Thursday, July 2, 2009

Throwing a tax bomb into the BTL foxhole

Falling tax revenues are about to balloon our budget deficit

"One idea, floated this week by George Osborne, is to end the tax deductability of interest payments on debt". I'd be quaking in my boots if I were a BTL'er

Posted by flashman @ 08:14 AM (1675 views)
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16 thoughts on “Throwing a tax bomb into the BTL foxhole

  • “the massive deficits that threaten to cripple the economy in the coming years – is a consequence not of incontinent spending but of a sudden collapse in tax revenues”

    – Wrong. Yes, tax revenues, are collapsing, but the spending has become totally incontinent.

    Public sector spending has lost all touch with the concept of achieving value for money. Today I hear of a plan to re-arrange the pavements and one way system at Piccadilly Circus, at a cost of £10 million.

    How on earth can a bit of tarmac, some white paint, the odd sign and a truck or two of paving slabs cost £10m?

    No-one ever queries these numbers now. No-one stops to say ‘hang on, why does this have to cost so much?’

    The argument has to move on now from how much is spent to HOW it is spent – there is stupid talk of acheiving efficiencies, by wet-behind-the-ears idiots like George Osborne, who havn’t got a clue how to achieve savings, by virtue of never having worked in a profit making business.

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  • stillthinking says:

    IT budgets must be worst value. However, no need to discuss them…..

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  • Uncle Tom…. Yes, how many of our Government have actually run “a profit making business”?! yet they are given free reign over Billions and billons of OUR money. Oh for another Welsh great in Michael Heseltine!

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  • I don’t think George Osbournes CV makes him any less able to trouble-shoot. If we look at Gordon Brown, you’d have thought as Mr Prudent chancellor he’d have been well qualified to deal with financial issues… recall the balls-ups he’s made.

    I think GO makes a good point on tax deductability of debt interest. It would make debt more costly which cannot be a bad thing.

    The point they’ve got to get across (the Conservatives) is that nanny-state waste-of-money schemes are the first for the chop.

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  • letthemfall says:

    I’ve looked up a couple of public spending figures to see whether there is any merit in the accusations of profligacy by the Govt. The US, not noted for it’s devotion to public spending, had a figure of about 36% of GDP in 2006, compared to about 41% for the UK. Certainly larger here, but not extravagantly so, I would suggest, when you consider the services this country offers to its citizens. I believe the figures for European countries are around 46%, but haven’t time to track any down. Our spending is at around 43% this year.

    Talking about IT budgets, many of these projects are failures to some degree, often carried out by private companies.

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  • If I wrote the headline, I’d have hesitated to emphasise falling tax receipts ahead of spending cuts (as per uncle tom’s comment). However, I didn’t really mean to cause a Tory/Labour debate. I don’t have much time for either of them.

    I was trying to relate the significance of interest deductibility to BTL’ers. Many of them have interest only mortgages. If they are not allowed to deduct this interest from their rental income, it would devastate the already marginal profitability of their business model.

    Here’s an example of what it would do to a heavily leveraged BTL’er (we’ll call him shitface):

    RENTAL INCOME 1200

    MORTGAGE INTEREST PAYMENTS 800

    OTHER COSTS 100

    At the moment they would pay tax on 300 pounds per month, based on the above. However under GO’s scheme (if they were not allowed to deduct interest), then they would pay tax on 1100 profit.

    * I might have got this a bit wrong because I don’t fully understand tax codes

    There is a fair chance that GO will get the opportunity to do this, so heavily leveraged BTL’ers might want to run for the exits now.

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  • I can’t see a Tory government bringing in such a change. Tory voters tend to be wealthier and own more property; certainly most BTLers would vote Tory. They’re hardly going to bite the hand of their core vote?

    Furthermore, tax relief of debt doesn’t just affect BTL. Ordinary businesses take out loans; some companies are up to their ears in debt (especially companies that were taken over by so-called private equity in the boom years). Dropping the tax-deductability of debt at the present time would be disastrous for such companies and disastrous for (un)employment. Perhaps they could introduce the change gradually.

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  • I think GOs idea is strong – and is totally understandable. If people had real cash (not a loan) and had a BTL, they would be taxed on the full income in Flashmans example. The system as it is presently drives you to take out the biggest loan possible. As a BTL investor, the likes of “Properdees-R-us” would advise you to get as many BTL houses as possible with as high a loan as possible. That’s all well and good in the one-way street world, but it incentivises high-risk to a gullible general public – as they are now all aware.

    As Drewster says – maybe a gradual and tapered relief that becomes fully effective in three years.

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  • mark wadsworth says:

    This whole ‘falling tax revenues’ is another complete and utter myth. The UK raised about £600 bn in tax pre-recession, let’s assume average tax rates about 50% (VAT plus income tax and NIC), if the economy £1,400 bn shrinks by 5%, then the economy contracts by £70 billion and tax revenues fall by £35 bn.

    Similarly, the entire welfare budget (excl. pensions) is in the order of £70 bn, even if this goes up by a quarter, that’s another £17 bn shortfall, so if the books had been balanced before (which they weren’t) and if the government weren’t going on a lunatic spending spree (which they are), we’d go from fiscal break even to a £52 bn deficit (or 3.5% deficit, slightly above Maastricht criteria, but nothing to worry about).

    In any event, George Osborne completely contradicts himself.

    See also what Uncle Tom says.

    As to deductibility of interest, if you think this through to the ultimate conclusion, it’s quite a good isea actually, it solves a lot of other problems as well.

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  • I think it’s kind of undemocratic to not allow a business to deduct its costs.

    The trouble we have though, is that spiraling house prices and its ba*tard child, the BTL craze, played a central role in the economic crash. Something therefore needs to be done. I’d have thought that limiting a BTL’ers debt to equity ratio would be a sensible move.
    If BTL’ers couldn’t comply with the new ratio (say 50% debt), then they should be forced to liquidate, within a reasonable time frame

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  • … Flashman, Drewster, Wadders:

    Maybe this rule should be for buy-to-let speculatives specifically? If you are PAYE or your largest pre-tax income is NOT obtained from property, then loan costs should NOT be deductable.

    This would target amateur BTLers.

    Not a tax expert, but seems the real objective.

    PS: Wadders: I’m not a Tory activist, but GO did refer to Inheritance Tax in his comments. The thrust of his comments is to de-risk. As you say, the more prudent savers are more money in banks for them to possibly fritter away. The answer – as you imply – is better bank control. ….. Which is after all what GO is also hinting he will do with BofE versus FSA as recently reported.

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  • “Talking about IT budgets, many of these projects are failures to some degree, often carried out by private companies.”

    This doesn’t count, the whole point being that the private company knew that it was paid for using public money and didn’t really give a sh!t.

    Are you beginnig to get it now, purely private would mean that if they didn’t deliver on time then they would not get paid and possibly sued. The consequences of failure in the public sector are … hang on .. nothing.

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  • letthemfall says:

    I rather think you don’t get it. Failure in the public sector has all sorts of serious consequences, especially for individuals with little money. All this prejudice against the public sector is just that. Private companies that perform badly for the public sector do get sued sometimes – not often enough no doubt. If private companies don’t care how they perform because they are paid by the public sector, that is a very poor recommendation for the private. Rather than carelessly slag off one section of the economy, provide some evidence and figures.

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  • mark wadsworth says:

    @ Flashman 10, of course it would be wrong to stop a business from deducting its costs. Which is why I am so heartily opposed to VAT, which is 17.5% of turnover minus certain input costs, but there is no deduction for salaries and wages (or interest, for that matter), so VAT is yet another tax on wages, and VAT can, for many businesses, more than wipe out its profits.

    @ Growler, that’s as maybe, but we know that the Tories go along with this whole idea that house prices have to go up at all costs. Heck knows how bad the bubble would have been had they still been in charge.

    @ LTF, I for one do not ‘carelessly slag off one section of the economy’, but it is beyond dispute that The State wastes at least a fifth of what it spends. State spending as % of GDP has gone up from 35% to nearly 50% in the last ten years, are the “services” we are getting half as good again as they were ten years ago? Nope – it all goes on the quangocracy.

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  • Actually it would be just not to deduct interest on debt on when it comes to BTL simply because do not put their own capital and they do not produce but to apply the same to a company employing people plus 50% tax on income in superdeveloped climate I think it is insane. In recession times you need low taxes but not for capital gains, an activity that does not create a lot of jobs.

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  • I suppose the real issue is what is going to happen when we do get the new Government.

    If there is enough public debate on re-instating banking rules, giving the BofE back the power taken away, revaluation of houses and implementation of CGT on property (as it is everywhere else in the real world) and new laws on LTV and salary multipliers – backed up by laws that say losses on house sales cannot be recovered from mortgagors – then we might stop most of the madness happenign again. To ask for anything more might well be great, but could be idealistic

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