This blog post is probably long overdue.
Actually, it’s definitely long overdue according to the surge of emails I’ve received over the last several months, from people with a profound passion for the letting industry, urging me to reach out to ‘you lot’ so we (landlords) can all band together to fight against a seemingly dogshit incoming tax change, which many believe will cripple the letting industry. Oh, so dramatic!
“Why haven’t you done it already? This is important! Why don’t you care?” is what’s been getting drilled into my poor little my ear-holes.
Don’t be like that. I do care. You know I care (even though you find my website and splutterings repulsive, and are only engaging now for the purpose of tapping into my readership base, but it’s cool, because fortunately this horrid little ogre doesn’t need any friends. Sigh).
I really do care about the cause, but at the same time I seem to value my uncompromising need to blog ‘about what I want, when I want‘ above anything else. So unless the mood strikes and the conditions are optimal, I’m generally an obsolete pile of slosh. It’s a real curse, but I’ve made my peace with it.
I was always going to discuss the new tax legislation at some point, but despite how inevitable the discussion was, delaying it was a stroll in the freaking park. Case in point, I chose to blog about Garden Fence Law before blogging about the new tax legislation, so you can only imagine how far down the pecking order it was. Can you even imagine how hollow someone’s life must be in order to write about bloody ‘garden fences’ during their leisure time, let alone ‘taxation’? Yeah, I feel sorry for me, too.
But let me stress, don’t allow my repugnant attitude sway you away from the importance of this blog post. This will probably be the most important post I’ll ever write (but that’s really not saying much). Plus, I don’t think I can continue to fob off the figureheads (i.e. the people with influence and power in the letting industry) for much longer, whom have been asking me to do this for quite some time. And, we all know how irrational and irate a bunch of hippies with a cause can get if someone slows down their progression, so obviously my fear is they’ll eventually start posting dog-shit through my letterbox.
So, I’m going to do the right thing by everyone and spread the word. And by “everyone” I mean me, because I don’t want dog-shit through my letterbox, or a bunch of angry people that smell of urine loitering outside my crib.
Many of you will already be aware of the incoming tax changes, ‘Clause 24’, particularly those of you that feel comfortable with betraying me by wasting time on other landlord websites. Everyone seems to be talking about it… but me.
Reluctantly, I’m going to jump onto the bandwagon, but I’m going to avoid going into the lengthy details of the clause, because quite frankly, they’re boring as shit; it involves a lot of nasty stuff like maths and elaborate explanations for why the clause is so unbelievably cancerous. I think I’ll stick to the basics, or at least, what I feel are the ‘essentials’. But don’t worry, I’ll provide links to other useful resources, where you can read more of the snoozy-details, so at least you’ll have the option of boring yourself to death.
2015 Summer Budget & Clause 24
As part of the 2015 Summer budget, the Chancellor of the Exchequer, the pompous twit George Osborne, announced that from 2017, there’s going to be an increase in tax for private buy-to-let landlords. More specifically, landlords will no longer be able to offset mortgage interest costs against rental profits before calculating tax.
So, let’s suppose you receive £1,000 PCM for your BTL. £600 goes towards the mortgage payment; £400 of which goes towards paying the interest of that mortgage, while the remaining £200 reduces the capital. Based on the current tax legislation, you can offset the £400 interest payment as an expense, which reduces the taxable net profit, and rightly so.
The new legislation will no longer allow you to offset the interest on your mortgage payments! It will be added to the taxable net profit. OUCH! How about that for a kick in the gonads?
Why are landlords in upheaval about this legislation? It’s not just because the increase in tax will take a sledge hammer to our profits, but it’s also because this legislation is only being applied to individual landlords, while every other type of business in the UK will be able to continue off-setting their total costs against their income before being taxed on their profit. Even corporate companies that manage large portfolios of real estate, who are effectively landlords, won’t be subject to the new legislation, so in true Tory style, they really are going after the little guys, while keeping the rich… rich. People are now questioning the actual legality of the clause.
IT’S A DARN RIGHT OUTRAGE, ISN’T IT? HOW COULD THEY?
Holy Mackerel, I need to calm the hell down. I almost gave myself a nose-bleed. *deep breaths*
The effects of Clause 24
As a result of this new legislation, many thousands of landlords will find themselves being taxed on loss-making buy-to-let properties and see massive increases in the percentage of tax payable. Many will be shoved upwards into a higher rate tax bracket, even though in reality they will not be making a single penny of extra income!
It should also be noted that the Government already collects tax on the mortgage interest paid by landlords – it takes it from the profits made by the mortgage lenders. So not only does the legislation victimise individual mortgaged landlords, it’s also a double taxation policy.
And of course, inevitably, as it always does, these extra costs will quickly find their way filtering down to the bottom of the chain, all the way to the tenants, which will further increase rental prices in an already unmanageable market.
I refuse to believe the Government aren’t aware of how this will pan out, because it really just boils down to basic economics (i.e. if you increase production costs, the retail price of the commodity has to increase), so it kind of makes you wonder who screwed who to make this ludicrous legislation happen. Others feel the same, and that’s why they’re calling it the “Tenant Tax”
How to support the fight
Fortunately, and perhaps surprisingly to many of you, there are people out there with a lot more dedicated time, compassion and desire out there than me, who are willing to make a stand. A strong one.
A couple of Robin Hood type characters, Chris Cooper and Steve Bolton (no idea who they are. Probably a couple of ‘portfolio landlords’ that stand to lose a buttload of cheese through the new tax clause), started a crowdfunding campaign earlier this year, to raise £250,000 (bloody hell, hoooooowwww much?! Right?), with the purpose of funding a mutually beneficial cause for all UK private landlords: a legal process called a ‘Judicial Review’, with the goal of overturning the proposed ‘Clause 24’
Here’s Steve’s cute little plead:
I like the cut of his jib. This seems to be legit. There’s a staged plant and a proper branded ‘Tenant Tax’ placard and everything. Well, I’m impressed.
They even managed to perk Cherie Blair’s interest, and she seems to be quite involved with the campaign. Here’s an interview by Vanessa Warwick from over at PropertyTribes, where Cherie explains more about the Judicial Review:
£50,000 was raised in the first 8 days of launching the campaign, which is pretty remarkable. But I think the generosity of the people has since plateaued as we’re still significantly far away from the target. Below are the current stats, as of 23rd June 2016.
Check the Crowd Justice page for the latest figures.
I’m not actually sure what happens if the target isn’t reached. Anyone?
Donating & more Info
You can also read more about the campaign and legislation over at the Crowd Justice page (but go there after you’ve finished with me, I’m still talking!). And if you’re feeling rather generous and believe in the cause then you should definitely donate towards it. Plus, if they suddenly get a surge of donations it will get traced back to this hellhole website, and maybe then I won’t be seen as leper by the community, and maybe I’ll start receiving invites to all the swanky landlord gatherings/conferences I enviously hear so much about. You want to help me make friends, don’t you?
As my boy Bolt’s says in the video above, “please do all you can” (I’ve literally never spoken to the dude in my life, but I already feel a connection and utterly comfortable with calling him “Bolt’s”).
Spread the word
Needless to say, donating is 100% optional. But spreading the word isn’t, so open that pie-hole of yours and tell someone. Anyone!
Fuck it, tell someone that doesn’t even care; someone that isn’t even a landlord. Information has a strange way of filtering down to the darkest of pits and falling onto the right ears. Hopefully filthy rich ears.
After I’ve written this blog post, I’ll probably knock on my neighbour’s door and force-feed him the details (I definitely won’t be doing that, but I want to inspire).
I’m going to donate £50,000 (no, I’m not doing that either, but I want to inspire).
(I think 2 obnoxious donate buttons is enough. I’ve officially done my part).
Important update (10th October 2016)
It appears as though the campaign to challenge the BTL tax change as unsuccessful (more details over on the PropertyWire website. The tax changes appear imminent. I’m sorry!
Making preparations for the incoming changes is imperative! Perhaps the following is more crucial than ever… back to the original blog post…
Upad have crafted a nifty little Tax Calculator which can assist you in working out how much extra tax you may have to pay when (or optimistically… “if”) the new legislation comes into play. Here it is. You should check it.
Prepare for the worst. Always!
I’ve a read a few articles on the new tax legislation by various reputable letting/landlord outlets, all emphasising the catastrophe that is fast encroaching, and how we should all huddle together, hold hands (I’ll probably be lumbered next to someone grotesque that doesn’t use hand sanitizer, great), sing ‘Kum Ba Yah’ and support the fight against the terror. Apparently this will be the biggest fight of our lives.
Like I said, dramatic.
I’ve personally felt more passion running through my veins when fighting over the last Ferrero Rocher in the tray (I know we’ve all been there, those things are little nutty balls of heaven), but perhaps that’s the problem, and why so many of the active rally leaders’ in the community are getting so irate- there’s currently an utter lack of exposure and relatively small dollops of support. They believe every landlord in the UK, approximately all 2 million of them, should be supporting the fight. If we all just gave £1 each…
So far, with approximately 1,000 backers, we’re still missing interest from about… 2 million people. I don’t know whether to cry… or make the most of it and laugh hysterically. I’ll most likely do the latter.
Seriously, if you can, you should donate and/or spread the word. It’s genuinely a good cause, organised by genuine people (from what I can tell), and the fight is the right fight, which you will most likely benefit from. For example, if you donate £100, and that money is eventually used to overturn the legislation, you could stand to make several thousands of pounds in savings.
However, while the legislation will, for sure, affect most of us, I also sense there’s an element of total irresponsibility surrounding the issue. While everyone is focusing on rallying the troops, and largely scaremongering in the process, which can be arguably justified, there seems to be a distinct lack of pragmatic thinking, although I understand why.
Right, so let’s be real about this…
I don’t know the facts or figures, but I can imagine that the amount of legislations that have been overturned in similar situations remains in a singular digit. I’d go as far as to say it’s unheard of. The Government need and want more money, and over the years landlords have proven to be a reliable cashcow, so the idea of stopping the legislation is glaringly, woefully optimistic.
What I’m saying is, you should prepare for the increase in tax, even if the fight for justice looks to be making progress in the right direction, which it is according to this recent article by the RLA: “The RLA’s relentless campaigning to challenge proposed restrictions to mortgage interest relief is starting to make an impact in Westminster, with a surge of support from Tory backbenchers.”
Personally, I’m not sure which way it will swing; I know which way I would like it to swing, but I know I wouldn’t bet on the stable boy to be victorious (I wouldn’t bet against either).
Let me clarify something important…
The primary goal of this blog post isn’t to make you aware of the Crowd Justice campaign or grovel for donations, despite the big red donate buttons and the lengthy introduction. You don’t have to part with your cash (even though you probably didn’t work hard for it, because you’re a lazy, rotund landlord, leeching off societies most vulnerable).
This isn’t even about the tax legislation. Fuck the legislation in the ass! This may displease the Church Elders of the letting world, as they probably would have preferred me to optimise this page for squeezing donations out of your tiny little rectums, but as always, I’ve got to do this my way. I believe there’s a bigger and more important message here, which every landlord out there should digest before it’s too late.
The primary goal of this post is to enforce a friendly reminder to everyone, including myself, that we should always expect and prepare for any change, including the Clause 24 tax legislation. As it stands, it’s still coming hard and fast… (you’re expecting me to stoop to my usual unnecessary lows here, but I won’t! But YOU KNOW).
Ironically, while the tax legislation doesn’t treat us like any other business, we need to respond like any other business, and that is by adapting to the market. Don’t sit idle and wait for the storm, you’ll probably drown with your shrivelled-up pecker in your hands. You’ve been warned in advance and you’ve got a reasonable amount of time to prepare.
The reality is, if this storm does drown you, it won’t be because you failed to donate, support or stop this one particular legislation, it’s because you sat and waited until it was too late. This added tax costs is nothing new as a ‘concept’, it’s merely another expense among hundreds of others, albeit, an insanely unfair one. Just like the recently introduced landlord licenses, which is just as equally horrendous, and in many cases will cost landlords more than the heightened tax bill they may face.
The thing is, even if Clause 24 gets overturned, another evil will inevitably surface with the same intent; looking to diminish your profits, whether that be on a domestic level (e.g. the need to replace a boiler) or another mass scale attack against landlords and the industry. We won’t be able to fight every fight, it’s futile.
Yes, the tax legislation is a sizzling pile of shit and I wholeheartedly believe in fighting it. But the pragmatist in me is urging everyone to spend the ‘majority’ of their time trying to absorb the cost, as opposed to fighting it.
Absorb & adapt to the market
My advice? Talk to a specialist accountant that is familiar with landlord tax, and find out how much of an impact Clause 24 will have on your dwindling finances, and then plan accordingly. Do the maths, and stress-test the figures. Just make sure you’ll be safe if shit hits the fan. Trust me, if you prepare and embrace the tax change, you’ll be happy whether the legislation gets revoked or not.
If you think you might struggle with the new tax change, start preparing now. If you want to keep hold of your investment(s), think of ways you can absorb the costs. I’ve written several posts on how landlords can save money, which may help you reshape and maximise your profits. But I’ll go over a few of the main one’s below.
While you should already be doing the following regardless, for both short and long term gains, I appreciate we don’t all start swimming until we’re thrown in the deep end…
*The Landlord kicks you into the deep end*
It’s still a massive mystery to why so many homeowners (not just landlords) don’t look at remortgaging at every given opportunity. Relatively speaking, it’s by far the easiest and quickest way to massively rein in the outgoings!
Even if you can find a mortgage product that offers a puny 0.1% reduction in interest, you could still potentially save thousands, and therefore instantly absorb the costs of the repulsive new tax legislation in one hit!
If you’re interested, here’s a more detailed write-up of my most recent experience of remortging a BTL.
- Make a lump sum payment to reduce mortgage
You never know, reducing some of your mortgage debt with lump-sum payments may work out better for you. Equally, it might be worth switching to a repayment mortgage if you’re currently paying interest-only. This is where a good tax accountant will be invaluable.
- Regularly look for better deals
I honestly believe most landlords miss a trick when it comes to service renewals (i.e. insurance, agency fees etc.), and that’s mostly due to obscene levels of laziness.
Companies that work on the premise of annual subscriptions prey on laziness. They rely on people to avoid the 10-20 minute chore of looking for a better deal when it’s time to renew a policy, which is typically once a year. The sad reality is, most people are THAT lazy, so they just go ahead and renew the policy with their existing providers.
9 out of 10 times, you’re existing provider won’t be offering you a competitive deal. They’ll be offering you the “lazy asshole” deal, which is usually 30% more expensive.
Last time I shopped around before renewing my landlord insurance policy I saved £250, and it took about 20mins.
PLEASE, just shop around when it’s time to renew! Do it for me and your children.
- Minimize void periods
Be organised and minimize void periods in-between tenancies.
Think about it, by simply slowing down the process of finding new tenants by 2 weeks, you can easily lose £400 in rent (based on rent being £800 PCM). Even if you half that period by working a little quicker, you’ll save £200. It really does boil down to being organised and prepared.
There’s more information over at the finding tenants quickly section!
- Obey the law
This is a bit of a quirky one, and perhaps it has no place in this list. But screw it, I’m doing it…
Landlords are continuously being persecuted for failing to comply with the law. Actually, this is probably one of the quickest way to vapourise profits into a puff of smoke, and it’s definitely more devastating than any tax clause.
Be a good boy, comply with your landlord legal obligations if you aren’t already. It’s so much cheaper than being sued.
- Avoid & prepare for bad tenants
See, the thing is, while this whole tax legislation is unfair and will jeopardise your monthly Range Rover lease payment, one asshole tenant can jeopardise your entire fortune.
Reduce the chances of harbouring donkey tenants by undergoing thorough tenant referencing. But just as crucially, always prepare for donkeys (because some times they’re just unavoidable) by keeping tenancies short, having a tenant and considering RGI (Rent Guarantor Insurance).
Let me illiterate, good tenants are crucial to turning a healthy profit. You will NEED good tenants to help you through the tough times.
- Minimize tenant turnover
The most important point in the list, in my opinion.
If you have good tenants, don’t do anything stupid like unnecessarily increase rent. Keeping rent reasonable/low in exchange for retaining good tenants is almost always cheaper than pissing off good tenants and giving them a reason to terminate the tenancy.
Despite popular belief, increasing rent isn’t the best way to survive in a tough environment. The best way to survive is keeping the cashflow steady, and you cannot do that without good tenants. I’m not saying don’t increase rent, I’m saying you might be better served being ‘reasonable’ over brash.
- Scale back if you’re struggling
If you’re fortunate enough to be a portfolio landlord, it might be worth selling a few of your properties and using the capital to reduce mortgage debt on the remaining. It’s a move that will undoubtedly be a kick to the ego to those that like accumulating, and it is a gamble, because the legislation might get squashed. It’s your call.
It is extreme, but so is bankruptcy. There’s also a lot to be said about coasting through life in comfort as opposed to fear.
- Offset every expense like your life depends on it
Stack up every expense you can against your tax bill.
While you may lose the ability to offset your interest payments, there maybe other expenses that you can offset, which you currently aren’t e.g. the cost in fuel for going back and forth to your BTL, the cost of your PC which runs your landlord software on, even the cost of communicating with your tenant and/or agent, and the food consumed during renovation periods etc. Again, a good tax accountant will let you know what you can get away with. The really good accountants will manage to find a way to offset pretty much anything, including a pair of nail-clippers.
Offset every last fucking penny.
- Operate as a company
According to this article on ThisIsmoney it might be worthwhile operating your portfolio through a company if you have 10+ properties, because you’ll benefit from company tax breaks that are otherwise unavailable to private landlords. But bear in mind, there are added costs and hassle associated with running a company.
Again, a good accountant will be invaluable here!
If you’re not doing ALL of the above (which is only the tip of the iceberg), I have no doubt in mind, you’ll be able to find ways to absorb more nose-bleed costs than your balance sheet is currently showing.
Workout how much this tax change is going to cost you, and make the changes you need to make in order to absorb the shit out of it.
Why I’m not worried, and perhaps lack empathy
If you made it this far, you maybe getting mixed signals, and wondering what side of the fence I’m on. So let me explain:
- I want landlords to support the fight. It’s a worthwhile fight, because the legislation is bullshit, and plagued with corruption.
- I want landlords to be aware of the tax change and make sensible preparations.
- I don’t think it’s sensible for landlords to rely on the legislation getting overturned.
- I want landlords to focus on being prepared for any change, not just the incoming tax change.
- In this very specific situation, I think it’s fundamentally more important to ‘prepare’ than ‘fight’.
- I want landlords, particular new landlords, to realise the concept of unforeseen expenses, even unfair ones, is the nature of any business. The concept of a ‘new expense’ is nothing new.
- The amount of risk your open to will depend on how you have invested.
I’m going to touch on my last point in a bit more detail, although I’m not sure if it’s the right time or place, because it might be like rubbing salt in the wounds. My ex-girlfriend always used to tell me there’s a time to listen and there’s a time to point out mistakes, and I never knew the difference. Needless to say, I dropped her like a bad cold! What an absolute PMS’ing bitch, right?
I want to emphasise, the impact of this tax change will affect a very specific investment strategy the hardest (it’s the same strategy that almost always gets walloped when extra costs incur)!
I’ve discussed my investment strategy in detail before; it’s an extremely low risk strategy, and the nature of its design is to withstand volatile climate changes. In short, I try to reduce debt as quickly as possible in order to buy outright, so I put down lumpy deposits and make overpayments when I can. It’s not the most profitable model, but it’s quite safe. Hold on, let me tuck my penis back into my knickers. Right? But coincidentally, it’s the perfect model to stand strong against the tax legislation (i.e. smaller the mortgage debt, the smaller the interest payments).
That’s why I’m not worried about the tax change on a personal level. Yes, the legislation is unfair, so I’m going to help fight it, and it will painfully eat into my profits, but I’m prepared for the change and I can absorb it, while still turning a profit that makes my investments worthwhile.
Let’s not kid ourselves… this change is going to affect ‘portfolio landlords’ that are up to their eyeballs in mortgage debt the most. Their main objective, at some point, was to expand as quickly as possible with very little equity, and mostly rely on property prices increasing. It’s a flimsy model, which by nature is fundamentally prone to topple rather easily. If you’re going to play that game you need to take responsibility. That said, us landlords shouldn’t be victimised, and I’m on the same side as those with whimsical house-of-card type portfolios, even though I think they’re freaking insane for walking down that path in the first place.
If anyone has any thoughts, comments… you know what to do, grab the mic! It’s appreciated as always, and I’m genuinely curious about the following:
- 1) Were you aware of the new tax legislation?
- 2) are you going to support/donate to the campaign?
- 3) how is the legislation going to affect you?
- 4) have you made any preparations for the change, or are you going to? I know of a few landlords that are currently scaling back their portfolio, and taking advantage of the insanely high property prices!
So, that’s me done for another month or so, or whenever the mood next strikes. There’s no real pattern, other than obscene amounts of coffee and boredom-endued suicidal thoughts.
Goodluck everyone! Power to the people! x
P.s. you should support the fight and donate if you can.