Monday, May 17, 2010
The shoe is on the other foot
This is Money: Capital gains tax rise hits buy-to-let
'There should be further consultation with the industry before drastic changes are made. The law of unintended consequences should be considered here.'
It's funny how they assume that there might be "unintended consequences". Tax legislation has been in their favour for so long that they’ve got used to the government being on their side. They can’t imagine it any other way. However, all things must end and tax legislation will now seek to claw back some of the profits that were previously granted to them. The bailouts were designed to prop up the banks. House prices were propped up as a by-product of this strategy. The banks have now been considerably strengthened, so the props will be removed and consequently, these much loved creatures will be hung out to dry.
24 Comments
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1. flashman said...
If anyone doubts that the shoe is now on the other foot, read the comment below. I nicked it from a bloke on the forum who nicked it from LandlordZone. HPC’ers often imagine that landlords and BTL’ers are smug and secure. The truth is, that even before the CGT bombshell they were wringing their hands in despair…
“I shall also email my MP. But I am seriously considering putting my portfoliio up for sale. Now before this new Law takes place.
As you said, many people have property as their pension and this is the case with me. Paying this tax would simply mean I would gain very little in the way of capital gain after the tax is paid and become dependant on the State.
As it happens I have suffered like we all have, by falling values, so, in 2008, when it was nearly time for me to capitalise on my investments, the recession occured. I thought I would hang on for another 3 -5 years and hope for a change of Government which has happened, but not as I expected.
I sunk all of a legacy I was left by my parents into property 10 years ago, and built up a decent portfolio to help me through my old age. It is now worth half of what it was at the beginning of 2008. If I sell, I don't get enough to see me through the next 20 years. If I don't sell now and wait for values to go up, then I am hit by this new increase in CGT.
So, I am damned if I do and damned if I don't
Has anyone in Government thought of the result of this with regard to the housing shortage?
I don't think so! Many landlords will sell up in the next year, and there will be even less properties for rent, and an even greater housing shortage...now what kind of Policy is this????????”
2. 51ck-6-51x said...
A classic lobby quote
"""
David Salusbury, its [National Landlords Association] chairman, said: 'We are concerned that a tax increase of this nature will act as a barrier to further investment in residential property just at a time when there is an urgent need for more housing.
"""
BTL does little to increase national housing stock - OK there is a small effect where some uninhabitable properties end up becoming habitable, but the same could be achieved by other legislative changes, especially around section 6 (squatters rights).
3. letthemfall said...
Presumably this person never thought much of the old saw about eggs in one basket.
The final sentence is a good one - the mysterious case of the disappearing houses.
4. 51ck-6-51x said...
Flash - if many sell, prices fall and those of us who cannot afford to buy their own first home now will do.
Furthermore those landlords that actually add value will remain since they do not depend on there being a certainty of capital gain, but rather a stream of income.
The question in my mind, really, is why do you think you deserve to have 20 years of income (i.e. pension) from the capital gain from property transactions on top of an inheritance (which is a very lucky position to be in to start with - or did you make your parents their millions for them?). For a sound economy earnings result from productive activity - i.e. in this example the added value of exercising a dual want for transfer of property (i.e. both your letting and my renting or your sale and my purchase at a nominal that we both like) - so if your property is worth more to me now than it was to you when you bought it you make a capital gain and that's productive. (N.B.: You know that personally I am generally against taxation and state activity anyway, so my ideal is that such changes in taxation do not even occur!)
5. Bear Necessities said...
51ck-6-51x - Read flashman's comment more carefully. He is quoting someone else.
6. str 2007 said...
666
Apologies if I've misunderstood you, but Flashman is quoting a BTLer, not himself.
Flashman
Interesting to see this, but if this guy invested heavily 10 years ago and now has lost half his money, I'm not sure his figures add up.
For a start it implies he used the legacy as deposits (ie leveraged his investment) fair enough. But assuming he did that then he should have tripled or quadrupled his money during a period (2000 - 2010) when prices more than doubled.
Prices nationally maybe off 25% from peak but South East seems to be at least back to peak to me.
Also he'll only pay capital gains as a % of capital gains. And then only if he does sell. Why can't he live off the income of the rent ?
Maybe he's only just covering his mortgages on interest only at present.
Anyway if this guys in trouble having bought 10 years ago, he's either stpid or there must be very significant problems for thos going into BTL say 2003 onwards.
Nice to see you're still bearish on houseprices Flash.
7. 51ck-6-51x said...
STR 2007, Ah ha, no apology necessary - thank you, in fact; I should learn to read ;p
Flash - please redirect my musings, it still stands that this guy appears to expect the moon on a stick.
8. 51ck-6-51x said...
Not only what I said @ Monday, May 17, 2010 01:32PM, but he goes on to this, "The law of unintended consequences should be considered here" - is he serious?! How does one consider effects which one cannot consider? Taken to it's logical conclusion he is saying that the system (capitalism / the economy / politics) is too complex to foresee what will happen when a change is implemented, and as such we should not make changes - maybe he is right in the grand scheme, but it's not really a valid argument against a specific change.
9. flashman said...
666: I suppose an argument can be made that everything is productive. If that is the case then it just comes down to the relative productivity of an asset. I share your distaste for the distorting effects of taxation and in the case of btl, I think that the distortions caused by tax legislation have bent the housing market out of all proportion. It might be that btl is in some way productive but it is far less so than other more useful categories of productivity. I am therefore all for any change in tax legislation that brings something as important as housing back into kilter. There is also the consideration that if housing attracts less capital then other more useful areas of production will attract more. Of course if the government didn’t impose ridiculous legislation in the first place, then there would be nothing to correct
The btl scene must also eventually comply with a general law of the universe, which says that if someone or something makes gains without effort or talent, then it will one day be taken away from them with a vengeance
10. flashman said...
Hi str 2007: The latest unemployment forecasts are for between 2.8 and 2.9 million, so I remain bearish on house prices (I'll resist one of my correlation posts). I think the guy is saying that he has lost half his money because he is using a fantasy valuation for the top of the market and an overly miserable valuation for now. There is so much illogicality and delusion to pick on that it’s hard to know where to start but I think that he is fairly representative of BTL portfolio thinking. To me, the most interesting aspect of the whole thing is how miserable these people are when most HPC'ers though that they were feeling smug. He makes the point that he can’t afford to wait for prices to rise to sell his portfolio because of CGT. It hasn’t even occurred to him that house prices might sink AND he’ll be hit with higher CGT
11. gone-to-colombia said...
Never thought I'd approve of a tax, but CGT on second homes, that has to be good, and fair. Next, higher council tax on a second home.
12. 51ck-6-51x said...
Flash, There is one way to sort what is the most productive of activities from others and that is to have free markets - as you alluded to when you said, "There is also the consideration that if housing attracts less capital then other more useful areas of production will attract more" - this is why free markets are such desirable things.
As a good example of something that is usually not productive is theft, that is the forced transfer of property without negotiation or payment (does that sound like taxation too? Oh.)
Government and taxation exist, in theory, in order to protect the public interest by providing public goods, which I would consider a gracious act; however, as experience shows time and time again the deviation from this noble cause is quick and certain. Someone (I cannot recall whom) once said that government would work if all it's members were saints. I say, if we could provide government via a free market mechanism such that such deviations are minimised then we should certainly do so, if not we should attempt to steer towards an anarcho-capitalism which you also imply "Of course if the government didn’t impose ridiculous legislation in the first place, then there would be nothing to correct".
Aside - I certainly see BTL as a productive activity, renting certainly has advantages for the economy over owning due to the ease with which a tenant may relocate for a different job (some of this may well be due to other legislation however) - look at the U.S. now - there a huge numbers who are staying put in their home (with a mortgage) even though there are no job prospects in the vicinity. The problem is not BTL itself but rather the relative attractiveness of this activity produced by interference with the fundamentals.
13. 51ck-6-51x said...
G2C said, "Next, higher council tax on a second home."
- well, maybe, I would say pay for what you use would be the ideal - whether an empty house costs the local government more or less would need to be discovered.
14. 51ck-6-51x said...
Flash said, "It hasn’t even occurred to him that house prices might sink AND he’ll be hit with higher CGT"
... or even that prices might sink so much that the rate of CGT will be of no consequence to him since there'd be no gain to tax!
15. magnifico said...
I remember banging on about the need of a set of taxes, aimed at discouraging investors from getting into residential property, five or six years ago on this blog.
I have been demoralised by the complete lack of political will and have been infuriated by idiots on "Homes under the hammer" boasting a portfolios of tens of property purchased exclusively on 100% mortgages.
I thought the mini crash vindicated me but I believe the best is yet to come.
16. str 2007 said...
Flashman
With regard to BTLers not being smug it didn't take long to find this :-
''Originally Posted by hamptoncourt
I'm not sure the CGT hike will have much of an impact. Surely it will make landlords more likely to keep their properties for longer and just flush out the few that were planning on selling soon anyway. After all most are in this for the long term and the growth in value and rents over the next five to ten years will more than offset the extra tax. The losers at the housepricecrash website are getting over-excited IMO.''
OK not smug but that's more the impression I get.
666
Without planning for additional family properties BTLers have forced people into renting by pushing up prices based on their business model of interest only mortgages and profits gained mearely from price increases.
That, fundamentally cannot be right.
If the housing market was 'normal' then people can still move for a job, even if a house sale/purchase is involved.
The correct way IMO to deal with your point on Job relocation id for each town to have 'council owed' rental properties for such purposes to attract new workers. These groups of properties shouuld be set up as a fund in which local people could buy shares.
The same system could be used usedfor holiday destinations and holiday lets.
That way local inhabitants get to benefit from investing in their local property market..
IMO landlords use the 'satisfying a rental requirement' arguement to justify their actions when infact their actions create the requirement through forcing people out of home ownership through taking limited stock and increasing prices.
17. flashman said...
str 2007: I think that there will always be people whose comment on something like this amounts to nothing more than a football chant. I doubt the guy even has a btl portfolio.
I know several people who work for the large accountancy firms. They are doing a roaring trade advising clients on the implications of the proposed CGT increase. There is genuine fear and panic in the btl and art collector ranks. I think we have both commented that it is only the expectation of capital gains that makes btl attractive to these people. If that were the case why would you not liquidate while you have a chance? Come to think of it, why would you enter a market where the returns are crap and any capital gains will be taxed heavily?
18. titaniccaptain said...
Flashman......
Can you tell me where I can get some decent info on CGT with regards to gold sovereigns?
This is all I have come up with other than sites with VIs spurting the usual "buy your sovs here" mantra.
http://www.moneyweek.com/investments/precious-metals-and-gems/why-you-should-buy-british-gold-sovereigns-16088.aspx
19. flashman said...
Hi tc: I'll email you with some info. I don't want to get involved in any discussions about gold.
20. titaniccaptain said...
lol understood
21. peter rocker said...
@tc: This article might be interesting, but I am not giving tax advice! http://www.investorschronicle.co.uk/InvestmentGuides/Commodities/article/20100415/f77e47ea-47d9-11df-af40-00144f2af8e8/Sovereign-investing.jsp
22. titaniccaptain said...
Thanks Peter Rocker
23. 51ck-6-51x said...
str 2007 said, "...BTLers have forced people into renting by pushing up prices based on their business model..."
Much as before, it is not the BTL itself that has overdone this (i.e. gone beyond the demand for rental properties and squeezed potential purchasers into tenants ) it's the actions of legislation and taxation status that have made it an overly attractive activity, without such there would be a roughly optimal number (it would go slightly over and slightly under, of course - but it would not distort away totally as now).
I totally agree that "If the housing market was 'normal' then people can still move for a job, even if a house sale/purchase is involved." as it would take less a few weeks to market and complete (roughly the same as handing in notice to the landlord). However I do not agree with your idea about council owned properties for relocation purposes, it will not be the most efficient & productive way for a start and it would become less so as it would be almost certainly be gamed, furthermore it's not /really/ a public good - if it is causing a reduction in productivity we get the infamous "jobless recovery" or employers move to the people they want to recruit or simply pay their costs. Taking the holiday home example there are existing, working, private alternatives - one can rent a holiday home or buy a time-share, so why involve the state - if it's a good business idea locals can do this themselves anyway (sounds ok to me TBH).
(BTW I'm off now, so won't see a reply I'll try to remember to look tomorrow though.)
24. str 2007 said...
666
Yes I see what you're getting at.
When I said 'Council' I really meant privately funded by individual shares, but overseen by the council. (not council owned houses in th eold sense). I should have been clearer.
What I was getting at was making the investment in rental property (be it short term for business or holiday) available to all with lower risk. ie £50 shares and maybe even loans for purchase of said shares, so they can be a 20 year purchase as part of a pension, much like a house purchase, but a smaller bite.
Maybe it's just me but I see a singl;e BTL purchase as still (£200k average) a significant (possibly too big a purchase for a single person/family to take on. (IE a void period is an investment going wrong at about £800-£1000 per month that needs funding).
Where as a smaller bite of a larger pie, also with economy of scales thrown in maywell produce a beter and more importantly safer return for individuals if it was done properly on a national scale.
You still may not agree but hope that makes what I was trying to convey a little clearer.