Alarming Tax article in Times

[Robin]

I read an article in todays Times whereby tax relieve on interest on buy to let mortgages may be stopped. The Institute of directors (IOD) was mentioned as the source of this suggestion.
In the IOD policy paper by Michael Temperton & Richard Baron entitled "Encouraging Savings: A Better Tax Regime", which seems to suggest we should more or less be forced by the tax system to invest in institutions rather than manage our own assets such as property, they say:

"The second reason is that economic conditions can easily steer people away from financial assets. Financial assets ought to be favoured by a climate of stable and historically low inflation coupled with the availability of positive real interest rates. However the appetite for financial assets has been substantially restricted by the emphasis on housing investments, not only owner-occupied housing but also buy-to-let. One of the major difficulties in encouraging individuals to save using financial assets is the difference between the returns which have been made on financial assets and those which may be expected from buy-to-let financed largely by borrowing at historically low interest rates.
The imbalance between investments in financial assets and in property is, primarily, a feature of a period of exceptionally low interest rates but it is also caused by the tax regime which applies to traditional buy-to-let investment financed largely by borrowings. Arrangements tend to be such that the rents are balanced almost exactly by interest on the borrowings, giving rise to no tax on income during the course of the investment."
http://www.iod.com/is-bin/INTERSHOP....=homePage.isml

This highlights the fact that there is little or no net income on the average buy to let property because of the cost of the mortgage interest. How therefore can the IOD suggest that landlords should pay large amounts of income tax on net income they haven't even received !!!!!!!!!!
It is a ludicrous suggestion. It would mean landlords would have to heavily subsidise their investments & so property investment would no longer be viable. As it is landlords now get hit harder with CGT because indexation allowance was replaced in 1998 with taper relief by Gordon Brown. Most landlords see their property portfolio as their pension. They don't get the benefit of the tax incentives of ordinary pension schemes.

All other business's can claim interest on business loans as an expense. Why should property investment be any different ?
Also why should people have to invest with institutions rather than manage their own investments such as property portfolios ?
My advice to all landlords is to contact your MP & let them know what you think of the proposal.

[P.Pilcher]

I suppose that this deserves my cynical comment: The financial institutions are at present embarassed that joe public (like me) has made much more money out of property than they would have done if they had invested with said institutions. When we invested in property we did it against the strongest financial advice from these institutions and by doing so have impaired their shareholder's profits and champagne lifestyles. It therefore behoves them to use any trick in the book to get us investors back such as getting the government to unjustly increase our tax burden - which they will not suffer being institutions. After all, because of the huge amounts of money these people control, the government has to listen to them. Whether they will acceed to these demands remains to be seen.
Note what has happened to the banks where they have been imposing their swingeing unauthorised overdraft and other charges on a section of the public who can least afford them. Up until recently, any threatened legal action was obliging the banks to return these excessive charges (Just look at their declared profits). Now court action can no longer be avoided the establishment has managed to manoeuvre so that the banks no longer have to make any refunds until the court action is heard which will take months and months, so ensuring that they can continue to earn investment income on the fees that they may have unjustly taken.

P.P.

[Smiler]

Stand back and look at the wider picture.....

What happens if they do this?

Collapse of the BTL market = House Price Crash = Not voted back in

Still think they'll do it?

[lorenzo]

Stand back and look at the wider picture.....

What happens if they do this?

Collapse of the BTL market = House Price Crash = Not voted back in

Still think they'll do it?

Agree.

The property market is up to its @rse in alligators already.

Apart from the fact that it would be a prejudice against a certain type of business, the whole "miracle economy" has be built u[pon a credit/property bubble. Crash Gordon will be doing all he can to prop up the market, not torpedo it.

The only pollie dumb enough to do this would be Ming the Merciless.

$0.02

[jeffrey]

How therefore can the IOD suggest that landlords should pay large amounts of income tax on net income they haven't even received?

Not so. Income tax can certainly be levied on income not received, as long as it is receivable. Non-receipt of rent, for instance, is no excuse unless it is formally written-off as a bad debt.

All other businesses can claim interest on business loans as an expense. Why should property investment be any different ?

No reason, but that wouldn't stop HMG from doing it!

[Grange]

As it is landlords now get hit harder with CGT because indexation allowance was replaced in 1998 with taper relief

You're the first person I have heard suggest that the replacement of indexation allowance by taper relief has resulted in an unfavourable position for the taxpayer.

unfavourable treatment compared to pension funds

Not really as unfavourable as you seem to think. Provided you never sell your investment property, you never pay any tax. That is a good thing. As it goes up in value, you begin to make profits on the rental income.

When you do take your money out of your pension, you have to buy an annuity - and so at that point you pay income tax on the entire capital sum in your pension.

[Robin]

Not so. Income tax can certainly be levied on income not received, as long as it is receivable. Non-receipt of rent, for instance, is no excuse unless it is formally written-off as a bad debt.

No reason, but that wouldn't stop HMG from doing it!

But it's net income they will never recieve.

[Robin]

You're the first person I have heard suggest that the replacement of indexation allowance by taper relief has resulted in an unfavourable position for the taxpayer.

Not really as unfavourable as you seem to think. Provided you never sell your investment property, you never pay any tax. That is a good thing. As it goes up in value, you begin to make profits on the rental income.

Consider with the old indexation allowance. If the RPI was say 5% for ten years & your property appreciated at 5%pa then in the eyes of the IR there was no real gain so no CGT.
With taper relief after ten years 60% of your gain is always assessible for tax. So we are worse off under flash Gordon's taper relief. Much worse off in fact.

[Robin]

I suppose that this deserves my cynical comment: The financial institutions are at present embarassed that joe public (like me) has made much more money out of property than they would have done if they had invested with said institutions. When we invested in property we did it against the strongest financial advice from these institutions and by doing so have impaired their shareholder's profits and champagne lifestyles. It therefore behoves them to use any trick in the book to get us investors back such as getting the government to unjustly increase our tax burden - which they will not suffer being institutions. After all, because of the huge amounts of money these people control, the government has to listen to them. Whether they will acceed to these demands remains to be seen.
Note what has happened to the banks where they have been imposing their swingeing unauthorised overdraft and other charges on a section of the public who can least afford them. Up until recently, any threatened legal action was obliging the banks to return these excessive charges (Just look at their declared profits). Now court action can no longer be avoided the establishment has managed to manoeuvre so that the banks no longer have to make any refunds until the court action is heard which will take months and months, so ensuring that they can continue to earn investment income on the fees that they may have unjustly taken.

P.P.

Absolutely correct. Vested institutions with billion of pounds of clout trying to shape HMO policy to get people back to investing in their poxy unit trusts.
I was advised by an IFA 11 years ago to invest in unit trust type funds instead of going into BTL.
I'd be nearly a million pounds poorer if I'd taken his advice !!!!

[Robin]

Not really as unfavourable as you seem to think. Provided you never sell your investment property, you never pay any tax. That is a good thing. As it goes up in value, you begin to make profits on the rental income.
When you do take your money out of your pension, you have to buy an annuity - and so at that point you pay income tax on the entire capital sum in your pension.

So what about when you are 65 & don't want to be managing or are no longer fit enough to manage 12 or how ever many properties & want to retire & go live in the sun but at the same time don't want to be a tax exile ?
It really amazes me the way you aren't seeing what the government are taking or can take from you in tax & look what they squander the tax on
Though I suspect perhaps you're not a landlord from what you say surely.
The tax burden is now the highest under this government than it's been for 25 years.
The people not paying tax aren't BTL landlords that the government need to re consider.
They are the extremely wealthy people that play the non domicile card & equity fund managers etc.

[the alchemist]

IOD Propaganda

Last year the goverment introduced something called "Real Estate Investment Trusts". Essentially this allows large institutions with gross assets in the £Millions to enjoy income and gains from property, TAX FREE. Type in "Real Estate Investment Trust" into google for an example.

The IOD's members (who are not required to pass any examinations nor are subject to a disciplinary code) are perhaps trying to hide from the Private Equity Fallout, and the latest debacle re the credit crunch.

So, having secured this benefit, they then call on the average BTL landlord to pay tax on gross income. Their analogy with the private housebuyer, who they say is being denied tax relief is grossly misleading. BTL investors do not get tax relief on their investment per se.. It is like saying that a shopkeeper who buys a loaf of bread of £1 and sells for £1.20 should be taxed on a profit of £1.20 and not the true profit of 20p, effectively bankrupting him, on the basis that an individual who purchased the bread to eat would not get tax relief on the £1. Crazy and, as has been pointed out, probably unlawful on the grounds of discrimination.

[Grange]

Consider with the old indexation allowance. If the RPI was say 5% for ten years & your property appreciated at 5%pa then in the eyes of the IR there was no real gain so no CGT.
With taper relief after ten years 60% of your gain is always assessible for tax. So we are worse off under flash Gordon's taper relief. Much worse off in fact.

Whereas back in the real world: Indexation 1997 - 2007 = 30%. So provided your house has increased by more than 75% in value since then, then you have saved tax.

House price inflation 1997 - 2007 = 300%?

Under indexation you pay tax on 270% of your original cost.
Under taper relief you pay tax on 180% of your original cost.

You are the first person whom I have heard suggesting - in the context of property, which is the context we are discussing - that taper relief has ended up by disadvantaging the taxpayer. Oh yes, Mr Brown thought it would increase his tax take, but sadly for him it probably did not.

[johnjw]

Alarming tax article in the Times

Just to go back to Robin's original comments about the proposed removal of tax relief on BTL mortgage interest; I'm surprised that there hasn't been more of an outcry against this ludicrously unfair proposal. Even the Daily Telegraph's comments have been subdued - along the lines of; Yes, BTL landlords have done rather well but perhaps things are about to turn so the government should leave things alone.
I dont know what percentage of BTL property is mortgaged but I suspect its a high percentage. Remove tax relief on mortgage interest and for many or most landlords, the business becomes a nonsense.
In my own case my mortgages are about 50% of the property value and the rents are about 4% of the property value. Removal of tax relief would halve the already small profit and the game wouldn't be worth the candle.
The good overall return on BTL over the past several years has been largely based on the rapid appreciation of property value. This phase has come to an end and indeed there may now be some depreciation in the offing.
BTL investors should be treated like investors in any other business and tax relief should continue to be given on mortgage interest. There is surely no case for a punitive change in taxation treatment based on an exceptional and perhaps never to be repeated increase in asset value.
Most businesses see rises and falls in asset value from time-to-time and if there is a capital gain at the end of the day, then the gainer pays CGT.

[Grange]

There has been no outcry because it is just plain silly and so will not happen as it would cause a widespread property crash.

[jeffrey]

There has been no outcry because it is just plain silly and so will not happen as it would cause a widespread property crash.

...but maybe that's what HMG wants!