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What are the REAL effects of the landlord grab tax?

11th January 2016

It seems the government have decided that landlords are profiteering greedy individuals that don’t deserve to make a profit, in fact they’re doing their damnedest not to. Under the new “Clause 24” taxation system, some landlords will not make any profit at all, pushing them further and further into debt. We’re already seeing some frightening and shocking reactions to the new system and I wonder where it’s going to lead. 

Under the new rules from 6 April 2017, the ability to reclaim expenses such as mortgage interest will be phased down and relief will be available as follows:

•    In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.

•    In 2018/19, 50% of the finance costs will be given as deduction and the remaining 50% will be given as a basic rate reduction.

•    In 2019/20, 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic rate reduction.

As well as the above, from April 2016 the formal Wear and Tear Allowance - which allows 10 per cent of rental profits to be written off for notional wear and tear, even if there has been no such actual expenditure in that particular year - will be replaced with a relief that enables all landlords to deduct the costs theyactually incur on replacing furnishings in the property.

What the government don’t seem to have accounted for in this new system is that many landlords are small, part time landlords or even landlords by accident. For example, they’ve just moved in with their partner and seem to have a property spare. In this situation, they may already be mortgaged to the hilt and this new tax change could make renting completely unviable for the homeowner. 

The result? Taking literally tens of thousands of properties off the market. 

But the biggest burden will probably affect the small investor landlord whose income is higher and has spent the last decade re-mortgaging to build up his portfolio of properties. Often they have a high debt to asset ratio, but not large enough to have considered putting everything into a limited company and they probably couldn’t do so, as they wouldn’t be able to organise corporate mortgages to replace existing debt. 

For the past few years, the press has accused landlords of profiteering, providing of sub standard accommodation, taking housing benefit and not providing satisfactory homes. Yet, in my 25 years experience of working in this industry, what I’ve seen is different. I’ve seen lots of small landlords offering great accommodation, doing their best to keep their tenants happy, so that they continue to pay rent, and being nothing but conscientious landlords. Don’t get me wrong, I don’t doubt that the rogues exist but they’re the minority, NOT the majority, that’s for sure. 

So what is the likely result? 

The tenant will pay in two ways. Rents will increase and there will be an even greater shortage of accommodation, which in turn will push rents up even higher. In fact, it’s started already... We’re getting calls daily from landlords who want to increase their rent to ensure they can still make their mortgages and pay the tax that will be due. 

One very sad case we had recently was where a landlord was already concerned over the increasing number of legislation changes, and now the tax changes. As a result, he started eviction of his tenant out of fear. 

The tenant in question is a lovely lady with two children, in receipt of housing benefit and has never not paid on her rent. But her landlord was an accidental landlord, not a hardened investor and couldn’t see a way to continue with the extreme levels of complexity and cost. So he had to issue Section 21 and seek possession. 

The council could not re-home the tenant until the bailiffs had forcibly removed her, and then failed to re-home her, resulting in her small family having to be housed in a hotel at the Governments expense. The stress this caused both this young family, especially with one of the children being disabled, and the landlord was heart-breaking. And from the Governments perspective? Rather than paying £650 per month LHA payment they are now paying probably around £1500 in hotel costs. 

So where is this heading?

The government seems to want to encourage large institutional investors by making new tax rules that don’t apply to them but in reality, is that where they want the private rented sector to go? Are institutional investors going to buy in the suburbs? The small towns? The villages? The outskirts? Probably not. They’ll focus on the major conurbations. If that’s the case, does that mean in the future if you want to rent a property, you have to live in the town or city in flats of housing estates? How will that affect the large community of professional tenants that choose to rent and do so out of lifestyle choice? 

We are fighting back...!

The property industry has pulled together and is tackling the government head on, by taking them to judicial review.  A crowd justice platform was launched by Steve Bolton and a few other investors on Boxing day with the intention of raising £50,000 to fight the change, a target that they surpassed in just 9 days, showing the level of feeling against this medieval tax law. 

To keep up to date with how this challenge is progressing head over tohttps://www.facebook.com/clause24/

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