in the next few years and that combined with this new restriction of relief will bite hard - some of the comments above suggest that the apparent level of borrowing in Rebecca's article was unrealistic but a general rise in interest rates will make this example look rather more realistic - in any event the loan may have been granted in an earlier year where the income was far more substantial and the current low earnings and survival by renting are because the person concerned wants to become (say) a teacher and so is putting up with a couple of years as a teaching assistant - quite a common aspiration I think you may find...

Thanks (0)
By Brian Ogilvie
19th Oct 2015 13:20

No Old Grey,yes of course the company would pay CT at 20% (and falling) but I was conjecturing that relief for interest paid by the company would then be given at 10% or some other figure below the prevailing CT rate

Thanks (0)
By Brian Ogilvie
19th Oct 2015 14:29

Michael

Thank you.If you are correct in stating that B2L properties pouring on to the market will be 'hoovered up by commercial landlords and financial institutions; many of them foreign' (and I am not arguing with that thought) then long term the game really will be up for owner occupiers as they cannot simply compete .Do you agree ?

If correct then to counter that drift then presumably the Goverbnment would need to require Uk based lenders to advance in priority to owner occupiers (as was the case until 1997 in my recollection) and/or legislate to prevent non residents from acquiring UK residential property,which itself sounds a non starter !

Thanks (0)
By Michael C Feltham
19th Oct 2015 16:23

Up The Creek and No Paddle!

Brian Ogilvie wrote:

Michael

Thank you.If you are correct in stating that B2L properties pouring on to the market will be 'hoovered up by commercial landlords and financial institutions; many of them foreign' (and I am not arguing with that thought) then long term the game really will be up for owner occupiers as they cannot simply compete .Do you agree ?

Basically, Brian, yes I must agree.

Again people suffer a short term memory.

Speculative house building in the UK came really, in three primary phases: Phase One was in the mid-to late 1930s, when estates of nasty "Jerry Built" little bungalows and houses sprang up in Kent, particularly, on disused orchards and agricultural land, mainly built from frame and concrete walls. Phase Two was the mid to late 1960s ending in the early 1970s Boom Bust, engineered by Heath-Barber, caused by slack money and no proper lending restrictions. the subsequent crash effected commercial and well as residential property. Phase Three was the Thatcher- Lawson, Boom-Bust, created by again, slack money and encouraging speculative insanity.

The subsequent Blair-Boom Bust was the grandaddy of all; and simply continued the Thatcher-Lawson strategy, in spades. This time, however most of the money, as I earlier stated, was short term interbank debt, where the subsequent mortgage was bundled, re-packaged etc.

Back when I wert young (!!), those wanting to buy needed to save like fun, first and go without any luxuries and adopt a meagre lifestyle, until over the early hump of repayments: furthermore mortgages were normally around 17 year tenor, older houses (slate roof, damp, dry rot etc) were not mortgagable. The only non-repayment mortgages were Endowment Backed, Sum Assured, where the obligor paid the interest, and the maturity of the endowment earned significant annual and reversionary bonuses sufficient to discharge the debt and leave a nice surplus. They were more expensive to service anad were for higher salary earners only.

Then the cowboys came to town! One of the first being Mark Weinberg, Hambro Life. He and others persauded mortgage lenders to accept insurance products which lacked a Sum Assured, but would (in their dreams) earn such significant bonuses during their life yada yada yada. And we know what happened here.....

The main problem was post Big Bang, when banks whined Building Societies (BSs) enjoyed an unfair tax advantage, and the laws were changed.

As the Thatcher-inspired greed got under way, more and more BSs de-mutualised and became banks: and we know what happened here, too!

Now BSs, acted in the reverse operational modality to banks: they borrowed short and lent long; whereas banks traditionally, always borrow long and lend short. Well they did, until financial engineering and rocket scientists invented more and more venal products to convince idiots lead could be turned into gold etc. BSs, were the exemplar of probity and rectitude, their "spread" (Difference between borrowing rate and deposit rate) was very small: yet by prudence and good management they prospered and amassed huge reserve capital. Can't have that said the markets, let asset strip 'em! Etc. Banks looked at the mortgage market and decided "We'll have some of that!". and so that entered a mad, frenetic competition to garner a larger share of that market. Income multiples rose to 8.5 X: Tenors (life) of mortgages exceeded 30 years! and L to Vs rose up to 130%. Well, quelle surprise! it was not sustainable.

Now sadly, the young and the older have been brainwashed into expectations of entitlement, well above their earnings and disposable income. And the only way It COULD be sustainable is if either the average house price fell to circa £84,000 (Income gross X 3): or wages and salaries gross rose to £92,000 per annum.

Quote:
If correct then to counter that drift then presumably the Goverbnment would need to require Uk based lenders to advance in priority to owner occupiers (as was the case until 1997 in my recollection) and/or legislate to prevent non residents from acquiring UK residential property,which itself sounds a non starter !

Point one: now way the banks and mortgage providers would do so unless government funded the gap. Government have no money, ony circa £1.6 trillion sovereign debt.

Point two: would trip a nasty reaction and trade war.

Thanks (0)
By AndrewV12
27th Oct 2015 12:23

Suberb article

The real bad news is,  one really really bad recession for the UK and were are in the same boat as Greece, regrettably all the pieces are in position for the next really, really bad recession. Nice one George and Mark.

Thanks (0)
By ireallyshouldknowthisbut
19th Oct 2015 14:38

.

What will happen in the market place is quite simple, the current army of small landlords buying with debt, will (slowly, it will take some time, possibly 10+ years to work through) be replaced by people who are already well off any can buy with cash, or representing investment funds.

Or in other words, George and his mates will do very nicely thank-you.

Those who are starting with little but willing to take risks in gearing up and getting their hands dirty to build a portfolio get shafted.

The tenant will end up with faceless "computer says" landlords.

NB Ian makes some very good points about losses which seem to be absent from many discussions on this topic.  Quite a number of landlords have large losses, which will be going "poof" very quickly indeed given the order of offset. This seems grossly unfair to me. It is part of the business model that you will tend to lose money in the first couple of years, and make it back at the end with a geared portfolio.

The numbers are far from uncommon in the lettings business, if you do a lot of returns in this area was we do, there are lots of people out there with a lot of debt.

Thanks (1)
By maermoss
19th Oct 2015 14:59

CGT

If the interest is disallowed and a releif is given is the interest cost now a capital item to be added to the base cost as with the claim to CA's on intregal fixtures?

Thanks (0)
By ringi
19th Oct 2015 15:56

Some better exmaples.

To quote an example from Phil Ashford blog (one of the best write up of this I have seen)

Let's do an example and bring this to life. Your name is now Ben/Laura, take a pick(!), and you earn £41,800 at your 9-5pm job. You also do quite well and get a £1,500 Bonus! When you got married you moved into your partner's house and you rented out your home as you found it difficult to sell.

You rent it for £600 a month and pay Interest of £500 a month on your mortgage. You have management and general repair costs of, on average, £100 per month. Neat example, because you make no money! You have therefore never before declared Rental Profits because £600 - £500 - £100 = £0 Rental Profits. You have never had to pay HMRC tax for making no money from your rental property,

"Of course, who would have to pay tax when you don't make profits?!". Well, from 2017, you do! You will start paying tax, and in 2020 with all other income still being the same, you'll have to pay £1,040 in tax for your rental property, compared to 2016 when you would pay £0. There's an obvious problem isn't there.

Your yearly profits from property are ZERO, yet you will have a tax bill of £1,040. It's lucky you got that Bonus! After tax and ignoring National Insurance, you'll have £1,200 in your bank account from your bonus, but, instead of treating your family for your extended hours at work recently, you'll simply pay most of it straight to the tax man to settle the tax bill on your £0 Rental Profits.

(He then shows the effect of a small change in interest rates etc)

This is another worked example from the telegraph

The landlord, pay 40pc tax.

NOW Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.

2020 Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.

Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000. You will have to pay £5,000 tax in this scenario, so you make no profit at all.

Thanks (3)
By Brian Ogilvie
19th Oct 2015 16:00

Interest under these provisions remains a revenue cost - it simply becomes a non deductible revenue cost - a tax 'nothing'

There is no mileage IMO in claiming that it has somehow become a capital cost - and even if successful that's even before any argument that it would then actually be deductible for CGT !

Thanks (0)
By markabacus
19th Oct 2015 19:19

A tax on turnover...... Now there's a thought

A tax income some have said, now got me thinking. Maybe they should try taxing Companies on turnover, that would stop them shifting their profits to low/no tax countries :-)

Thanks (0)
By carnmores
20th Oct 2015 11:06

@cfield

i wondered if someone would mention that , my answer is NO, I wish to discourage residential landlords and this is one of the best ways of so doing

Thanks (1)
By moneymanager
20th Oct 2015 12:38

but it won't

The very last thing these measures will achieve is to make residential letting unnatractive. All that will happen, as others have posted here and I posted yesterday on another thread, is that the players will change to a combination of those requiring no or little finance, foreign buyers, and big corporate landlords who often build and manage. Wishing to promote home ownership is no bad thing but there is simply more money "out there" than there is here. Could we, should we follow the example of countries that prohibit foreign property ownership?

Thanks (1)
By kjevans
21st Oct 2015 19:02

Why discourage residential landlords?

Do you think that all those who can't get or don't want a mortgage should live in the woods or in the workhouse/concentration camp? If there are no landlords letting residential property where are all those people going to live? Once, not that long ago, renting was just as usual as ownership and families rented for their whole lives. Personally, I'd rather a landlord ran a business and made some money, than I would subsidize housing associations and council tenants out of my taxes (how else can they charge cheaper rents?)

More houses needed (and fewer office blocks)

Thanks (1)
By Michael C Feltham
22nd Oct 2015 17:19

HAG

kjevans wrote:

Personally, I'd rather a landlord ran a business and made some money, than I would subsidize housing associations and council tenants out of my taxes (how else can they charge cheaper rents?)

Since when much of Housing Association stock was built in the 1970s, HAs obtained massive subsidies from Government's now defunct Housing corporations.  It was called HAG (Housing Aid Grant) ad was up to 80% of total cost.

Bear in mind this was a grant - not a loan. No debt service and no capital repayments!

Now, of course, benefit has been capped nad will correctly continually erode.

However, occupants of social housing who earn £30K> will have to pay market rents.

Ergo, not a chance in hell of them ever saving a deposit: £30K would not qualify for a mortgage in any case, now.

Clearly, Government's weasel words on housing mean they do not want loads of new home buyers.

And since Government have allowed the  French, Germans, Dutch, Kuwaitis, Qataris, Russians, Japanese, Koreans, Indians and now Chinese to increasingly hoover up national assets and major corporations and, in the case of China, act as financiers, then I am certain sure the concept of large foreign investment groups becoming the major source of residential private sector tenancies, will not be far from Osborn et al little warped myopic minds.......

Thanks (0)
By Michael C Feltham
22nd Oct 2015 17:25

That's fine....But???

carnmores wrote:

i wondered if someone would mention that , my answer is NO, I wish to discourage residential landlords and this is one of the best ways of so doing

OK, that's fine: however who will act as providers of the huge gap in the market thereby created?

Remember, Government simply don't have the cash: rather, britain now owes circa £1.3 Trillion in sovereign debt.

Perhaps you would prefer to wind the clock back to the days of such as London City and Westcliff Properties (The very unsavoury Harry Landy and British Israel Bank)?

They liquidated their huge residential portfolio when Wilson brought in security of tenure for tenants in 1964/5: and restricted rent rises.

Now what this will do is return to the days of Peter Rachman; since it will be extremely difficult to bring foreign based corporations to task.

Thanks (0)
By cfield
22nd Oct 2015 17:58

Capital gains

carnmores wrote:

i wondered if someone would mention that , my answer is NO, I wish to discourage residential landlords and this is one of the best ways of so doing

It's also wrong in principle, because the tenant doesn't contribute to the increase in the value of the property just by living there. It's going to go up in value anyway whether they live there or not (or down if there's a slump in the market). If anything, a sitting tenant deflates the value of the property as there is no vacant possession.

What you're effectively suggesting is that the the landlord should pay the tenant for the great honour of choosing his property to live in. The only way you can sustain an argument that a tenant is somehow entitled to share the capital gain is by overturning the law of property and putting houses and flats into common ownership. That's a Bolshevik idea.

So it's wrong in principle, it's wrong morally, and it's wrong for all the practical reasons that Michael Feltham and others have mentioned.

Thanks (0)
By Brian Ogilvie
20th Oct 2015 13:06

Completely agree ...

Moneymanager I completely agree with your analysis  ....some developments are now being marketed exclusively overseas so even UK BTL landlords cannot get a look in !

The issue of whether and how to prohibit foreign ownership of UK property is the unanswered question.BUT surely to do this this would produce all sorts of retaliatory action,plus no doubt it is against EU and probably a few other international agreements besides !

You mentioned countries which do prohibit such ownership moneymanager,which are these please?

Thanks (0)
By moneymanager
20th Oct 2015 21:25

Not so welcome

e.g.

Singapore requires government approval for some types of property:

http://www.sla.gov.sg/Services/RestrictiononForeignOwnershipofLandedProp...

Switzerland only allows 1500 permits a year and is heavily cantonally directed

http://www.investorsinproperty.com/public/scripts/tiny_mce/plugins/filem...

The problem is I think driven partially by foreign BTL but also foreign BTLE (Leave Empty) in other words property in well regulated countries is simply a repository of wealth (ill gotten or not) and a protection for when/if the proverbial occurs.

Thanks (0)
By taxwizard
20th Oct 2015 13:23

Foreign ownership

I think Norway and Australia does not allow foreign ownership

Government has started to make foreign ownership somewhat unattractive last year by taxing Capital Gains on property.  It should have removed the personal allowance too.  I don't understand the logic of allowing individuals based overseas to have a personal allowance so they don't end up paying tax here in the UK and perhaps it is not declared in their country of residence either.

Its unfair to penalise the UK landlords and blame them for the crisis in the housing market surely it would be better to ensure foreign ownership of UK property is minimised.

Thanks (1)
By ringi
20th Oct 2015 19:41

The only solution to high prices and rents is ….

More homes, or fewer households.

So get building, or reduce the population size.

(Who owns the homes, how they pay for them, etc make no real differences provided all the homes are in use.)

Thanks (1)
By ireallyshouldknowthisbut
22nd Oct 2015 15:21

.

As for the "why?" landlords are the current Tabloid scapegoat for all housing issues.

That is about the sum total of all the arguments about why small landlords are a problem.

At some point, someone is going to work out that if you restrict the supply of rental properties, rents will, erm, rise!  Who would have thought that might happen.

The hope of course is that forcing sales will mean prices fall, and people currently in rented will be more able to buy, but for those that are left it doesn't look pretty.  Lower choice, higher rentals, lower standards.

I am sure Gideon's chums running residential property through offshore vehicles will be very pleased.

Thanks (0)
By Mallock
23rd Oct 2015 12:36

Landlords selling up

Since we wrote to all landlord clients explaining the changes we have had two contact us to say they are actively looking to sell some or all of their properties. One is selling about half his portfolio and is reducing his borrowing to make sure he has a good surplus and doesn't lose any of the "credit" for loan interest paid.

The other is selling up his modest 6 property portfolio over the next couple of years because he is just sickened by the constant changing rules and in his view the discriminatory taxation.

Many others are making grumbling noises!

Thanks (1)
23rd Oct 2015 14:10

Limited Company for B2L properties

Someone mentioned that if you had a Limited company you could put the rents etc through, is this a way round the problem?

Thanks (0)
By petestar1969
26th Oct 2015 10:50

Yes

Someone mentioned that if you had a Limited company you could put the rents etc through, is this a way round the problem?

You can transfer the properties to a limited company, or better an LLP, but it will trigger a CGT liability on the transfers.

Thanks (0)
By FCExtraordinaire
29th Oct 2015 09:33

Limited Company ?

Someone mentioned that if you had a Limited company you could put the rents etc through, is this a way round the problem?

I have thought about that one and have inquired many times about it with other accountants.    However,  the answers I get are that if the property was owned personally this could not be done and most would not want to do it.

If anybody has client experience of doing this and getting it passed by the HMRC on an inspection,  please let me know.

Thanks (0)
By Mallock
29th Oct 2015 13:38

Transfer to a Company?

FCExtraordinaire wrote:

Someone mentioned that if you had a Limited company you could put the rents etc through, is this a way round the problem?

I have thought about that one and have inquired many times about it with other accountants.    However,  the answers I get are that if the property was owned personally this could not be done and most would not want to do it.

If anybody has client experience of doing this and getting it passed by the HMRC on an inspection,  please let me know.

Any transfer to a limited company must be at current market value. If that gives rise to a gain, then the individual will be subject to CGT. If the property is mortgaged, the mortgage will also have to be transferred into the company's name. In a company there is no annual CGT exemption so potential tax savings on a future sale will have been lost (although you could argue that the CGT exemption would be used in the transfer to the limited company). There will be legal fees for the transfer.

Any withdrawal of profit from the company by dividend in going to face an additional 7.5% dividend tax which is effectively additional tax over that which would be suffered if the properties were owned personally.

Accounting costs will be a bit higher and if you are not eligible to take advantage of the new Micro Entity rules (or don't take advantage of them) valuations may need to be carried out for the properties annually.

Is it possible - yes. Is it worthwhile - that depends on individual circumstances.

Thanks (0)
By Old Greying Accountant
30th Oct 2015 11:41

But would the company ...

Mallock wrote:

FCExtraordinaire wrote:

Someone mentioned that if you had a Limited company you could put the rents etc through, is this a way round the problem?

I have thought about that one and have inquired many times about it with other accountants.    However,  the answers I get are that if the property was owned personally this could not be done and most would not want to do it.

If anybody has client experience of doing this and getting it passed by the HMRC on an inspection,  please let me know.

Any transfer to a limited company must be at current market value. If that gives rise to a gain, then the individual will be subject to CGT. If the property is mortgaged, the mortgage will also have to be transferred into the company's name. In a company there is no annual CGT exemption so potential tax savings on a future sale will have been lost (although you could argue that the CGT exemption would be used in the transfer to the limited company). There will be legal fees for the transfer.

Any withdrawal of profit from the company by dividend in going to face an additional 7.5% dividend tax which is effectively additional tax over that which would be suffered if the properties were owned personally.

Accounting costs will be a bit higher and if you are not eligible to take advantage of the new Micro Entity rules (or don't take advantage of them) valuations may need to be carried out for the properties annually.

Is it possible - yes. Is it worthwhile - that depends on individual circumstances.

... not get indexation on the base cost, so if CGT exemption taken at point of transfer, indexation should at worst equal any rise in exemption limits, and probably exceed them.

Thanks (0)