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After The Budget

The chancellor pulled a number of rabbits out of the hat in his Summer 2015 budget statement.  Although many column inches had been dedicated to the loss of buy to let tax ‘perks,’ the landlord community was not expecting the measure to actually materialise.  Until April 2017, landlords will be able to set all mortgage finance costs against rental income, but thereafter relief will only be applicable at the basic tax rate, albeit phased in over 4 years.  The big questions are who will this affect and will it cause landlords to sell or not buy more property?  Landlords most likely to be paying tax at the higher or additional rates of 40 and 45% will be those on high incomes who have bought one or two buy to let properties as a pension investment.  They are likely to have bought new builds requiring minimum maintenance and their low expenses will mean they face hefty increases in tax bills.

Portfolio landlords with larger businesses tend to go through an initial phase where their spending on development or repairs is initially high and they build up operating losses.  Once they have established their portfolio, they set their losses against rental income and eventually get into higher tax brackets.  So long established landlords could be seriously penalised.  When the NLA estimated that landlords would increase rents on average by £840 a year, a Stoke on Trent portfolio landlord said that rents in his areas hadn’t gone up for 10 years and he had no chance of recouping these extra costs.  He was managing arrears from LHA tenants whose rent was no longer paid direct to him because of the government direct payments policy, and bemoaned the end of council tax exemptions on empty property.  He felt “clobbered left right and centre by such measures.”  There is little sympathy for hard working landlords trying to make a living in what can often be a difficult trading environment, yet we desperately need the housing they provide.

My main concern about the removal of mortgage interest tax relief is that it breaks an important principle that legitimate business expenses are set against earnings.  The tax system is in a muddle over whether it views letting as investment or a trading business.   I’m clear that it is a business and I am worried that these changes are the thin end of the wedge and effectively open the door for future abolition.  The loss of the 10% wear and tear allowance for furnished properties from April 2016 similarly threatens a straight 10% increase in tax for landlords letting furnished property.  The renewals allowance will stay in force and in theory replacement furniture can also be set against income, but given the treasury expects to make substantial savings from this change, landlords are likely to see higher tax bills.

The introduction of a higher minimum wage was an astute political move by the chancellor to steal the opposition’s clothing, though few are content to use its official title of ‘national living wage.’  I have long felt that one of the key problems with the UK economy is low wages and there is no doubt that employers use working tax credits to their advantage, in effect subsidising pay.  So I support a minimum wage of £9 per hour but there will be an impact for landlords.  Firstly young people will be excluded from it and secondly single parents and families with more than two children will be hard hit by the loss of working tax credits.  The reduction of the welfare cap to £23,000 in London and £20,000 elsewhere will also fall hardest on larger families and we will see many more living on benefits have to up sticks and move out of inner London.  I think interim Labour leader, Harriet Harman, was right to support the changes to signal that the modern Labour party should recognise that this shift from benefits to better paid work is the right direction of travel.  I will be keeping a close tab on levels of arrears in the landlord community to see what kind of impact these changes will have.

It’s worth pointing out that young people have been especially hard hit in this budget, potentially affecting student lettings.  Under 25s are excluded from the new ‘national living wage’ and 18 to 21 year olds will no longer be eligible for housing benefit.  Maintenance grants have also been abolished and replaced by yet more loans: stories of 21 year old graduates being saddled with debts nearing £50,000 are likely to continue.  England continues to be out of kilter with a much more progressive Scottish government who quite rightly see education as a social good.

One other tax change will be of concern to landlords and other individuals who trade as a limited company.  Dividends over £5,000 will be subject to tax at 7.5% and the employer allowance of £2,000 national insurance exemption is to be removed by sole director companies where the only employee is the director.  The government says that these measures are targeted at tax motivated incorporation, implying that these structures are created with the simple goal of tax reduction.  Many incorporate so that they can be the MD of a company rather than a sole trader and because their customers require them to trade as a limited company.  For landlords planning to buy properties in a limited company to side step the loss of tax relief on mortgage interest, these changes will also be a blow – though the reduction in corporation tax to 18% could mitigate against the increased tax on dividends.

The budget heralded one or two other measures with a direct impact on housing.  Housing associations are already reeling from the prospect of Right to Buy being foisted upon them.  Now they must reduce rents by 1% per annum.  This will surely impede their capacity to build more housing.  Meanwhile the increase in the rent a room allowance from £4,250 to £7,500 is a welcome measure that will free up empty rooms, of which there are an estimated 90,000 in London.  Rental income from a lodger up to the limit is tax free.  Ironically just as the chancellor is putting the brakes on buy to let investment, he is encouraging a new breed of amateur landlords letting out their spare rooms, probably through Airbnb.

On the Friday after the budget, two key planning changes were announced.  Firstly, automatic planning permission will be given to brown field sites that have been zoned by local authorities as suitable for residential development.  Secondly, permitted development rights have been changed to allow residential properties to be extended to the height of neighbouring properties.  A maximum height will be set – to avoid multiple copies of the shard and other tall buildings being constructed!  Critics have argued that development on brown field sites may escape proper scrutiny resulting in housing with poor internal space standards, poor accessibility and limited access to green spaces.  Higher buildings could produce lots of loft conversions, but will it facilitate the building of more homes?

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