565: Full Scale Assault on Landlord's Businesses by Tory Government - Ramifications
Distressed Landlords: Its been a most distressing and depressing few months for buy-to-let business owners. They have been clobbered by attack upon attack by this so called Tory government that has taken the profitability away from a previous business that was viable. The full scale assault on hard working landlords providing a business service to tenants is ill advised. Those Landlords that voted Tory will of course be seriously considering voting for another party in future. The following measures have been instigated:
- 3% stamp duty surcharge on all buy-to-let properties on the whole value of the property
- Inability to deduct mortgage costs against income the only type of business to suffer this measure (in the world it seems) for higher rate tax payers (40% or 45% bracket)
- Inability now to deduct 10% wear and tear against income only allowing actual maintenance costs invoiced
- A new capital gains tax rate was announced of 20% for all investments and businesses except buy to let property investors who have to pay a draconian 28%
- The additional stamp duty is also applied to developers renovating properties (unless it is your home and you only have one property)
- The Bank of England has been given new powers to increase deposits required to purchase buy-to-let properties and restrict lending presumable to stifle investment and also making it harder for buy-to-let owners to operate effectively
The above measures make most buy-to-let business unviable - uneconomic - and will lead to distressed sales by hard working landlords only try to make a reasonable return while providing a business service - something they always thought the Tories were encouraging. Tenants will of course lose their homes in the process.
Attack on the Rental Sector: Buy to let residential landlords have been singled out and the treatment has been dire. No other country treats landlords like this. It will be extremely difficult to make a decent return henceforth and many landlord will be forced sellers though they will been suffering punitive 28% capital gains on any sales.
Un-intended Consequences: We believe this tax treatment will have awful unintended consequences for the government that only time will start to unravel. Firstly, we thing:
· Rents particularly in areas with high property prices will have to skyrocket as there begins a massive shortage of rental property supply starting mid 2016.
· Many tenants will be evicted because landlords will start selling down their property portfolios.
· The tax measures could even precipitate a house price crash of there is panic selling caused by a Brexit and higher mortgage costs clobbering buy to let investors further in two directions.
· There will be a reduced level of building as buy to let investors elect not to purchase new build properties
· Large institutional investors have also been hit by the 3% stamp duty levy which will reduce their appetite for investing in residential property
· There will then be an overall worsening of the housing crisis as the supply of new homes and the supply of rental units dries up driving high levels of homelessness and higher rents, with lower worker mobility
· The measures will then significantly damage the overall economy particularly in London because rents will rise fast and work mobility will reduce as renters are priced out of the capital
· House prices increase could drop but the lower building levels could actually tighten the supply urther and cause house prices to rise faster than before
· The number of properties coming on the market after a short period of landlords selling down will like drop further
Confidence Evaporates: The confidence from landlords of buy to let properties has been decimated and another major concerns is what is around the corner as the Chancellors plots his next move targeting landlords. There has been an onslaught of bad news attacks and these are not likely to recede they may even intensify. It seems there is insufficient industry lobby voice landlords seem to be a sitting duck unfairly targeted. This is a massive surprize as landlords would tend to be Tory voters so he is targeting the small business person in the private sector trying to provide a service and making a return on risked capital stifling these business owners.
Alternative Investment for Children: For landlords with children a far better investment for your family in its totality if you can still afford it is to:
Have each child when they get to 18 years only to start a First Time Buyer ISA (or a Lifetime ISA). The First Time Buyer ISA allows them to save £200 maximum a month, up to a maximum of £12,000 then the government give £3000 making the total £15,000 then this can be used as a down-payment on a deposit for a home.
If your offspring then buy say a £200,000 home in Derby with three bedrooms when they are 21 years old (or earlier) they will be able to have two lodgers both paying about £380 a week which will then pay for the full amount of the mortgage. Hence outgoings will be minimal and your offspring can see the capital value increase by say 6% a year and be making £12,000 a year in wealth creation because of it. This would be instead of paying about £800 a month to rent a £200,000 home.
If you have two offspring, then they should both do this and both offspring will get a foot on the housing ladders very early and avoid the 3% stamp duty levy, landlord taxes and maximise their exposure to rising property prices. They will of course need to earn enough money and/or have enough savings to prove to the bank they are capable of borrowing the £185,000 for the purchase.
Your offspring can of course take advantage of the Help to Buy deposit scheme where the government can lend up to 15% towards the purchase of a property as long as the first time buyer has the 5% initial deposit. This means someone who has saved £12,000 is given £3,000 by the government and can then borrow from the government using Help to Buy another maximum £45,000 before going to the bank for the rest of the lending.
The steer is if you can have your children buy say a 3 bedroomed property instead of a 1 bedroomed property they can have two lodgers with very flexible rental terms and have their mortgage paid for by the lodgers meaning they can then own a home and be saving for a larger one for when the property prices have risen by say 20% and they have more equity available to get the next wrung up the property ladder.
We are not ware there is any limit to the amount of lodgers you can have and there is a £4,250 per year tax-free allowance any more rental from lodgers than this amount needs to be bundled into your childrens income and annual self-assessment tax return.
Bed and Breakfast Treatment: The natural extension to this is that your children own a bed and breakfast establishment with say ten rooms. This type of business can still deduct mortgage costs against income at the higher tax rate of 40% or 45%. What we are saying is lodgers are treated in a fairly similar fashion to bed and breakfast guests. It is important though that the lodgers share facilities (at least some) with the owners or residential landlord of the property. If a person is staying in your property in a self-contained flat, this does not classify as a lodger. So if you or your children buy a four bedroomed flat then rent 3 rooms separately to lodgers, and the lodgers share the bathroom and living room for instance, then this classifies these people as lodgers. You can purchase the property on a normal residential mortgage though you ae likely to need to advise your insurance company and mortgage company that you have (or are planning to have) a lodger or lodgers.
Brexit: To add insult to injury - to further Landlord's woes - there is the spectacle of the UK voting to exit the EU. This could create a real crisis for Landlords just after the new taxes hit because:
Sterling will crash sharply down - at least 20% in value
Interest rates will have to rise sharply to defend the pound and subdue inflation caused by higher import costs
Landlords will be hit by the double whammy of having to pay tax on losses caused by mortgage rate rises - rents would have to rise sharply to help pay the government taxes on the added mortgage costs
A vicious circle housing crisis would ensure - again - the unintended consequence of the taxes.
If the UK population votes to leave the EU - you need to position to get out of property rapidly - if its not too late. The shortage of rental property will become extreme in this scenario.
We hope this Special Report helps frame the recent assault by the Chancellor on hard working landlords and gives you a few alternative options to consider. If you have any queries - please contact us on firstname.lastname@example.org