Tom Entwistle: both landlords and tenants would lose out under Osborne’s buy-to-let tax changes
Friday 19 February 2016
The government’s three-pronged attack on small-scale buy-to-let landlords looks to me like a politically motivated strategy that could easily back-fire on the Tories.
With swingeing new regulations and tax changes and a move to encourage the ‘Tescoisation’ of the industry, who could blame the substantial cohort of largely Tory voting landlords for feeling they’ve been cut-off at the knees.
Making more laws and regulations in an attempt to squeeze-out the rogues in the industry is one thing - making more regulations into law is all governments can do.
Government ministers must be as frustrated as hell (many MPs are landlords themselves), along with the more responsible landlords in the industry constantly reading negative media hype about landlords evicting their tenants at the drop of a hat.
Central government can’t force local authorities to deal with the rogues more effectively - they can only cajole and encourage - but they can certainly appear to be doing something and look convincing by passing more and more regulations into law.
The tax change which comes into effect from April is another matter altogether.
Breaking an age-old principle that allows businesses to off-set the interest they pay on business loans against profits is a bold step on George Osborne’s part, and one which in my opinion could easily back-fire.
Buy-to-let is not a business, says HMRC
HMRC says buy-to-let landlording is not a business - it’s an investment. So that explains it.
But wait a minute, the Government also says buy-to-let is a business when it comes to Flood-Re and businesses can’t join the Flood-Re scheme - that’s for consumers. I’m confused.
There is a policy to corporatise what is probably the nation’s biggest cottage industry by far, to reduce the housing shortage quickly and at the same time bring in professional tenancy management on a large scale, akin to the German and US private rental sectors.
But with around 98 per cent of the UK’s private-rented sector comprising 2m or so small-scale landlords, it’s going to take some time to bring about this change.
Buy-to-let tax relief cuts and stamp duty increases will not affect rogue landlords
What’s more, corporate investors backed by institutional funds will inevitably go for the professional end of the market, with up-scale units targeting premium tenants, leaving the bottom end of the market untouched and thousands of low income tenants still housed by the ‘rogues’ of the industry.
As with most forms of regulation, it’s the responsible operators that comply and the rogues just seem to carry on as normal.
To be fair, the vast majority of landlords with low or no-income tenants are responsible landlords, and local authorities are in a bind - bringing the rogues to book is a long laborious process involving countless man-hours to gather together enough evidence and get them into court.
And when they do, up to now at any rate, the fines have been paltry and many rogue landlords see them as a business expense.
Then, by condemning a landlord’s accommodation, the local authority presents itself with an immediate and urgent problem - the up-rooted tenants need re-housing quickly at the local authority’s expense.
It’s almost a disincentive for local authorities to seriously tackle the rogues.
Will stamp duty increases really deter buy-to-let investors?
The coming changes in April will no doubt remove some of the attractions of buy-to-let and with less new investment and more house sales into ownership this will almost certainly push-up market rents.
It is perhaps not surprising that activity in the housing market picked up in December following the announcements of coming tax changes in April. More homes were coming onto the market for the first time in over 12 months, but the number of enquiries from buyers rose even faster.
It’s too early to see the overall trends, but could it be that the increase in houses coming to market is mainly due to landlords selling-up ahead of the coming tax changes? Tapering of tax relief on mortgage payments will start on 6th April.
On the other side of the coin, could it also be that the spurt in buyer enquiries is down to landlords buying-up properties before the 3 per cent stamp duty surcharge comes in on buy-to-let and second homes on 1st April?
We will have to wait and see for the answers to these questions.
A major change in direction in the industry - and that’s what this amounts to - brings a lot of uncertainty and no one yet knows how buy-to-let will be after the dust settles.
The extra 3 per cent on stamp duty is not a great deal when viewed over 10 or 20 years of house price inflation, and will be even less if prices take a temporary dip through some landlords selling-up. Others will be waiting to pounce no doubt.
Landlords with large mortgages will be hit hardest by the buy-to-let mortgage tax relief cuts
For landlords with businesses of any size operating with their property investments within a limited company, the tax changes will have no immediate effect, excepting the tax changes to company dividend payments.
Even then, most will be largely unaffected.
But the small-scale landlord with one or perhaps two properties, being a lower rate taxpayer, will possibly also feel little change.
Landlords who will really feel the hit are those in the middle - the high and higher rate taxpayers - and in particular those who pushed the boat out and bought a lager portfolio of properties with a high proportion of debt-to-equity in the mix.
They will gradually be hit with an increasing tax burden over a four-year period. For them, buy-to-let investment will no longer be a license to print money, if it ever was.
Some of the Chancellor’s previous tax changes have already proved inept. Will these buy-to-let measures prove likewise?
For example, stamp duty receipts are already down following the previous budget’s changes to stamp duty on primary residences. This is due to the fact that transactional volumes for more expensive houses have slowed to a trickle.
There is no doubt that MPs got their ears pinned back on the doorsteps at the last election about young
Johnny and Janet’s inability to buy, and a policy of deterring multiple small-scale ownership was perhaps planned to mean more houses for first-time buyers.
But will this be the case. Will the 3 per cent stamp duty levy really deter second home owners?
With house prices still rising, you can’t get away from the fact that most potential first-time buyers can afford the rent on a house that they could not afford to buy, especially so in the capital.
In my view these tax changes could even make it even more difficult for youngsters to move out of the family home if the number of affordable properties available for rent declines.
The one policy that does appear to be working, and gaining some traction, is the government’s Help-to-Buy scheme, which is helping to bridge the gap between supply and demand.
With a 40 per cent interest-free loan and low deposit on offer to first-time buyers the task of securing a mortgage is made much easier, and developers are encouraged to build more low-cost housing.
According to a research report by estate agents Countrywide it says that a 3 per cent stamp duty levy would take around 11 months of rent for the average landlord to recover.
But if house price inflation persists at even a fairly modest level compared to past experience the extra cost would easily be recovered in the first year.
For landlords who take a long-term view on property as a safe long-term investment, especially in relation to alternatives like pensions and the stock market, the extra stamp duty may not be too much of a deterrent.
But the planned erosion of mortgage interest tax relief will certainly make some landlords get their calculators out and think hard and long.
Something of a curve ball in the mix is the cloud-funded fight by a group of landlords who have hired human rights lawyer Cherie Blair QC, herself a substantial buy-to-let investor and an ex-prime minister’s wife, to take the government to task over the legality of removing business interest relief on human rights grounds. Watch this space.
How will it all pan out? No one knows for sure, and as the above is, there is much speculation. It is quite possible that post 6th April life for landlords will go on much as before - people adapt and change their strategies.
But though two things are virtually certain - tax takes and rents will rise.
Tom Entwistle is editor of the LandlordZONE website and is an experienced landlord of residential and commercial properties.