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546: Draconian Taxes on Buy To Let Business

08-14-2015 team

Attacks Continue: The on-slaughter of Landlords businesses continues apace. The draconian tax changes announced in July 2015 will have a profound impact on the buy-to-let business investments (this off the back of the previous increase in capital gains tax from 18% to 28%)

Firstly it will render about half of investor’s portfolios uneconomic because taxes will be paid on losses – and it will be very hard to make a profit if an investor borrows money for a property purchase. Not being able to render mortgage costs as an "expense" is anti-business.  The Chancellor seems to have mistaken a business offering services to clients with a paper investment. In doing so we predict:

1.    Yields will drop dramatically – leading many buy-to-let investors to start selling up their portfolios

2.    This will lead to more properties to purchase and a slight softening of the house price market, along with a severe tightening of the property rental market and rents rising very sharply.

3.    The property rental crisis will worsen considerably particularly in London where there will be a giant shortage of properties to rent – one reason is because property prices are high, borrowing high, yields low and the new tax changes make buy-to-let uneconomic for new investors in London. This will be the unintended consequence of the tax change – that in part is targeting wealthy London landlords it seems. Just where the most rental property is required - will see the biggest reduction because of this ridiculous new tax change.

4.    The rental market in lower priced areas - in the north - will not be affected so much. Hence just where rental property is required to keep business and the public sector ticking over, it will be hit the hardest and very few new rental properties will be available.

5.    This will be worsened by the very high population growth in SE England, along with inward migration and new migrants having large families. Rents will become prohibitively expensive for public sector workers and low paid private sector employees. This will make running businesses in SE England more challenging – and attracting the right talent.

Paying Tax On A Loss: We have never heard of paying a tax on a loss before anywhere in the world – this must be an all time first. If you have no borrowing, there will be little impact, but most buy-to-let investors have borrowing of at least 60% - upwards to 90% or even 100% of the property value if property prices have dropped in your areas (e.g. Wales, NE England, Yorkshire). It makes no economic or business sense – unless you are intent on destroying a business that is – which the Tories seem to be proposing.   

Unsustainable: If interest rates rise sharply, then many buy-to-let businesses will go bankrupt since they will not be able to pass on their losses to the tenants. Any buy-to-let landlord going under will also see tenants on the streets in droves - since the properties will be repossessed by the banks - who will evict the tenants – adding to the rental housing crisis.

Banks Not Helping: It now looks like the banks will tighten up lending criteria for buy-to-let landlords as well – this is probably in large part (perversely) to the higher taxation  - since banks will now quite rightly see buy-to-let as a riskier business (or investment as the government call it). This will further reduce rental supply and lead to higher rents in the next few years.

Interest Rates and Inflation  The slightly more positive news – if there is any out there - is that the Tories are trying to do something about the massive public sector deficit and trade deficit. It does not directly impact investors returns though. The implementation of spending cuts over the last five years have been very well received by the financial markets after the crisis caused by Labour’s overspending up to 2010. The Tories always said it would take 10 years to repair the damage and we are now over half way through the process. Because of the right economic spending trend, Sterling has gained against most other currencies – particularly since Euroland was forced to start printing money again. This has had the desired effect of keeping inflation low. Furthermore the crash in oil prices has also kept inflation at near zero despite the recent 3.2% wage inflation, this has allowed the Bank of England to keep interest rates at record low levels of 0.5%. It’s worth pointing out these very low borrowing costs would be impossible with a Labour government since Sterling would decline, inflation would rise and interest rates would have to rise with it – also to help support the currency value. What we are seeing is a well managed UK economy which is re-balancing from public to private sector – leading to low interest rates and strong economic growth – with record employment levels and stable unemployment levels.

House Prices To Rise: This is of course perfect conditions for further house price growth. It’s no surprize. It’s also worth pointing out that the UK has the most right wing government in Europe and hence most likely to keep the finances in order and not be spend-thrift. Many Euro countries have drifted to socialism or central coalitions. The financial markets know this and price this into the value of Sterling – hence keeping down inflation, interest rates, borrowing costs and boosting Sterling values for Sterling investors – ref London property. This boosts London’s standing as a safe haven for super-rich global investors. The currency risk is much reduced. Sterling has strengthened recently against most currencies except the dollar – and when you compare it with the Russian Rouble that has declines 70% in value and Brazilian currency that has dropped 50% against the dollar/Sterling, you can understand why the super-rich want to park their money in prime London property despite higher stamp duty.  

Labour Leadership Election - "Corbynmania"   The Tory opposition has frankly gone into meltdown – the Labour leadership contest has been very divisive – but this is probably just the beginning. If Jeremy Corbyn gets to be the new leader, this will start a massive shift to the left and make Labour unelectable. They will become a fringe protest movement – closely aligned to Karl Marx’s communist philosophies. It could ultimately lead to the destruction of the party – a split into two - this is indeed the more likely outcome. If this happened, then Labour would win very few seats. For centre-left Labour supporters (the so called "Blairites")– it must be the most depressing period in the last 50 years or more. Rather then coming back to the centre ground (moving right) which was needed after Ed Miliband’s humiliating defeat, the party seems to have lurched far to the left and even fewer people would trust the Labour party with the economy – which was the key reason why Labour did not get enough votes in May 2015. This brief period of "Corbynmania" will we believe end in tears for Labour and the socialists - it will tear them apart and transform them back to the early 1970s. The Tories will look on with glee - they will have done nothing whilst the Labour party regrettably self implodes on itself. This will do nothing to help UK politics because we need a credible opposition to keep the Tories straight - its looking ever more likely they will have "carte blanche".   

Tories Here To Stay: For property investors – we can look forward to the next decade under Tory rule. We just hope they start treating the buy-to-let business with some credence since the punitive tax measures recently announced have made the property investment community bitter and it will ultimately end up driving rents higher and reducing the overall supply of rental properties and investment opportunities – the UK government creaming tax even when a buy-to-let business owner is making a loss, then taking a gigantic 28% capital gains tax on top – before taking another slice with inheritance tax at the end. Its little wonder buy-to-let investors will be leaving the business in droves in the next few years.        

Tax Changes Drive The Wrong Behaviours

Because of the massive assault on the buy-to-let rental sector, and also prime real estate through higher stamp duty on properties >£500,000 value, we think this will drive property business owners to do the following:

·        Make short term profits out of buying, renovating then selling property using short term bank loans to finance (rather than renting them out at a loss)

·         Investing in their own homes – where no capital gains tax is payable – particularly if the value is less than say £1 mln (extensions, loft conversions, partitioning into flats)

·         There will be fewer long term landlords willing to pay tax on losses – hence many buy-to-let investors may sell up and move on – reducing the rental supply and driving up rents and increasing the shortage of rental properties

·         Property investors may also choose to buy small pockets of land, build homes-flats, then sell them immediately (but not let them out)      

Don’t Hang Around Paying Tax On Losses:  No-one can afford to stick around making big losses for years – whilst paying tax on these losses to the government. It’s economic suicide. So expect a rental market crisis by 2017 as these tax measures start to kick in and buy-to-let investment dries up. With the massive inward migration of people plus booming indigenous population in southern and eastern England – it’s a recipe for a rental market crisis – particularly as the government is not building any rental properties and housing associations are selling their properties. It could all be part of a masterplan by the Tories to drive down the amount of renters in large part because these people are more likely to vote Labour. However, we cant see how it will add many new properties to the overall market – its likely to do the opposite since buy-to-let investors often buy new builds – and if they don’t buy these, they will not get built. It will hence lead to an overall worsening of the housing crisis.

We hope you have found this Special Report insights – albeit it makes rather depressing reading we have to admit. We try and say it how it is, rather than gloss over things. If you have any queries please contact us on

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