Osborne’s Landlord Tax is NOT a Turnover Tax
David Lawrenson of LettingFocus.com says some landlord sites and other media, (including the mainstream media), are inadvertently misleading people by referring to one of George Osborne’s Section 24 tax change as a “turnover tax” on landlords.
We say, “This particular Osborne Tax might be a crock of old “do-do” – and something we could do without – but it most certainly is not a “turnover tax”. Calling it a “turnover tax” is misleading. If you were to go on Dragons Den and confuse projected turnover (sales revenue) with profit, you can expect to be going back down in the lift pretty fast.”
Landlord Tax is NOT a Turnover Tax
In one national newspaper, this weekend, we read this:
……Instead all landlords will be able to claim a basic-rate allowance – meaning that higher and additional-rate taxpaying landlords will essentially pay tax on their turnover, not their profit, which will send many into loss-making territory.
I think this is well meant but misleading.
First, a bit of background.
Unless you have been asleep at the back (for a very long time) you will know that George Osborne introduced a new system, to be phased in over the next few years, in which landlords will continue to be able to effectively deduct the cost of interest on loans which they’ve used to buy property to let, but only at the basic rate of tax, not at their highest rate.
This will make buying to let (and keeping buy to lets) a whole lot more difficult, (and indeed often unprofitable), for landlords with highly geared portfolios. It will also have the effect of shifting many previously basic rate tax paying landlords into the higher rate of income tax.
Naturally, most landlords, weary of what they see as endless attacks on their business, think this is not a good thing. (George Osborne, however, thought it was a great wheeze, believing that would create a more even playing field for first time buyers, the beloved friends of the home-ownership loving Conservative party).
So why is the term “turnover tax” misleading.
It is misleading because landlords will still be able to deduct all other allowable costs that result from their letting business. That has not changed.
For a landlord, their gross rental income is analogous to their turnover. But just like any business, they can still deduct all other relevant allowable costs – letting fees, repairs etc. – against this figure, leaving a profit figure – and it is this profit figure, not the gross rent/turnover, which is added to other income, (e.g. from employment) and it is the total figure on which tax is levied.
So you can see how many landlords have gone from previously being basic rate taxpayers to being in the higher rate.
The main difference is that they cannot set off interest on loans at their highest rate of tax any more (and that is a big difference for many people).
But it’s worth noting that landlords will get an effective credit to reflect the cost of interest that they would have paid had they have been basic rate taxpayers. This is how we understand things will work.
As a consequence of this tax change, many lenders have upped the rent-to-interest calculation they use for assessing new loans and re-mortgages. making things harder still. Plus they now use a new stress test of a minimum (currently) 5.5% interest rate. Some impose even higher rates. This means that those needing mortgage finance need much larger deposits today than they did in the past.
The result of this, as we know, has been to push some landlords to incorporate, some to move into commercial lets, some to turn their properties into (still scandalously unregulated) AirBnBs or serviced accommodation, some to seek private joint venture equity financing, some to sell out and exit the business altogether, some to put up rents, plus a mixture of all these things and more.
Turnover / Tenants Tax Makes Aggressive Leveraging A Thing of the Past
The end result is that the days of leveraging up to quickly build a portfolio are long gone. The days when two maths teachers from Kent called the Wilsons, could amass a portfolio of hundreds of houses in five or ten years has gone forever.
However, all is not lost. Far from it.
I mentioned access to equity funding – basically the private money of other individuals. The Osborne tax changes has helped this source of funds grow even faster and it is a topic that I will return to again and discuss at my next seminar on 23rd November 2016 – see details below. Come down and learn how two of the speakers use private finance/joint ventures in their property businesses.
Plus, don’t forget that it is thought that about half of landlords continue to buy property using 100% cash, (i.e. no mortgage), so for them there is no need to borrow from a bank nor to worry about how interest is taxed.
And yields are still great. We operate mostly in London and North West Kent and our net yields are around four per cent overall. (Rent less all costs except financing costs divided by the current value of the property, since you asked). Tell me the name of a high street bank or building society where can you get that? (The private individuals who are funding buy to let ventures with spare cash are clearly asking the same question!)
And with financing getting harder and some landlords exiting, I expect future rents to rise some way above the rate of general inflation. The biggest risk for the future may be the very scary John Mcdonnell, New Militant (Momentum) and barmy rent controls, but that could be a long time coming.
Note: The main action group who are in court fighting to get this tax declared as illegal have dubbed it the “Tenants Tax” which I think is a far better phrase than “turnover tax”, as it will be tenants who will ultimately have to pick up the tab of higher rents in the end – a consequence of 1) landlords exiting the market and a future shortage of private rented housing and/or 2) just passing on the higher cost of doing business.
I wish those fighting this tax well, (their QC is one Cherie Blair), but surely it is within the government’s power to single out a business and tax it differently to other businesses. We have seen this in the past in the windfall taxes levied on the petroleum industry. And I guess Cherie will be paid her fee whatever the court decides! I would prefer to see the landlords organisations swing support behind attacking Bank of Ireland and Skipton for cheating customers on tracker mortgages. West Brom have been defeated already and I feel this injustice can be and should be reversed, but it needs support and increased awareness.
Footnote 10/10/2016: Last week, at the High Court, a judge decided there could be no judicial review of this case, as he though the case had no realistic chance of success.
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