The Building Societies Association has warned a new charge on bank profits could take up to £20bn out of the mortgage market over the next five years.
In the July Budget, Chancellor George Osborne announced plans to gradually reduce the levy imposed on banks and instead bring in an 8 per cent surcharge on profits from next January.
The tax will hit institutions recording more than £25m in annual profits, while the levy will drop from 0.21 per cent to 0.1 per cent by 2021.
The BSA says this will unfairly target its largest members because, unlike banks, they are unable to raise capital through methods other than retained profits.
As a result, profits that would otherwise be used to support further lending will now be subject to tax.
The BSA says under the proposals Nationwide, Skipton, Yorkshire, Coventry, Leeds and Principality building societies could be left with an additional annual tax bill of £126m.
It estimates this sum could be used to support as much as £4bn a year of mortgage lending, or £20bn over the next five years, equivalent to 147,000 loans.
It is only Nationwide that pays the bank levy, so five of the top six building societies will not benefit from the corresponding reduction in costs.
One building society source says: “The Government said in its manifesto that it wants to support aspiring buyers. But now capital that could have been put aside as ret-ained profit has to go on the tax, which otherwise would equate to £20bn of lending.
“We can’t say for sure that lending won’t happen, but that money is now at risk.”
The trade body is in talks with the Treasury over potential reforms to the proposals.
Can the market afford to lose £4bn?
The Council of Mortgage Lenders puts total gross mortgage lending at £203.3bn for 2014, and £177.6bn for the previous year.
The estimated £4bn cost to mortgage lending of the bank profits tax represents less than 10 per cent of the total £52.7bn gross lending advanced by building societies in 2014.
Capital Economics property economist at Matthew Pointon says: “£4bn is not a huge number when the market is doing about £18bn a month in gross terms.
“It’s pretty small beer, especially because we expect lending to continue to rise.”
Brightstar chief executive Rob Jupp agrees. He says: “A loss of £4bn of mutual lending is going to have some small effect on the market, but that would be assuming a scarcity of new lenders coming in to the market.
“If this had happened three years ago it would have been a significant problem because mutuals have been the oxygen for the intermediary marketplace, but it’s a sign of the market that we can now lose £4bn and still grow.”
National Institute of Economic and Social Research Jack Meaning says: “In terms of overall mortgage lending, it doesn’t seem like it would be a considerable amount, given the amount of lending going on at the moment.
“What’s more, given that this legislation favours the main banking sector we might even see an uptick in lending from the banks instead.”
But Meaning adds the cost of the profits tax is important because the figures involved are significant to the building societies themselves.
He says: “We saw through the financial crisis that it was building societies which were more resilient in their lending. There’s a strong case for saying we want that kind of diversification in the mortgage market.
“All new taxes will hurt some parties and favour others, but this seems to be a move in the direction of hurting the building society sector.”
Yorkshire Building Society expects its bill to be around £13m a year in additional tax, which it could otherwise use to back £400m of annual lending.
Chief executive Chris Pilling says: “Given our mutual structure, it is consumers who would ultimately bear the brunt.
“The funds we will need to pay in extra tax would otherwise represent retained profit that we would use to support our growth as a mortgage lender and reinvest in our business.”
Leeds Building Society finance director Robin Litten says he expects the charge to add £5m a year to its tax bill.
He says: “It’s disappointing for the new surcharge to be applied to building societies, which are financially strong and typically operate lower-risk business models than the larger, more complex banks.”
Skipton Building Society chief executive David Cutter estimates Skipton will see its bill rise by £6m a year.
Cutter says: “Building societies are once again being caught up in the political collateral damage to address the banking sector.
“It’s a perverse move to put an extra tax on building societies when they are providing the vast majority of growth in the mortgage market.”
Number of loans ‘at risk’ over five years due to profits tax
Amount at which profit tax will be levied from January
Estimated annual amount Yorkshire BS will have to pay on profits