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Tony Byrne: Osborne’s absurd ‘Alice in Wonderland’ B2L tax grab

Tony Byrne

Chancellor George Osborne announced a number of swingeing tax increases targeted to hit individual buy-to-let investors in his summer Budget last year. The measures are complex, harsh and highly discriminatory against private landlords.

In fact, they are so financially absurd they have been described as the “Alice In Wonderland tax grab”.

The four key changes are as follows:

  1. Removal of the 10 per cent wear and tear relief for furnished lettings from 6 April.
  2. An extra 3 per cent stamp duty payable on purchases of second homes above £40,000 from 6 April.
  3. Removal of higher rate tax relief on mortgage interest staged over three years from 6 April 2017.
  4. Capital gains tax payable on the sale of an investment property within 30 days from 6 April 2019.

Landlords are up in arms about this. So much so they created an online campaign using the Crowd Justice website in order to raise a £15,000 fighting fund that will enable them to contest clause 24 of the Finance Act 2015. The campaign was so successful they raised the required amount in a matter of days and, subsequently, a further £35,000 very quickly.

The aim is to get a judge to accept a judicial review of the potential removal of higher rate tax relief on mortgage interest for private landlords.

The proposed new law appears to break both European law and the resulting UK law in the 1998 Competition Act, which outlaws putting one party at a competitive disadvantage to another.

As these measures are discriminatory against buy-to-let landlords as opposed to companies, which appear unaffected by the changes, they seem to have a justifiable case. The most disturbing feature about the proposals is they were imposed without any consultation. Our democratically elected Government’s attitude is more akin to that of a one-party dictatorship.

And while buy-to-let investors will be badly affected by these changes (especially the accidental amateur ones) the ultimate losers in all of this will be the tenants. Landlords will have no choice other than to increase rents to cover their increased costs.

As a result, tenants will not be able to save enough money for a deposit to buy a house. Less people will become buy-to-let investors, so less private sector properties will become available to rent.

Fewer properties with higher rents will result in further house price increases, which will make house buying even less achievable for first-time buyers. It is a simple case of the law of unintended consequences. Such an experiment was tried some years ago in Australia and it failed miserably. If the law is enacted here I predict the same result for the UK.

Unfortunately, the Chancellor’s obsession with eliminating the deficit very quickly in order to make him electable as the next Prime Minister will have the opposite effect. He is fast alienating all sectors of society and this will be his ultimate downfall.

Tony Byrne is financial planning director at Wealth And Tax Management and author of Wealth Magic

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. I couldn’t agree more. In no other sphere of activity are expenses not deductible before taxation. If this evil lot actually built more council houses to house the people who they penalise through vicious cuts to benefits and the “bedroom tax” then the BTL market would stabilise naturally. Meanwhile we roll over to Chinese and Saudi property speculators and multi-nationals in cosy tax deals. Most BTL landlords are only trying to do their best for themselves and their families and are castigated by Osborne for so doing.

  2. Perhaps a better description would a key character from Alice in Wonderland, namely the ‘Mad Hatter’. There is a whole industry supporting Buy-to-Let, rental agents & their staff, conveyancers & their staff, mortgage brokers & their staff! Falling revenue streams to these entities will extend the negative impact from tenants & landlords to the staff/proprietors, leading to possible mortgage arrears, higher short-term credit useage, & last but not least, lower tax revenues to the Exchequer. Even that mad Hare wouldn’t have stuck this in his hat!

  3. I could not agree less with these comments.

    1) How many properties are furnished to start with and why should someone get 10% regardless of the reality of the true figure. Its a business so they should join the real world and use capital allowances.

    2) This is the one I think sets out the real agenda as it is over the top, but all this is really about trying to get the general public to keep their money in circulation rather than put it in property. Especially those with pension lump sums to invest!!

    3) Those that pay higher rate tax will become homeless or just get one less holiday a year as a result of the 20 / 25% they will have to pay on their portfolio? My heart bleeds for them.

    4) God forbid that Landlords / 2nd property owners cannot manipulate the tax system and avoid paying the appropriate tax by moving property around.

  4. Paul Barnard: “In no other sphere of activity are expenses not deductible before taxation”

    Nonsense, if you borrow money to invest in shares, you cannot offset the interest on the borrowings against the income from the shares. BTL is an investment for an amateur landlord (it is nothing like running your own business), so why the different tax treatment?

    Tony Byrne: “Landlords will have no choice other than to increase rents to cover their increased costs. As a result, tenants will not be able to save enough money for a deposit to buy a house. Less people will become buy-to-let investors, so less private sector properties will become available to rent. Fewer properties with higher rents will result in further house price increases, which will make house buying even less achievable for first-time buyers”.

    So the changes are great news for landlords then! The higher rents cover the tax bills so they are no worse off, and house prices go up even faster. Why are they up in arms then? Probably because this is the Alice in Wonderland thinking right here. If landlords could increase rents, they would have done so already. They are up in arms because the tax increases will reduce the returns from BTL investments. Some landlords will be able to stomach a negative cash flow and lower returns. Those that can’t will sell. If landlords sell up in droves, that increases the supply of houses on the market, and that will also be a deflationary pressure on house prices.

  5. Property is an investment and many landlords don’t realise that tax and other regulations can change in respect of any investment. I have heard (unsubstantiated) gossip that many landlords have already placed properties on the market because of the new rules. If that is true and it gradually leads to falls in property prices that would be a good thing for working people that cannot, at present, afford to buy. It will all come out in the wash but I agree with most of what Steven Pearman says, but also the point that Paul makes about building more council houses. Housing association properties should also not be sold off. Why should a small section of people be gifted thousands of pounds when others are struggling? Apart from buying votes of course.

  6. I side more with Steven Pearman than Tony Byrne. My view is in what other line of “business” would I be able to go into a bank and say:
    “I want to borrow not just tens of thousands of pounds but hundreds of thousands. I want to borrow over 15 years and I’m only going to pay you the interest, no capital repayments. Oh, and I want an interest rate that is lower than a private individual can get a personal loan. And my business proposition is that I will generate about 25% more in gross income than the interest payments cost. Where do I sign?”
    99.9% of business people would be laughed out of the bank.
    The 10% wear and tear allowance measure is a red herring, as landlords will still be able to claim relief for actual expenditure.
    The additional stamp duty measure affects all second home owners, including those buying holiday homes that they might only occupy a quarter of the year.
    The majority of BTL investors pursuing this claim who are affected by the 40% tax relief measure are only so affected because this “business” is a sideline they largely sub-contract out to third parties so they can get on with their normal day job – how many other business people operate in this way?
    So three out of four measures being complained against are not affecting them unfairly compared to other business people.

  7. I was going to pick up on the points raised but I note that others have got in before me.

    Interesting to note that BTL sales and now exceeding purchases and the general press is reporting that a property price correction could be triggered by investors vacating the sector.

    Falling prices then rising rates and who knows what else. Not much Wealth Magic then.

  8. I’m very pleased that BTL is being discouraged – its high time property was viewed as somewhere to live, not an investment opportunity. There are far too many young people who cannot afford to get on the ladder, and the sooner this ridiculous bubble is burst the better.

  9. My heart bleeds for all these people who can afford to buy second homes, or consume swathes of private property to then charge extorionate prices for, which preclude anyone under the age of 30 from living anywhere without having an unreasonable income for their age, let alone save up for a mortage. It must be truly tragic to have your rapacious need to exclude huge swathes of the population from being able to rent slightly checked and made more expensive.

    Not to mention your utility of 3rd party companies who take a further, massive chunk out of us.

  10. Simple fact is if you allow a turnover tax on landlords that need to borrow, then who and what sector is next? Bash landlords all you like, but they provide a service that is in demand. Osborne has already ruled out turnover tax on businesses because he understands it will put some/many out of business. The irony is that he is doing just that to landlords – and not the wealthy ones at that. But how many bad landlords are there really after you read the headlines? Not many.

    There is no joined up thinking or consideration for the effect it will have on tenants. All against the backdrop of hard to source mortgages, increasing house prices and difficult planning laws. The rich will continue to prosper, the only difference now is those that aspire and borrow will be put back in their place.

    Jason McClean
    http://www.thepropertyinsurer.co.uk

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