324: Crazy new capital gains tax threat
It’s Robbery of Property Investors: Property investors are being attacked like bankers – but we are the ones paying 5.5% on mortgages to help bail out the banks – when interest rates are only 0.5% (a massive 4.5% uplift) meanwhile providing a public service by supplying rental accommodation – often at a loss. This attack on hard working individuals in crazy – we take all the risk, and get hardly any of the reward. It’s not the buy-to-let investors that have been defaulting. We did not cause the banking crisis. We are now helping pay for it through over-inflated mortgage costs. Council taxes. Energy costs. Regulations. And we don’t deserve either 40% or 50% capital gains tax out of the blue – it's robbery.
We get the worst of all worlds – we are not considered entrepreneurs, we are not considered businesses, and we are bundled in with second home owners – but meanwhile we provide a public service to tenants 365 days a year - we are on call 24/7. Many landlords have had enough and are starting to sell up. The costs are too high, taxes too high and returns non-existent – and just about to get a whole lot worse. If the government decide to penalize buy-to-let investors in this way – it will surely lead to tears all around. We cannot frankly think of anyone that would gain. Government, landlords, tenants, home-owners – we honestly believe by April 2011 all will loose out if these draconian measures come into force.
Crazy Tax System: For property investors, if a stupid new capital gain tax change comes into force for buy-to-let investment – bunched in with the second home owners - there are a few paltry investment opportunities left after this potential “highway robbery” of the highest order. So be on your guard to switch tact and take advantage of these opportunities if they present themselves to you - and all our fears come true.
High End Property To Protect Your Wealth: Capital gains tax is not paid on a principle residence or home. Therefore if you divest buy-to-let property and put the proceeds into extending or renovating your principle residence, you could enjoy the fruits of the expanded building and see high end property prices rise as others follow-suit and want to buy larger properties. Properties close to high wage jobs would be best placed for capital increases – like London and the south-east. Just think, why should a wealthy individual want to buy stocks and shares when they only have 50% of the gains but 100% of the downside on risky shares. Would it not be far better to put your money into something that has:
• 100% of the gains
• No way of loosing 100% (realistically one could only lose about 50%)
• Something that you can live in and enjoy - tangible benefits - "touch it, feel it, not just paper"
• Something that you can add value to
• Something that you can borrow money against – and use leverage if you wish
We’re already seeing the start of a bear stock market caused by the potential capital gains taxes rises and investor sell their stocks and shares before 22 June - this started a week ago after the rumours started. Why should someone risk 100% and only get 50% of the gain on a risky stock – its crazy. The new capital gains tax will be a massive mistake – already the FT100 is far lower than it was in 1997 as Labour came to power – in inflation adjusted terms it’s now about 40% lower. Yes, that means the top 100 UK companies are worth 40% less than in 1997. That means the private sector has been crucified over the last 13 years and its just about to get even worse if this new capital gains tax starts. If you already have a large property – best extend up, down, to the side and maximise the value of the property. if you dont move you will avoid paying stamp duty. It’s probably the best investment you can make. But don’t downsize – inflation and the tax man will eat all your savings before you know it.
Buy-to-let High Yield after April 2011: If the government are stupid enough to raise capital gains on buy-to-let (instead of just second homes) – then they will be starting the next housing crisis. Already rents are rising, there is a massive shortage of rental property particularly close to London. If the government give people until April 5th 2011 to sell gains for 18%, this will lead to a massive selling spree – and house prices will drop. But after they stabilize – as early as mid 2011 – but possibly many years later (if a severe house price crash is precipitated by the panic) then rental prices will have sky-rocketed and property prices will be so low that yields will be high – making re-entry to the buy-to-let market attractive once more. We certainly don’t hope for this scenario – it would be a foolish tax policy decision of the government, but if the foolish enact the foolish – then this is an opportunity to make higher returns after mid 2011 – some way off, but worth considering all the same. Let’s just hope it doesn’t come to this.
Crisis Triggered by Tax Change: So just in case the government starts the crisis on 22 June 2010 – there a just a few opportunities left from the mess that will be caused. We feel particularly sorry for the tenants – many would be given notice at the same time and won’t be able to find a place to live by end 2010 if these tax changes take effect – lots of empty properties being sold with too few buyers. The average home owner would also suffer as property prices came down – and negative equity and lack of mobility could then start effecting bank's liquidity – bad loans all over again. All a sorry story from a tax gain that would likely make very little revenue for the government in the next few years – in fact, after the damage done particularly to the baking sector, it would likely make a loss of revenue.
Warning - No Tapered relief = House Price Crash:The only hope is that - if the government do foolishly decide to target buy-to-let investors, that they provide tapered relief. If there is no substantive tapered relief (like the system of 2006 and before) and the government give people until April 5 2011 to sell off - there will be an almighty bail-out that will lead to a house price crash - this is what we think. Second home owners would run for the hills. Country areas would suffer huge falls. Funnily enough these are just the areas that the Conservatives and Liberals have the largest share of the votes - that would be causing a crisis in their heartlands. It's not just an idle thought - we are serious. Why wouldn't it set in a panic situation?
High Tax Britain: The only other consideration is - whether it is worth emmigrating to a low tax country. Many European countries like Slovakia have flat tax at 20%. Others like Switzerland have flat tax of around £25,000 fix a year based on the size of a rental property you live in. The overall tax rate of high earners is now about 80% when you take into account earned income tax (50%), bonus tax (50%), capital gains tax (could be 40% or 50%), inheritance tax, national insurance (11%), council tax, VAT (20% soon) and petrol/other duties (80+%). Britain just taxed itself to death. So if you are really upset about it - it's seriously worth considering moving out of high tax UK. Or at least doing some calculations to see how much of a benefit it could be depending on your business circumstances. When you add up the tax on tax on tax - its over 80% - especially if you send your kids to public school (no tax offset) and are a high earner.
Impact of Tax Changes on Housing Crisis: The new government desperately needs to encourage home building and increasing flows of property for private rental - but so far we have seen no evidence that this will be the case. In fact, all the evidence so far points to further shortages - albeit there could be a short flood of properties on the market later this year if the capital gains tax change: 1) starts 6 April 2011 (instead of immediately); coupled with 2) zero tapered tax relief for buy-to-let properties. If this happens, it would be the single most catastrophic event to hit housing in twenty years - and it may be many years before things recovered to normality - meanwhile buy-to-let investors would have lost all confidence in the market and their investments. Rents would have sky-rocketted and there would be many empty properties as no financing was available to sweep them up. We know it would happen - it's just the honest economic and market logic. To think someone who invests in a property and providing a service to tenants for a 10 to 20 year time frame during inflationary times - should pay the same 40% or 50% tax as a day trading speculator - is outrageous, absurd, stupid and ignorant. Everything we would never expect from a Tory administration. How can they do this? Who do they think we are? The Tories never mentioned this in their manifesto. Voters voted from them only three weeks ago. 36% Tory plus 22% Liberal Democrats (plus the 24% Labour) never voted for this absurd tax change that would lead to lower revenue we all know - this idea coming from an ex-economist is mind-blowing! If it happens, it's time to bail out for investing - why should people take 100% of the risk but only get 50% of the reward over a ten year time frame when inflation has risen 50%? - its absurd.
Vince Cable - tax could cause house price crash John Redwood - trying to stop the crisis
We would like to remind Vince Cable - the Business Secretary and Lib-Dem architect behind the CGT increases - that for buy-to-let investors, taxing on capital gains at the same rate as earned income tax is ludicrous. The reason is that almost all buy-to-let investors already pay earned income tax at rates between 20%, to 40% and even 50%. They use any remaining disposable income to save, then invest. So if after ten years of inflation, there is then a further 40% or 50% capital gains tax on any non-inflation adjusted asset increase - it's then equivalent to more like an 80% or 90% tax. On top of this, buy-to-let investors have to pay council tax, VAT, petrol tax at 70% and other taxes. So it is crazy. And we are surprized it's ever got off the ground for serious consideration, because economically it makes no sense. We plead and kindly request that Vince Cable (as an ex-economist) checks his economics notes or does a net present value cashflow - and you will then be able to see what we are talking about. Flat 40% to 50% tax rate is something draconian that a far left leaning socialist government would implement. Not a Conservative and Lib-Dem coalition. We did not vote for this four weeks ago. Its crazy - period.
The person that seem to make sense for the UK and the average hard working individual and families is John Redwood. And Mr Laws from the Lib-Dems agrees as well.
Buy-To-Let Investors Are Bailing Everyone Out:What's particularly galling is that buy-to-let investors are now paying 6% mortgage payments to balance the books of failed banker's accounts - and help the government get their bail-out money back. The when the bankers make profits from the 1 million mortgages - they pay themselves massive bonuses. Yes, that's a gigantic 5.5% above the base rate of 0.5% - a massive tax in effect on buy-to-let investors of 4.5% per annum on finance over and above the normal 1% uplift. So on a £100,000 mortgage, that's £4,500 a year. Meanwhile inflation runs at 3% over the long period - say ten years. So these hard working investors risk their money for a ten year period and pay this massive uplift tax on financing - and note very few buy-to-let investors have defaulted. Meanwhile we risk tenants not paying, fire, leaks, tenants trashing the place, services charges, council tax, higher energy costs etc - and all the 24/7 hassle of being an unglamourous landlord. And now - Vince Cable is proposing to take at a stroke up to 50% of this inflationary asset increase. It's theft. It's totally unfair. It's a joke. It defys economic logic. It's the highest capital gains tax in the western world. It will lead to a house price crash. On the non inflation part of this increase over a ten year period, the effective tax would be 75%! And if house prices crash by 40%, most investor loose everything - having paid the massive mortage fees and taken accumulated losses over the years - with no tax benefit from this (they cannnot be offset against wage earnings). We are extremely angry about this - as you can tell. We encourage everyone to sign-up to the Telegraph petition on capital gains tax - before it's too late.
click: Daily Telegraph campaign
We have to stop this. And if we don't then there is no point voting Tory or Lib Dem in the next election.
Instability and Shortage: Overall - whilst there is a massive shortage of good quality accommodation for rental and purchase, there is also a big chance tax policy decisions could destabilise the market and regrettably make matters a whole lot worse. The way out of the mess is to:
give tapered relief on capital gains tax (down to zero or 10% rate after 5 years) for buy-to-let investors (and other investors for that matter)
don't shoot the market in the foot by having a blanket 40% or 50% as of 5th April 2011 - this would lead to a house price crash for sure - everyone would loose out and it could lead to banking meltdown
start encouraging investment in the building of houses, in southern England especially
Brain Drain: Remember, anyone trying to improve their asset position is only doing this so they do not have to rely on government pensions one day. This after previous government destroyed pensions. This wealth creation benefits the country. It is a very dangerous policy one that stifles risk taking, business behaviours and entrepreneurish - all this top talent will leave the country if they are treated in such a poor way. Other European countries have far lower taxes - so if we want to go back to the 1970s - we'll get a big brain drain of the most motivated and talented individual voting with their feet. Then the country will be in a permenant recession.
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A Crazy Idea
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