The Property Voice Podcast - Soundbite Episode: The Alice in Wonderland Tax Grab…and what we can do about it.
As I am on my travels at the moment, I still wanted to give you your weekly dose of the Property Voice Podcast. I am broadcasting today’s show from Hanoi, Vietnam and this gives me the opportunity of having a bit of a rant to get an issue off my chest. I will be sharing my thoughts on some of the recent changes to taxation affecting buy-to-let investors including the Clause 24 mortgage interest relief, or 'The Alice in Wonderland Tax Grab’ and the 3% Stamp Duty surcharge as well. All is not lost though, as I also share a few tips of how we can be flexible and adapt to these changes to lessen the blow to put us into a better position going forward. I hope you enjoy this soundbite episode…a bit of a rant but also a bit of hope going forward as well…
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Resources mentioned
Mortgage interest relief petition and Government response from the Parliament website
Judicial Review of Clause 24 on the Crowd Justice website
Today’s must do’s
Join the crusade by supporting the Judicial Review team – see the link above
Review our existing portfolio, income tax position and take professional advice in doing so
Adopt some of the other changes mentioned during the show such as: passing on the costs of the tax hikes, changing strategy, paying down debt and diversify our property investments a little more to protect our position.
Subscribe to and review the show in iTunes…and while you are at it please help us to spread the word by telling all your friends too!
Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!
Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
As I mentioned last time out, I am releasing a few soundbite episodes over the next few weeks as I am currently travelling. I am recording today’s episode from Hanoi in Vietnam in fact; so I hope I don’t sound too out of it given that my body clock has yet to acclimatise to the different time zone and I will resist the temptation to break out into a Robin Williams Good Morning Vietnam tribute as well you may be pleased to hear!
Needless to say, I have wanted to let off a little bit of steam about the recent changes to the BTL landscape brought in by the current Government…today provides that opportunity as I have a bit of rant about the so-called ‘Alice in Wonderland Tax’ or Clause 24 of The Finance Act 2015 and also the 3% Stamp Duty surcharge for second property owners from April 2016.
Let’s get straight into the heart of the matter with our main topic in this abridged version of the show.
Property Chatter
The July 2015 Budget The Autumn Statement also in 2015 had a significant and negative impact on the BTL sector.
Two of the main changes that came into being were a significant change to how mortgage interest relief will be allowed going forward and
A 3% Stamp Duty surcharge for people owning two or more homes
The mortgage relief issue gave rise to a petition, which closed with nearly 61,000 signatures within its six-month open period. To be perfectly honest, that’s a rather pathetic adoption rate when you consider that there are at least 2 million buy-to-let landlords in this country. Perhaps we don’t understand what is coming, perhaps we are just apathetic or perhaps we even agree with the principle of changing part of how we are taxed from on profit to on revenue instead…who knows?
Needless to say, after 10,000 signatures, the Government do promise to at least respond (we needed 100,000 signatures before we could get it debated in Parliament again). Here is what they had to say in response to the petition:
“The Government is committed to a fair tax system so is restricting relief on landlord property finance costs to the basic rate of tax, reducing the generosity for wealthier landlords.”
Read the response in full: https://petition.parliament.uk/petitions/104880
A fair tax system eh?
Well homeowners get plenty more tax benefits than buy-to-let investors such as zero capital gains tax, £7.5k tax free rental income for starters. Then, if we compare individual buy-to-let landlords to those investing via a company structure – we see that individuals get the restricted interest relief but companies do not. How are these things fair, or as the Government likes to phrase it…levelling the playing field? It sounds like we are playing both halves up hill to me at least! Finally, despite the Government’s attempt to defend this point by claiming it is coming in gradually over the next few years, this ignores the fact that the changes are still retrospective as they penalise all existing properties that have a mortgage on them, with many of us simply unable to simply pay the mortgages off or sell on.
This all strikes me as pretty unfair I have to say. We are being hit quite hard but what has our response to this been so far?
Well, the petition effectively failed sadly. However, a couple of individual investors, including the highly respected Steve Bolton, have sought to take on the Government through the courts instead. They are pressing for a Judicial Review, claiming that Clause 24 breaches European Human Rights and Competition Laws. It also seems and somewhat ironically that Cherie Blair, wife of the former Labour Prime Minister, Tony Blair is leading the legal challenge against the Conservative Government. This has become known as ‘The Alice in Wonderland Tax’, or Clause 24 of The Finance Act 2015.
OK, so that’s one major change, however, in addition to the changes to mortgage interest relief, another of changes affecting landlords is the 3% surcharge on Stamp Duty from April 2016. This is effectively a tax on buy-to-let and to be honest, the Government don’t seem too perturbed for us to think otherwise. It can of course create a hefty premium and up-front cost when entering into a new property investment deal; so do your numbers to check it still stacks up.
So, with this change of stance from what many would previously have considered to be a landlord-friendly political party before the last election, what can we do about this? In fact, does it throw into question the viability of BTL for the average investor altogether?
My response – well maybe it does give rise to serious concern…if we fail to be flexible and adapt. But let’s first consider who will these changes impact the most…
- Clause 24 will affect landlords using BTL mortgages the most. Those with higher loan-to-values will be most impacted. Whilst the Government has been at pains to point out that only higher and highest rate taxpayers…the apparently wealthier ones…will end up paying more tax, this simply isn’t accurate. For example, even Basic Rate taxpayers could be pushed into a higher tax bracket as a result of the changes. Those that require a mortgage to buy an investment property when compared to cash buyers and those buying through a company will not be affected at all, which does raise the question of who is really being targeted here. I believe the cottage industry of buy-to-let with the many smaller landlords is being targeted rather than the larger, corporate entities. The reasons are unclear but the result will probably mean some individual investors will simply sell up and exit the market if they can, whilst others will be deterred from entering in the first place.
- The Stamp Duty surcharge will impact pretty much anyone that already has one property, regardless of why they will be buying another property or whether they own it individually or through a company. However, it also sweeps up those buying their own home if they already have another property worldwide, those buying a property for their children, a holiday home or an investment property. The aim seems to be to reduce the demand for property other than by homeowners. However, where will all the rented accommodation tenants go when the BTL sector starts to shrink? Who will build all the homes we need to plug the gap in housing for all sectors and not just homeowners? To be honest I am not yet sure…and I doubt the Government is either!
So, what are our options then? Here are a few ideas that I might suggest…
- Join the fight to reverse Clause 24 by pledging towards the campaign to secure a Judicial Review, which is the only realistic hope of reversing the law now. You can find out more at the Crowd Justice website under the case Clause 24
- Review your existing portfolio to see how Clause 24 will affect your current and future investments AND your overall tax position. I suggest you speak to a tax accountant about this.
- Consider paying down debt and /or selling poor cashflowing properties
- Pass on the increased cost in the form or rental increases or reduced offers on purchases. This will hurt tenants and I am sure is not what the Government intends to happen, but it is an inevitable outcome I believe. We may need to pass the tax hike onto the tenants instead then, whether we like to or not. If we reduce our offers this will lead to a cooling in the housing market as well…let’s hope that does not turn into a bust though…that would be another unintended consequence!
- Consider your future investment strategy – higher income strategies will at least help to offset the impact of Clause 24. As for other strategies – look closely at the numbers before proceeding with your project. Finally look to invest through a limited company going forward as the changes limiting mortgage interest relief do not apply to companies and consider transferring existing properties into a company through a beneficial interest trust. Again get professional advice though here.
- Have some diversity in your portfolio – Clause 24 could literally wipe out a number of investors in certain situations. Particularly those that refinanced regularly and are trapped by a high capital gains tax charge after settling a high mortgagee redemption figure above the original purchase price should they try to sell. The reason why they got trapped is that they worked the system in too narrow a way and so became vulnerable to such a change taking place. However, if we have a mixture of investments, some for capital growth and others for income, some with medium or higher loan to values and others with lower levels or even no debt, we can start to shield ourselves from these or similar changes taking place in the future.
That’s it really:
- Fight it
- Review our position
- Reduce our exposure
- Pass on the tax hikes to our tenants and sellers
- Adopt different strategies and tactics
- Diversify to de-risk our position
Meanwhile, keep calm and carry on! It is still all about running the numbers and doing your research…if the deal still stacks up then go ahead. We should have a professional approach to our property investing and that’s why there are a range of different approaches we can and indeed should adopt going forward, if we had not already.
There we go, I am feeling a little better for having got that off my chest a bit at least. How about you…let me have your thoughts and ideas on the subject, as always: podcast@thepropertyvoice.net
That’s it for this week then, a soundbite episode with a slight rant at the illogical and as far as I am concerned, unfair headwinds we are currently facing from the recent political changes.
I will be back next week with another soundbite episode, so I look forward to you joining me then.
Meanwhile you can always drop me a line, podcast@thepropertyvoice.net and the show notes as always can be found over at our website, www.thepropertyvoice.net
Meanwhile, as always, thank you for joining me on the show today and until next time on The Property Voice Podcast…it’s ciao ciao!