Dear Mr Fallon, A Landlords Open Letter to The Rt Honorable Michael Fallon MP
Thank you so much for your time at your Swanley surgery on Saturday.
Following our meeting I would like to take the opportunity to summarise some of the key areas of disagreement between us on the effects of Clause 24 of the Finance Act (2) 2015.
Firstly I would like to start by saying that David and I believe that there are still key effects of this policy, which along with many other people, you appear to have not fully understood.
From the start the Treasury has sought to present these changes as “creating a fairer taxation system“, when the reality of the impact of this policy could not be further from the truth. The policy has been presented as reducing tax relief for the wealthiest landlords from 40% to 20%, which on the face of it may seem reasonable. However this is a gross misrepresentation of the facts and is probably why more landlords have not expressed their concerns to you.
I have explained that prior to the tax change landlords did not receive any specific tax relief for mortgage interest payments. Those payments were, and still are, a legitimate cost of doing business. Until now they have been deductible in full, along with certain other costs of doing business, before arriving at a profit upon which we are then taxed at the marginal rate. Post clause 24, mortgage interest payments will no longer be considered a legitimate cost of doing business.
Under Clause 24, finance costs (including mortgage interest) will cease to be deducted from rent received when tax is calculated. Thus individual landlords who have mortgages will be taxed on an amount of fictitious profit. A “relief” of 20% of the finance costs will then be deducted from the tax calculated in order to arrive at the tax payable. The result will be an increase in income tax, compared to the position today (except where the sum of total income plus finance costs does not exceed the higher rate threshold of £43,000). The increase will amount to a levy on finance costs of up to 25%, depending on the tax band that the landlord is put into by the fictitious profit. The levy will be payable even if the business really makes a loss. This will force many of them to raise rents or evict their tenants and sell-up.
This change in income tax legislation will not affect incorporated landlords, no matter how small their businesses are, or property rental companies. They will all remain able to deduct 100% of mortgage costs in calculating their tax liabilities, and thus will be able to operate at a distinct advantage over their unincorporated rivals in the market place.”
It is interesting that you did not consider this increase in income tax a breach of David Cameron’s pre-election pledge not to increase income tax full stop , but rather saw it as a wider policy of deliberate withdrawal of reliefs. This is not a case of withdrawal of relief; it is disallowing costs of doing business as a way to artificially inflate profits upon which we will then be taxed. By artificially inflating our profits and moving people from lower rate tax to higher rate tax, it is most definitely increasing our tax burden. Mr Cameron’s promise is therefore most definitely being broken. To say anything otherwise is distorting facts.
Also if this is considered fair, why are you applying the principle only to mortgage finance costs on property lettings businesses carried on by individuals? How can it be fair that a residential letting business carried on by individuals is the only business to have profit redefined in this way? Many incorporated landlords have portfolios much smaller than I do so why allow them to continue to deduct finance costs and not apply the same rules to my business just because I happen not to be incorporated ? How is that fair ?
Your answer to this was that the Bank of England sees BTL borrowing by individuals, as distinct from corporations, as a threat to the stability of the housing market, and that it is individual investors that are causing overheating in the market. If the government believes this is the case, would it not be fairer to address this by limiting future borrowings, rather than drive those who have worked hard to establish residential lettings businesses (and for the most part provide decent accommodation for a wide variety of tenants) to bankruptcy ?
I asked you why if “overheating” is the concern corporations are not being targeted in this way, and will still be able to deduct mortgage finance costs in full.
The idea was expressed by you that corporations, particularly large corporations somehow present a less risky lending opportunity than individuals as a reason for exempting corporations from Clause 24.
Leaving aside the well rehearsed reasons for the recent financial crisis and the damage done to the economy caused by the collapse of large corporations, assessment of risk should be a matter for lenders. Indeed it is clear that they see there is greater risk in lending to corporations and therefore require higher interest rates than they do from individuals.
If Government wants to involve itself in discouraging leveraged investment by businesses, why single out leveraged property lettings businesses? Why not disallow the finance costs of other leveraged businesses? To suggest intervention in risk management of private enterprise is a reason for this policy is for the government to unfairly discriminate against private landlords, whilst at the same time offering other categories of borrowers help-to-buy incentives.
Treating payments to Lenders as though they were profit, rather than the expense which they actually are, increases the likelihood of private landlords defaulting by effectively increasing our cost base. How can that be fair? Clause 24 actually pushes us toward defaulting on our loans. No business can survive a rate of taxation higher than actual profit. Clause 24 has the potential to inflict an infinite rate of income tax on private landlords. This will occur when landlords pay the tax/levy on finance costs even though they have really made zero profit, or even a loss. To find the effective rate of tax we divide it by the profit; when we divide anything by nothing the result is infinity. No Government can reasonably state that this is a fair tax!
I have always sought to weigh my level of borrowing prudently across my residential property portfolio , carefully balancing liabilities against equity, income, interest rates, etc, and at an average of 50% gearing across the portfolio. I cannot reasonably be judged to have over extended myself or be at risk of defaulting, at least not until Government introduced C24.
You also stated that a higher rate tax payer is by definition one of the wealthiest tax payers. May I respectfully point out that clause 24 will in many cases push basic rate tax payers into the higher rate of tax, reclassifying them overnight as “wealthiest “ by your definition but without one single additional penny of income. How is that fair? How is that targeting the wealthiest landlords? The truly wealthy do not buy with mortgage finance.
We disagreed that the number of landlords likely to be affected by Clause 24 is “only “ 1 in 5 and you insisted that the OBR had researched this thoroughly. Even if you are correct, why is it considered acceptable that 20% of landlords suffer as a consequence of this policy? What benefit is it to the Government and the economy as a whole? You may be interested to know that when a FOI request was submitted on this very point, HMRC admitted that it could not produce data to support the statistic. Our own research shows that there are 1.7 million BTL mortgages in existence at the present time. Taking my own portfolio as an example, if each mortgaged property homes an average family of three, that would be 5.1 million tenants at risk. Or to put it another way, around 10% of the population facing eviction or substantial rent increases as a direct result of this draconian policy.
The reality is that Clause 24 was introduced with no prior warning or consultation whatsoever and whatever you say about this not being retrospective, it will apply to existing finance and business models. It will cause some businesses to suffer infinite rates of taxation and bankruptcy, but will also lead to rent increases and evictions.
As the tax is phased in some tenants will be phased out and ‘upgraded’ to those that can afford higher rents. Councils will face enormous demands on their housing teams and we know that many are already waking up to this fact. They are extremely concerned for the impact on C24 and the increased pressure on their temporary housing budgets. May I respectfully suggest that you talk to a few Council Private Sector Housing Officers? If you won’t take it from me that there will be dire consequences then ask them for their opinions.
Landlords will be no better off from the rent increases – they will just be collecting the levy to pass on to HMRC, like VAT – but tenants will be worse off. Their disposable incomes will be reduced. Those tenants who want to buy their first property will be less able to save for a deposit . This levy on finance costs will work through to become a levy on tenants .
Clause 24 has not been thoroughly researched. There is no joined up consistent thinking or logic to it and would probably never have progressed had there been the normal consultation with the industry bodies who would have advised on the consequences. This policy ignores common sense and long-term welfare issues, in favour of short-term tax grab and appeal to Generation Rent. However as the impact is already being felt with rent rises and evictions, the glory of “landlord-bashing” will be short-lived. The public is already beginning to see through the veneer of “helping people on to the property ladder” and realising the hard truth that it will do just the opposite.
The corporations that donate large funds to the Conservative Party coffers will of course like to see C24 progress to completion but the voters will see it for what it is Mr Fallon.
Isn’t it interesting that Mr Osborne has adopted a Green Party policy that was clearly flawed? Is this the best that the Conservatives can do to solve a housing crisis?
Yours Sincerely
Charmaine Royce and David Price
