Finance Bill

Written evidence submitted by David Rumford (FB 71)

Summer Budget – Clause 24 of the Finance Bill.

 

To whom it may concern,

I have been a landlord now for over 6 years. I have bought a number of properties using mortgage debt and refinancing. I have given up my old day job to do this full time, as I enjoy renovating properties and providing homes for people.

Whilst not setting up a Ltd company, this is in effect my full time job, and I own the properties personally.

I make a modest income, once the large mortgage payments have been made, but always stress tested my purchases against rising interest rates, so to take a sensible approach.

I am greatly concerned however that now owning 19 properties, that I will be taxed on turn over rather than profit !

By my calculations my tax bill will outstrip my means to actually pay it!

Retrospective changes on what is in effect a business is ridiculous. I will have little option but to evict my tenants, who simply can't afford to even save modest deposits. I will then have to fire sell the majority of the portfolio. The further issue is the tax on even taking this option!

Please could we adapt a more common sense approach, and set this for new purchases. This has always been a stable financial country to make sound business and investment decisions. Please don't destroy such with a flick of a pen!

 

I would like to give you an example of why this tax on turnover is going to be so disastrous to Britain’s tenants and in particular the poorest members of society who will not be able to manage a rent increase.  If we take the example of Jim who is a high rate taxpayer with only one let property worth £200k we can see what happens.

 

If Jim has a 75% mortgage at 4% and a monthly rental turnover of £833 we can look at Column 1 to see that the annual rent received is £10k. Costs, other than mortgage interest amount to £2k and the annual mortgage amount comes to £6k. This results in a taxable profit of £2k of which HMRC get £800 and Jim gets £1200.

 

When the tax change is fully implemented, but with no other changes, the picture changes greatly. Jim now sees the Government tax him on the money he pays as mortgage interest so after the 20% interest relief his tax increases to £2k wiping out his profit and he has a net income of zero.

Column 3 shows what happens after the tax change and a 1% interest rate rise to 5%. Now instead of making £1.2k a year from his property, Jim has to find the same amount to pay his tax meaning a negative net change of £2.4k! Jim is not a happy man.

Many landlords, even accidental ones, or ones that have moved for their job but let out their old home, are going to be adversely affected. If we now say that Jim is actually a lower rate payer earning £29,785 of taxable income from his job then the £2k profit from his rental property takes him just to the threshold of the higher rate tax band under current rules. He would therefore still pay lower rate tax on his salary and his rental income. After the tax change HMRC see his taxable income as £37,785 and he will pay higher rate tax on £6k even though he’s not earning it.

 

Now

Post Tax Change

Post Tax & 1% Interest Rate Rise

Rental Turnover

10,000

10,000

10,000

Expenses

2,000

2,000

2,000

Mortgage Interest

6,000

6,000

7,500

Profit

2,000

2,000

500

Taxable Profit

2,000

8,000

8,000

Tax

800

3,200

3,200

Tax Relief (20%)

-1,200

-1,500

Net Tax Burden

800

2,000

1,700

Net Income

1,200

0

-1,200

 

 

So what can Jim do?  I believe he has 3 choices:

Subsidise the property from another source of income.

Why would he do that?  And suppose he has 2 properties, or 10, or 50 or 100?  Or maybe he’s one of those older people that took their pension money to give themselves a living right now.  His letting business is just not sustainable and substituting the tenant’s living costs is not an option for him.

Increase Rents.

As I’ve already said this will be happening because it has to.  Of course Jim will have to pay tax on the increased rent too, so in order to break even in the example above he has to put the rent up by exactly 20%.  That doesn’t give him a profit, it’s just to get his net cashflow to zero.  But Jim has invested money into this property and needs to see a return so rents need to increase even more than 20%, probably more like 30% and/or Jim will scale back on maintaining the property.  Now it may be that the mortgage is smaller but to break even it would need to be 60% of the £200k value.  However there would still be no return on the investment.  So why would he not increase rents?

Sell The Property.

There’s going to be loads of people doing this.  The Government says that the tax on turnover will only affect around 1 in 5 landlords but this has been proved as wildly inaccurate by various landlord groups. It is believed to be closer to 60%!

The same groups believe that around 20% (1 in 5) will actually quit the market altogether and as there are around 2 million landlords in the country that means 400,000 will exit. Many of these will only have 1 property but others will have many. Some landlords will sell some properties because the new tax system makes those homes unviable for their business.

So if we say those 400,000 landlords sell an average of 2 properties each then that’s 800,000 tenants being evicted because of the new tax. If each of those tenants is a family of 3 then that’s 2.4 million people looking for a new home in a much smaller market.  Rents will sky-rocket and if, for any reason they can’t, then more properties will be sold off.

I hope that these examples illustrate why this tax change cannot be allowed to go through.

 

 October 2015

Prepared 14th October 2015