The Chancellor's attack on landlords

In July 2015 Chancellor George Osborne announced the withdrawal of higher rate tax relief on mortgages of residential landlords. Those higher rate taxpayers with higher gearing in terms of finance have had their business models badly damaged or indeed destroyed as by 2020 they could be paying tax when actually suffering losses in real terms.  There have been a number of tax projections to prove this. At the very least, the returns on their investments will be very low.

If individuals own multiple properties, one cannot say that life is simple, and that people just lie back and enjoy the return of income. The reality is that there is considerable investment in time, plus worry concerning risk as few tenants are perfect and some are positively headaches. At the same time it is inevitable that repairs to properties must be made as and when needed, redecoration is necessary, and damage has to be repaired between tenancies.

The latest attack on residential landlords announced by Mr Osborne in November 2015 is a 3% addition levy of Stamp Duty Land Tax (SDLT) on property not purchased for the owner’s own permanent occupation. This takes effect in April 2016. This is probably intended as a deterrent to would-be landlords and those wishing to expand their portfolio. It is dressed as giving first-time buyers a chance to own. However it ignores the premise that everyone needs a place to live, whether owners or renters.

At the bottom end of the market, for example in the Southend area (I have to declare an interest), the small flats in town would not be the initial target of first-time buyers. The reality is that landlords are providing what amounts to social housing, and for their return on investment have considerable risk in terms of the types of tenant. 

In our own case the tenant of a flat downstairs from ours caused a fire with a Christmas candle. We lost our tenant of course as our flat was damaged, and incurred extra costs over the insurance recovery and legal requirements in paying for extra safeguards in case of another fire.

Then we took a tenant of the Southend Council homeless list, and within six weeks he trashed the flat and left, having turned on the shower tap and leaving the hose to pour water onto the floor. By the time we found out probably three days afterwards, the damage to our flat was considerable, it was uninhabitable for six months due to damp, and the refurbished downstairs flat we did not own was destroyed again.

We residential landlords take a risk, and frankly for the money there is no easy ride. Two years after the last event we are still carrying forward losses from that time; yet we feel that we are doing good by providing for a genuine need for our investment with what amounts to social housing. Yes of course we hope to make a capital profit one day. Why shouldn’t we, given the risks we have taken on?

Of course the country needs more houses, but George Osborne’s target of 400,000 by 2020 looks very inadequate to meet the requirement. Net migration to the UK in the year to June 2015 was 336,000 so in five years there might be another 1.5 million people. They are not all going to buy the houses that do not exist yet and will not in 2020. They are largely going to be renters. Where will they live? They need private residential landlords whether those with one or two properties, or fifteen.

If the Chancellor were honest about the new measures quite simply being tax-raising to fund the deficit rather dressing them as social engineering, we could understand to a degree why he had made these announcements. However, they will be damaging to the social fabric of society in ways that seem to have been overlooked, and amount to a very backward step in managing the housing crisis.

Landlords and the restriction for mortgage interest relief

In response to signing the petition to the Government concerning the decision to deny higher rate tax relief on mortgage interest paid by landlords, I and every other signatory have received the following email. I will let you read it and comment further down.

Government response

“Hi Jon Stow,

The Government has responded to the petition you signed – “Reverse the planned tax relief restriction on ‘individual’ landlords”.

Government responded:

The Government is committed to a fair tax system so is restricting relief on landlord property finance costs to the basic rate of tax, reducing the generosity for wealthier landlords.
The Government is committed to a fair tax system so is restricting tax relief landlords can claim on property finance costs to the basic rate of income tax.

Landlords are currently able to offset their mortgage interest and other finance costs against their property income, reducing their tax liability. This relief is not available for ordinary homebuyers and not available to those investing in other assets such as shares. Currently the landlords with the largest incomes benefit the most, receiving relief at their marginal tax rates of 40% or 45%.

By restricting finance cost relief available to the basic rate of income tax (20%) all finance costs incurred by individual landlords will be treated the same by the tax system. This recognises the benefits to the economy that investment in property can bring but ensures the landlords with the largest incomes will no longer benefit from higher rates of tax relief.

By unifying the treatment of finance costs for all individual landlords, the Government is reducing the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary homebuyers.

Less than 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure. Taking account of the other measures from the Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted their forecast for house prices. The OBR expect the impact on the housing market will be small. Furthermore, this change is being introduced gradually from April 2017 over 4 years. This will give landlords time to plan for and adjust to these changes.”

The reality

Not every landlord will be affected by the change, but a substantial number will be. It will be especially difficult for long-term landlords with multiple properties and with a higher gearing in terms of mortgages. As property inflation has progressed, many will have re-mortgaged in order to buy further properties. In many cases, such a model will not be viable, because there will be no profit left.

I can sense that some will say sarcastically that their heart bleeds for the poor landlord who no longer receives net income from their properties. Yet the landlords affected will be in a trap. How can they divest themselves of their portfolio in short order, and in this context, two, three or four years is not long? If they do sell up of course the Government will reap a reward in terms of large amounts of capital gains tax, but it is hard to see substantial benefit to the housing market in terms of more property available to first-time buyers. Purely in terms of numbers it is unfair and will put some landlords out of business.

Of course if the property portfolio is held through a company, mortgage interest relief will not be restricted. Yet comparatively few portfolios are overall, especially with the higher mortgage gearing, and that is for commercial reasons. Mortgage lenders do not like lending to companies because they have less security. In the past I have dealt with a client who had property portfolios worth in excess of £3M with borrowing of nearly £2.5M. He would not be able to carry on.

You might have noted that I mentioned putting landlords “out of business”. The response from HM Government talks about property investment, but HMRC does see rental activities as a business in some contexts. In a business, one expects to deduct in full all one's revenue costs. Is there a slippery slope which will bring more commercial activities to lose full relief for finance costs?

Property “investment” is not like holding a portfolio of shares or multiple ISAs or money on deposit. There is a risk as with stock market investments, but anyone who has been a landlord will tell you that there is a lot more involvement as a landlord, even if you use a letting agent. It can be very hands-on.

Suppose the tenant causes a fire or a flood and you have to deal with the insurance company, attend the site on multiple occasions to see the insurance assessor, get builders' estimates, supervise the builders, and get the letting up and running again. It can take many months, be pretty full-time, and very stressful. Believe me, I have been there, fire and flood. It definitely feels like running a business. The time commitment is often very substantial.

The Government and HMRC on their behalf are being disingenuous. It suits them to make a tax-grab from people whose effectively full-time work is from their letting business, and who are often providing a real service to local authorities in dealing with their displaced people requiring housing.

It would not be a “fair tax system” for those whose property businesses will be destroyed.

I believe the new rules will be a costly mistake; costly for the landlords, but also for those who need a roof over their heads but will never be able to afford to buy.

HMRC systems not joined up

Three months ago I registered a new client for Self Assessment as she had purchased a buy-to-let property which gave rise to a decent profit in 2014-15.

Two days ago she and I received a Form P800 reconciling her PAYE income and giving rise to a refund of over £800. This was on the same day my client had emailed her spreadsheet of lettings income and expenses.

I telephoned HMRC to suggest they did not send the tax refund as ultimately it would not be due to my client. I was told that it was already in the post, and as it turned out my client had the cheque today. We have agreed she will bank it and pay back the money under Self Assessment. We cannot trust HMRC not to lose the cheque if we sent it back, and anyway it would be months before they dealt with it.

I did ask the HMRC agent why they would make a refund on PAYE when they had been advised the client had another income source and had registered to do a Tax Return. Since the agent would not have the knowledge to be able to answer and because her command of English was poor, the question was effectively rhetorical.

The answer is probably that, as per usual, there is a lack of joined-up thinking going into HMRC systems and programming. Oh, it is all so frustrating.

Professional firm targeted by fraudsters

Recently I heard a worrying tale from a partner in a firm of accountants, who shall of course remain anonymous.

Apparently fraudsters had hacked into their computer network and submitted entirely bogus personal Tax Returns on behalf of actual clients of the firm. All these false Returns resulted in substantial tax repayments which were directed to bank accounts controlled by the crooks.

HMRC had spotted the frauds, although I am not sure how much money was wrongly paid to the villains.

It is a lesson to all of us not to be complacent about Trojan horses and clicking on links in dodgy emails (which is apparently what let these guys in). If we are caught out it could be hugely damaging to our firms' reputations, and result in the loss of the clients whose privacy has been violated. Also, we would be patsies in allowing the tax to be stolen from the Treasury, which is the same as if it was taken from our collective selves.

Unintended consequences

One of my clients called me in a panic. She had received a "threatening notice" from HMRC saying that she would be fined £100 for not sending in her Tax Return. Actually, I submitted her return for 2014-15 on 11th May 2015.

Hers is always one of the first I do each year. Why? Because she is ninety-five years old and does not like anything hanging over her.

Obviously I was very puzzled about the threatening letter. It turns out this was her Notice to File a return. Normally one would expect these to be posted in April, but due to the HMRC contract with Royal Mail they are still trickling through; hence my client's was received on 1st July.

Not everyone can immediately understand that some letters from Officialdom are due to inefficiency and incompetence, and therefore some people take these letters seriously, especially vulnerable people.

Surely we can hope that next year all Notices to File are sent out in April and that taxpayers receiving them will not feel threatened? My ninety-five year-old was in a tail-spin and could scarcely catch her breath. Government contracts with Royal Mail should not cause such distress.

Working Tax Credit and working hours ploys

I am no expert on Working Tax Credit (WTC), and I know that many who were on Incapacity Benefit and even Disability Living Allowance have been pronounced “fit to work”, some say unfairly, in the last two or three years.

Word on the street is that you can get your sixteen or thirty hours work to be entitled to WTC by being self-employed selling through Kleeneze catalogues, or maybe selling lottery tickets for charities. How you can prove your working hours from that, I don’t know, but maybe neither HMRC nor DWP care.

Are my sources correct? Have you heard anything about this? Does it matter?

State Pensions, PAYE and unfairness

Not all the taxpayers I look after have high incomes. From time to time I help pensioners and others whose means are quite small.

It may surprise many, but there are some people whose only taxable income is from the UK State Pension. Quite often it is enhanced by the additional State Pension, previously known as the State Earnings Related Pension Scheme (SERPS) and the State Second Pension. This does not mean that those pensioners are living the high life. Their total income might well be no more than £11,000 or £12,000 a year, but that is more than the current Age Allowance of £10,500, frozen by the Chancellor, George Osborne. That means that those pensioners have a tax liability.

Quite a few new pensioners with higher State Pensions are unaware that they have a liability to tax. In fact many are unaware that State Pensions are taxable at all. In the past year or so, I have come across such individuals who have suddenly found themselves with unexpected tax demands and on one occasion a demand for four years’ tax all at once.

I took on the poor chap who had paid HMRC for four years’ tax, and found that actually he owed nothing because HMRC had overlooked his entitlement to the Married Couples Allowance. This actually eliminated his supposed liabilities, but he died before I got the tax back. His widow received the payment.

However, there are others who are receiving tax demands on their State (and only) Pensions out of the blue, and still do have a tax liability. Surely it would be less painful to bring taxable state benefits into PAYE and ensure that no one receives any unexpected shocks? After all, these are by definition people on low incomes, and it cannot be expected that they will have any savings out of which they pay tax. Generally they spend what they receive at that income level, and who can blame them?

Better still, why not exempt from tax any amounts of State Pension in excess of the Age Allowance or Personal Allowance as applicable. After all, these pensioners have done their bit.

What do you think?