Finance Bill

Written evidence submitted by Ian Simpson (FB52)

As a sole-trader landlord, the changes proposed in the Summer budget are not only grossly unfair, they are also illogical, misleading and counter the principles of fair taxation. I will explain further

Traditionally, tax is levied on profit, not turnover, for example, a builder spends £80,000 on materials and labour to build a house, sells the house for £100,000 and pays tax at the appropriate rate on 100-80=20K : 40% of this (£8000 ) which is paid to the exchequer as tax and keeps £12,000 for his trouble.

Now take the example to a landlord property business,

Landlord has a portfolio worth £800,000 receives the usual 5.5% Rental income of £44,000

He is lucky enough to have a mortgage interest rate of only 3% though this will likely rise soon, and he is 75% geared, so 3% of £600,000 is £18,000 payable annually.

He also pays around £7,000 per annum on repairs, agents’ fees, cleaning, wages, council tax, utilities, replacing items taken or broken by tenants, and so on, and has void periods of rent, so loses another £2000 to this.

Here is the scenario now and in 2020, if the measure were to go through unchanged.

NOW

2020

Gross Rents

44000

44000

Costs

9000

9000

Interest

18000

0

Real (actual) Profit

17000

17000

Taxable Profit

17000

35000

20% "relief"

0

3600

Tax at 40% on Taxable Profit

6800

12560

Effective Tax Rate

40%

73.8 %

The problem is that tax is effectively being calculated on turnover, not on profit, against every known principal of economics and taxation. The example above is typical, and the tax rate effectively doubles. For many landlords the tax will actually be much worse, and in many cases more than the real profit (the mortgage interest still has to be paid, regardless of whether it is tax deductible or not) so the effective tax rate will be over 100% , or be a tax on losses. This cannot be right, and the IFS (Institute for Financial Studies) has said that this proposal is "Just Plain Wrong".

Several submissions to local MPs have been met with the stock-standard letter from David Gauke to the effect of "levelling the playing field" with first time buyers. This argument is completely incorrect too, for several reasons.

1. Many first time buyers are not competing for the same properties as landlords : Landlords often take on dilapidated, broken down properties, which include flats and houses, and also ex hotels, pubs, nursing homes etc and re-juvenate them into dwellings. These type of properties are of no interest to FTBs

2. When landlords sell, they have to pay Capital Gains Tax on any gain, FTBs do not.

3. Many if not most tenants have no intention to buy : they cannot afford the deposit, their work moves them around, they are just leaving a relationship, etc etc, the list is endless, but the message is the same.

If this measure were to go forward in its current form the effects would be as follows :

1. Many low paid landlords (currently basic rate payers) would be pushed artificially into being higher rate payers by their taxable profit (not their real profit). This would have undesirable effects on their Child benefit, CSA payments, disability allowances, and any bonus payments received at work. There was an example in the paper recently of a teacher in Potsmouth, who will have to stop her teaching job as she will be paying more than her entire salary in tax should the measure go through, so there will be losses to the country of these types of jobs as well. (Just when we need more teachers, midwives, nurses etc.)

2. Tens of thousands of landlords’ businesses would suddenly become unworkable (operating at a loss – and still paying tax on that loss)

3. Massed sales of rental properties would ensue, causing the ending of thousands of tenancies with resultant evictions and homelessness.

4. Rents would rise between 15 and 25% just for landlords to pay the extra tax and survive, for those landlords and tenants who actually decided to stick it out.

5. Already over-burdened council housing departments would be forced to accommodate this new mass of humanity who had lost their homes as a direct result of the measure

6. House prices would be depressed, resulting in a downturn to the building industry, and a reduction in the confidence of the housebuilders to purchase new land and make submissions for new housing, as they will expect massively reduced demand from landlords.

7. Masses of secondary trades which rely on the Private Rental Sector (PRS) will be affected too : plumbers, electricians, carpenters, cleaners, lawyers, estate agents, and so on. This would have an enormous economic impact. Far more , in fact, than the chancellor probably thought or planned.

Also, quite amazingly if Joe Bloggs, sole trader landlord is affected in this way with double taxation, and taxation on losses, Joe Bloggs Ltd, with EXACTLY THE SAME portfolio, mortgage, and rent levels, will be unaffected. This is grossly unfair, discriminatory and unlawful.

Suggested amendments

1. Complete retraction of the idea

2. If not 1. then the new measures to limit the interest relief are levied only on NEW purchases or new Borrowings from 2020 onwards, and existing mortgage finance costs are still allowable as a cost against rental income going forwards. This would reduce the attractiveness of new flats/houses to landlords, giving FTBs more chance to compete in this market, (which is the attested aim of the measure) but at the same time would not penalise landlords for decisions made in the past, and would avoid the mass bankruptcies, huge rent rises, and homelessness as described above.

3. An amnesty on Stamp Duty and Capital Gains Tax for those landlords who wished to move their portfolios into a Ltd. Company structure. Perhaps a window of one year to allow this measure.

September 2015

Prepared 14th October 2015