“Why the long face?” the pub landlord asked the racehorse in one of the cornier Christmas cracker jokes from my youth. Last month, that horse might have turned the question on a bevy of depressed landlords.
Buy-to-let (BTL) landlords, that is. They were among hundreds of delegates who packed the Institution of Civil Engineers’ Westminster citadel for Paragon’s annual Great Buy to Let Debate on 28 February.
They ranged from what have been termed ‘amateur’ residential investors, through corporate portfolio owners to the great and the good of the property and lending worlds. And yes, a measuring tape would have confirmed that most faces were approaching the length of Red Rum’s.
The main topics included the looming realisation that tax changes and mounting regulation could undermine much of the BTL sector, especially the smaller investors in the audience. The plight of most of them - I’ll guess they are Tories to the core - was summed up by personal finance editor at the Mail on Sunday and ‘consumer champion’ Jeff Prestridge.
“Mail readers are not sophisticated investors,” he said. “This is another attack by a Conservative government on people’s ability to build long-term wealth.” And that was before the chancellor’s widely maligned tax grab on the self-employed.
— Instinctif Partners (@InstinctifPtnrs) February 28, 2017
Fellow panellist Professor David Miles of Imperial College London, formerly a member of the Monetary Policy Committee, had presented the stark analysis that landlords would have to raise their rents by up to 30%, possibly more, to cover the impact of stamp duty and the potentially far more damaging erosion of mortgage interest relief.
They won’t, of course - at least in my view. Some might manage a few per cent but, even so, many personal investors will see taxation approach - and even exceed - their profits.
Tax changes and mounting regulation could undermine much of the BTL sector
Their tax is levied on their gross rental income at their marginal rate of taxation (ie highest band). But in a phased process over the next four years, tax relief on mortgage interest will end up only being permitted at the basic rate of 20%. This will hit higher-rate investors whose interest payments are a major proportion of the rent especially hard.
In theory, basic-rate payers would receive the same relief as their tax. But the coup de grace for many is that the entire rental income, rather than the net sum after costs, could push them into the higher band. “Tax could exceed 100% of their profits,” one seasoned expert confirmed as we queued for the buffet.
When the new rules were announced in George Osborne’s last Budget, many observers concluded that personal investors would merely have to transfer their portfolios into newly created company structures. They would then pay corporation tax at 20%, but wholly on profits.
The problem is that many smaller investors face substantial capital gains tax (CGT) payments to prevent haemorrhaging losses after income tax over the long term. This would be a lump sum, so asset-rich but cash-poor investors might have to sell some of their portfolios to third parties to pay the CGT on the rest, effectively ‘tail swallowing’, in rights issue parlance.
They could have started this process earlier, potentially utilising a year of annual allowances for themselves and their spouses to mitigate some of the pain. But “some were being led to believe the rules would change”, according to David Whittaker, chief executive of Mortgages for Business.
Professional BTL at the expense of traditional
My industry soundings suggest that many haven’t even figured out the true implications to start with, let alone deluded themselves into imagining U-turns. If so, there could be a belated stampede of attempted sellers, facing resultant downwards pricing pressure, as each of the next four years’ tax bills gets more punishing.
Larger-scale ‘professional’ BTL in existing company structures, on the other hand, won’t feel any impact and may see opportunities. “
We might see smaller landlords selling up to larger landlords,” predicted David Cox, managing director of the Association of Residential Letting Agents. But even they have to contend with, he estimated, 165 pieces of separate legislation.
We don’t want ‘mom and pops’ running the housing market
Institutional build-to-rent was a different matter altogether and the panel seemed unanimous that this would grow at the expense of owner occupation and traditional BTL.
An audience member, a Conservative councillor and multiple investor, summed up the palpable ‘them and us’ mood. He told the increasingly mutinous assembly that a recent housing minister had told him:
“We don’t want ‘mom and pops’ running the housing market.” The housing white paper seemed to make that clear.
Compere John Wrigglesworth, one-time UBS housing analyst, consultant and now public relations man, decided to gauge the mood of the audience - as if that were needed. “All those in favour of the changes raise your hand,” he said. Not one went up. The neighs have it.