PROPERTY 118 owner Mark Alexander is someone I respect enormously as a businessman and fellow landlord. He has announced he is planning to leave the UK and sell his property portfolio in an attempt to avoid financial disaster as set out in the summer budget 2015 where landlords have to pay tax on borrowings. This got me asking the question, is the Government destroying the Private Rented Sector in the UK?
Professional landlords with large portfolios and small accidental landlords with one property and all those in between are now affected by the Government’s new tax approach. Gone are the days of borrowing money and paying interest and being able to offset that cost against revenue to come to a profit figure. Now, your borrowings will be taxed and that means making a profit is much harder. Especially as your borrowings are now taken as earnings and could push you into the higher tax bracket. Anyone with one property or more needs to be worried about this.
That is what has happened with Mark, his property portfolio is highly geared and he has small equity in his properties. His own example is if he bills £100,000 in rent, under the old scheme he will earn £20,000 profit. It’s a good business. Under the new tax scheme he’ll pay £155,000 in tax alone and that is a £55,000 loss. Not good and shows the real problem landlords are facing.
In my view this is a blatant attempt to grab tax from the private rented sector landlords. They are forcing landlords to either sell up or pay more tax. If they sell up or transfer to company status, then they will earn more in tax as a result through stamp duty and capital gains tax. If they don’t then they will earn more in tax paid by individuals naturally.
I don’t think this is done in error or ignorance. They are hitting all comers hard as the austerity really starts to bite the common person. It’ll bite even harder now as I expect most landlords will increase rents accordingly to meet the new tax implications and that means the tenants will end up paying. The landlords that are forced to sell up will remove supply in the market and make the rent increases even more attainable and life will not be easy for the tenants.
The landlords that do sell up will probably do so in a similar vein to Mark. They will find a tax haven in Europe – such as Malta – and go there and avoid paying tax. They can even sell their properties and avoid capital gains tax. All they are doing is removing themselves from the private rented sector and by doing so increasing the rents for tenants. They are also putting property back into the market which will possibly increase supply briefly and that may have a small local impact on prices but more than likely will go unnoticed.
The real legacy of this change will be the higher payments of tenants and the possible contraction of the construction industry as private landlords, who recently have been buying around 1 in every 10 of new properties, now exit and stop buying. That could lead to another dip all by itself.
So, no, the Government is not trying to destroy the private rented sector, they are trying to grab tax money from what appears a soft political target. Instead, they are going to slam tenants and construction and miss out on CGT by smart landlords moving abroad. Not a clever policy and I hope someone in the civil service advises them quickly and stops it happening, we can do without losing good landlords and housing stock supply, because after all, who will step into the breach if the private landlords leave? Not the Government or decimated housing associations, that’s for sure.