A Conservative peer and former shadow chief secretary to the Treasury has become the first senior Tory to speak out against recent measures which he says are seen as an attack on buy to let.
Lord Flight, writing on the Conservative Home website, says the range of recent measures announced by the government ”put thousands of tenants’ security at risk” because landlords may feel obliged to sell their properties.
The measures include an additional stamp duty surcharge of three per cent on all ‘additional properties’ (so chiefly buy to let properties and second homes) priced above £40,000, the restriction of mortgage relief for buy to let investors to only the basic rate of income tax, even for investors paying higher rates, and a change in the Wear and Tear Allowance, permitting landlords to claim only for repairs involving receipts.
He warns the tax changes “risk the very crisis in the buy to let housing and lending markets of which the Bank of England has recently warned”.
Here is his article in full:
I hope the Government will re-think its sudden attack on Buy to Let this summer and autumn. Otherwise, it risks the very crisis in the Buy to Let housing and lending markets of which the Governor of the Bank of England has recently warned.
Buy to Let has been an entirely sensible market economy development, in most cases as an alternative to saving for old age via pension schemes.
Up to World War II, investing in rented property was the main method of providing for an income in old age. Given the poor performance of the stock market over the last 20 years, it is hardly surprising that many people have opted for Buy to Let investment as an alternative, and more successful, retirement provisioning investment. Buy to Let has, moreover, provided some three million homes for those not able yet to afford to buy their homes – especially in London.
Buy to Let does not enjoy any of the major tax advantages of pension saving: i.e. tax credits on the amount invested and accumulation of income and capital gains free of tax within a pension scheme. The only Buy to Let “tax advantage” has been the ability for the interest cost to be offset against an individual’s income to determine their tax bills – the very thing which the Finance Act measure has hit by limiting the tax deductibility of mortgage interest to a 20 per cent tax rate. This will hit more modest Buy to Let investors the most, while many of the more sophisticated have their Buy to Let properties held via a company.
On top of this came the announcement that an additional three per cent Stamp Duty will apply on new Buy to Let investments from next April. The risk is self-evidently, that as some Buy to Let investors are motivated to sell as a result of the reduction in the tax offset of mortgage interest, potential buyers will be put off by the additional three per cdent Stamp Duty on top of what are already confiscatory rates of Stamp Duty applying in London (where properties are generally more valuable). More sellers and less buyers clearly has the ability to create a sharp fall in prices, if not a crash. A significant increase in those selling Buy to Let properties may also put thousands of tenants’ security at risk as buyers will want to sell with vacant possession.
If the Government’s thinking is that Buy to Let investment has squeezed young buyers out of the market, this is misconceived. The fundamental problems creating scarcity value have been our nightmare planning arrangements and the hoarding of land with planning permission by developers.
Furthermore, the new high rates of Stamp Duty are a major “disable” when first time buyers cannot borrow to finance large Stamp Duty costs. Politically, the Government may lose more votes over this issue than they realise: there are many thousand Buy to Let investors living in marginal constituencies.
On a wider front, the risks of a significant fall in house prices in London and the South East have risen considerably, partly as a result of the penal rates of Stamp Duty which have already served to reduce, substantially, the volume of transactions.
In addition, a recent announcement by the banks indicates that 100,000 or more middle to senior ranking staff are likely to be made redundant over the next year or so. Many will be looking to sell their London properties and move to a cheaper part of the country. Younger buyers cannot afford market prices in London and the South East, and cannot borrow to finance the substantial Stamp Duty costs of acquisition.
The flux of foreign buyers is reducing in the wake of substantial extra UK taxation. The coming rise in interest rates will also, inevitably, exert downward pressure on house values.
If there is a crash in property prices in the Greater London area, this will have a major impact on the banks and on the economy as a whole, for which the Government will be blamed. I suggest, apart from anything else, that now is precisely the wrong time to be attacking the Buy to Let market when the balance of supply and demand is shifting.
Moreover, at the least, it would have been much fairer for the reduced 20 per cent allowable offset tax on mortgage interest to apply to new, and not existing, Buy to Let investments. Changing the tax rules on existing Buy to Let investments is, in principle, retrospective in its impact.
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Very good letter, however I would like to add a couple of points.
Many tenants choose to rent to live and buy to live these days because it gives them job mobility and investment flexibility, this is not just good for them but good for the economy and is threatened by these changes.
Secondly on the point of pensions, it was not so long ago that a previous government decided to allow residential property to be included in a pension, the proposal was cut before inception over abuse worries.
The point is that this government has taken advantage of the average persons financial naievitty in order to carry out a tax grab on pension investments. The thinking would be along the lines of 'if most people don't appreciate the tax relief we give on pensions why give it to the few who do'
From a purely pragmatic political point of view this was an easy win. However they have apparently bought their own snake oil and are applying the same approach to buy to let, a sector which could not be more different to traditional pensions in the minds of the voter, especially the Tory voter.
Buy to let is literally the last bastion of hope for most aspiring people, hope for financial freedom and independence that is. I know because for the past 16 years my company has been active in this sector and we have experienced first hand the passionate feeling so many people have on this issue.
It's almost like this government wants to be so so clever that teacher gives them a gold star but, like so many precocious children, they have gone too far and need some discipline.
I entirely agree with you Simon, the government are going back on their promise to tenants and the rental industry!
Well said. With 'Labour' moving to the far left and the Conservatives seemingly only interested in 'multinationals' and 'old money', maybe it is time for a new political party the 'progressive conservative party' who look after the interests of the aspirational middle classes who are the backbone of our socially democratic country.
A lot of good points. If we are going to try for a new party lets let the liberals and lefties do it. We do not want to split the only party we have keeping us from some sort of neo-communism. Once we have a good 'new' party in action we can all move to supporting it - from either direction.
Osbourne has proved to be a closet Gordon Brown. He has certainly betrayed a huge number of Conservative voters. At least he has no chance of ever becoming prime minister after this!
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