Wales’ Dilapidated Homes Need Protection from Chancellor’s Tax Hikes
Tax increases on landlords are likely to add to the numbers of deteriorating homes in Wales.
The Welsh Government reckons there are about 23,000 empty homes in the country. Many are too dilapidated to qualify for an owner-occupation mortgage, and investors are now nervous of piling into buy to let because of George Osborne’s punitive new rules applying to individual UK-based landlords (but not to incorporated businesses or, in the case of axed tax relief, to foreign buyers).
In 2012 the Welsh Government introduced a helpful scheme called ‘Houses into Homes’, which offers interest-free loans of up to £25,000 per property to fund renovation. Loans from the £20 million fund have to be repaid within two years if the property is sold, or three years if it is let, and the repayments are funnelled into new loans. The owner cannot borrow, renovate and live in the property – it must be sold or let to someone else.
The interest-free loan, plus any mortgage, must not exceed 80% of the property’s value, and the building must have been empty for at least six months. Individuals account for the majority of loans approved under the scheme. The evaluation report, prepared by Sheffield Hallam University and published in October 2015, says that 32 approved loans were to limited companies, 3 to unincorporated entities, and 207 to individuals.
Despite the usefulness of the scheme in bringing empty properties back into use, Chancellor George Osborne’s tax attack on landlords could damage it significantly. The attack includes:
* Stamp duty surcharge. The new 3% charge on buy-to-let and second-home properties costing between £40,000 and £125,000, and an additional 3% tax above the existing rates on properties over £125,000, is a real disincentive to any plan to buy a run-down property, improve it and let it at a rent which local people can afford. Unless you can afford to buy six or more properties in a single transaction, that is – then, you would be exempt from the charge.
* Removal of higher-rate tax relief on mortgage interest. So what? Landlords are about as popular as traffic wardens (no offence to traffic wardens, they have a job to do), but this change, to be phased in between 2017 and 2020, will inevitably result in many landlords making cash losses. That’s the idea, I suppose, the Chancellor’s retaliation for retirees using their newly liberalised pension funds to buy properties to rent out (although that was his idea too). Here’s a simple illustration. Mrs J has annual rental income of £20,000 and has no costs to deduct other than mortgage interest of £13,000. She is a higher-rate taxpayer so pays £2,800, leaving her with a profit of £4,200 (but remember, she has not spent a penny on maintaining her properties). Under the new rules*, her tax bill would rise to £5,400 and her profit fall to £1,600 (and no money spent on maintenance).
Mrs J is now extremely vulnerable to any rise in interest rates – goodbye all profit – and is not maintaining her properties either. Get the tenants to pay more rent? They are probably paying more than they can afford already.
Of course, if Mrs J was not a resident of the UK, or owned in excess of 15 properties, she would be unaffected. The UK government intends to exempt people owning 15 properties or more – a case of regressive taxation (the more you have, the less you pay). And what would you do if you had some expenditure you could put off – like replacing a window, or a cooker – to try and balance income and spending? You might well delay, even if the property deteriorated as a result.
The media tends to assume that landlords will put the rents up. If the tenants can’t afford to pay, what then? Not a happy prospect. The situation facing tenants who receive benefits is set to worsen, as Universal Credit is rolled out. The rationale for Universal Credit and other ‘simplifications’ is to cut the benefits bill by £12 billion, for example by limiting child tax credit to two children, and by cutting the benefits cap from £26,000 to £20,000 (£23,000 in London). In addition, benefits for working-age claimants will be frozen for at least four years.
In Wales overall, and definitely in West Wales, people cannot easily switch from benefits to well-paid work. There just isn’t enough well-paid work to go round. The average gross disposable household income, per head, in Wales in 2013 (the latest year with published figures) was just £15,413, over 12% less than the UK average.
Maybe the uninhabited, deteriorating homes in Wales will be snapped up, without tax worries, by the super-rich and the residents of foreign tax havens.
Is that what we really want to happen?
*The rules on tax relief are explained clearly in ‘Squeeze on buy to let’ by David Whiscombe, http://www.taxation.co.uk/taxation/Articles/2015/09/01/333612/squeeze-buy-let. ‘Buy-to-let tax changes – how they affect you’ from MTM Property, December 8th 2015, gives worked examples – http://www.mtmproperty.co.uk/buy-to-let-tax-changes-how-they-affect-you