Death of buy-to-let: landlords wake up to Osborne's 150pc tax

Richard Dyson in The Telegraph

Hundreds of thousands of landlords and their accountants are digesting the impact of George Osborne’s shock tax change unveiled in the summer Budget on July 8.

The tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020.

The change was unexpected, and the new regime is highly complex, so investors and their tax advisers are only now fully grasping its effects. Many investors remain unaware of the change, or underestimate its severity.

All higher-rate taxpayers who own buy‑to‑let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.

Those who are worst affected will see:

● the actual tax they pay on their investment rising twofold or more;

● the tax rate payable rising above 100pc, meaning that more than all of their profit is paid in tax;

● a degree of tax that pushes them into loss, making their investment financially unviable and forcing them to increase rents sharply – or sell.

Scroll down for a worked explanation of the changes.

What is also becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy‑to‑let, often alongside pensions and Isas, as a means to supplement their income.

The mechanism of Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

So very wealthy landlords who do not need mortgages are untouched.

• Comment: This Alice in Wonderland tax sets a new benchmark in financial absurdity

In effect, the Chancellor wants to tax landlords on their turnover rather than their profit, meaning that tax will be payable on nonexistent income. This explains why tax rates will, for some, exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.

As landlords absorb news of this shock tax attack, many have turned to online forums to vent their dismay. Some are writing to their MPs and directly to Mr Osborne.

More than 14,000 have signed an online petition calling for the tax to be withdrawn.

Other buy-to-let investors, though, remain unaware of the tax bombshell poised to wreak havoc on their finances. Accountants, mortgage lenders, brokers and other professionals are themselves still working through the ramifications.

Tina Riches, tax partner at accountancy and investment firm Smith & Williamson, said: “We are contacting all of our clients who have mortgaged property which they let, and we want to speak one-to-one with those worst affected. It is going to have a significant impact.”

Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.

So mortgage costs above 75pc of rental income will mean the buy‑to‑let investments become loss-making.

For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.

The investors worst affected are therefore likely to be those who have bought recently with large mortgages. Low-yielding properties, such as those in London and other parts of the South East, where rents are comparatively low relative to property prices, will also be exposed. That is because rental income is likely to be lower relative to investors’ mortgage costs.

“It will be very difficult for middle-income borrowers to get into buy‑to‑let in future,” Ms Riches said. “It won’t end overnight, but existing investors will sell and far fewer will buy. Buy‑to‑let may well waste away.

“The wider worry is that the Government can make such radical changes without any consultation. What other areas will come under attack?”

Connie Cheuk owns 5 Properties - Photographed at her home in Littlehampton. Photo: Philip Hollis

Read how Connie Cheuk (pictured above), a landlord with five properties, will see her tax bill rise by almost 40pc. She is even contemplating giving up her 18-year career as a teacher as a means of reducing the tax impact

Britain’s big mortgage banks are reluctant to comment and appear to want to downplay the impact, perhaps to reassure their shareholders. But a senior executive at a top-five buy‑to‑let lender admitted privately to Telegraph Money: “For a group of customers there is a challenge, a potential for their cashflow to turn negative. They will be loss-making. Overall, this move makes it substantially harder for investors to generate a net income from buy‑to‑let.”

Of the many landlords to contact us, several are considering selling. This would enable them to pay off mortgages and limit the tax damage. Others will evict tenants and refurbish properties so they can be re-let for more.

One landlord described how a property currently let to a single mother of four, who is on benefits, will “not wash its face” once the tax starts to bite. If he converted the property into two units he could increase the current rent to cover the tax. The council would have to rehouse the family, he said, “and there is already an acute shortage of housing in that area”.

Another landlord described a £110,000 property, on which there is a £68,000 mortgage, let to an elderly couple at “about two thirds of the going market rent”. It generates an annual £1,100 profit, which would fall to £370 after the tax change.

“The property needs a new boiler, which would wipe out profits for years,” the landlord said. “My options are to increase rent significantly, which the tenants can’t afford, or evict them and sell up, or convert the property into smaller units.

“The Chancellor doesn’t grasp the misery he’ll cause – or doesn’t care.”

When George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords.

It’s true that every mortgaged landlord who pays 40pc or 45pc tax will indeed pay much more under his proposals.

But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.

In fact, contrary to Mr Osborne’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.

At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.

In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

Here is a worked example assuming you, the landlord, pay 40pc tax.


NOW

Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.


2020

Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.

Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.

You will have to pay £5,000 tax in this scenario, so you make no profit at all.

People who buy expensive cars enjoy killing pedestrians

Bridget Christie in The Guardian

Illustration: Nishant Choksi for the Guardian

 

As a standup comedian, I have a heightened sense of other people’s behaviour. In a room of 500 people, I can sniff out the one checking their watch, yawning and stretching their arms above their head. There are a myriad ways an audience member can display their apathy towards you. One standup friend, Joe Wilkinson, saw a piece of chewing gum fall out of a man’s open, dribbling mouth while he was doing his best stuff. I’ve had a man in the front row order himself a takeaway.

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I think society is ruder than it used to be, and I’m not alone in thinking this. Paul Piff is an assistant professor in the department of psychology and social behaviour at the University of California. Last year, he wrote a paper titled Higher Social Class Predicts Increased Unethical Behaviour. In layman’s terms, what Prof Piff is saying is, rich people are more likely to behave like twats than poor people are.

Piff proved his suspicions in a number of ways, many of them involving the use of hidden cameras. One of his experiments, which he shared during an unintentionally hilarious TEDx talk, meant getting some of his mates to stand at pedestrian crossings and monitor which cars stopped and which didn’t. Normal cars (ie ones that look like their sole purpose is to transport people safely from A to B without exploding) stopped – which, incidentally, they were legally obliged to do. “Status cars”, such as 4x4s, convertibles, sports cars, chariots and the Diamond Jubilee State Coach, did not. Piff had proved, beyond any shadow of a doubt, that people who buy expensive cars enjoy killing pedestrians, which definitely qualifies as unethical behaviour.

Another of Piff’s films showed two young men playing a rigged game of Monopoly. One player was given an unfair advantage: more money, two dice, a crash course in Received Pronunciation, a massive throne to sit on, an ermine cloak and the Sovereign’s Orb. The behaviour of this player changed rapidly. He started playing in an incredibly annoying, obnoxious way.

The most fascinating part, for me, was that, even though he knew he was at an unfair advantage, the player still believed he had won the game through personal skill. I thought immediately of George Osborne cutting the maintenance grant for Monopoly players from low-income families, and how this meant that working-class kids would now always lose at Monopoly, so won’t even bother trying to play any more.

Piff believes that being wealthy can make people less ethical, more selfish and less compassionate. “The rich are way more likely to prioritise their own self-interests above the interests of other people,” he says. “It makes them more likely to exhibit characteristics that we would stereotypically associate with, say, assholes.” Yes, that’s right. There is a professor, called Piff, who used the word asshole in an academic study.

I’ve encountered a lot of assholes recently. And I have noticed, with alarmingly regularity, that when I call people out for, say, walking into the road in front of my car without looking because they were on their phone, I am verbally abused in return. The man who ordered his takeaway during my show seemed genuinely baffled as to why I even brought it up. He was hungry and needed to eat. What the hell was my problem?

We are living in an age of narcissistic entitlement, and I don’t think this is purely down to wealth or privilege. Technological advances, easy credit, bad parenting and pizza restaurants’ willingness to stock every conceivable topping has created a world in which everything is possible and available, where there is immediate and unlimited choice – except in the case of the Labour leadership, where our options have been severely limited.

In a recent documentary about the police, a female officer said she’d noticed a big change in young people’s behaviour, which she put down to bad parenting, a lack of discipline and contempt for authority figures. She said that because we don’t say “no” to our children, and instead use tantrum-averting language (“Well, I’d rather you didn’t punch me in the face repeatedly, darling, because it makes mummy upset”), young people don’t know how to respond to being reprimanded: they go into meltdown.

We interact with each other less and less. We shop online, communicate online, we watch bands and sunsets through our iPads and don’t care about the people standing behind us. We’re forgetting how to behave in the physical world. I don’t know how we address this. But a good place to start might be to call our children assholes when they’re being assholes. I’d also suggest arresting anyone who orders a takeaway during the punchline of a show.

Currency wars in emerging markets hammer global stocks

 Ben Chu in The Independent

Developing world devaluations have sent global stock markets into a funk and stoked fears of an intensifying global currency war.

In response to China’s surprise devaluation of the yuan last week, several emerging market economies have slashed the value of their own currencies to retain their competitiveness.

Kazakhstan’s tenge lost 24 per cent of its value against the dollar after the country’s central bank announced that it would allow the currency to float freely. Meanwhile, South Africa’s rand slid to its weakest level against the dollar in 14 years and Malaysia’s ringgit fell to its lowest level against the greenback in 17 years. Turkey’s lira and the Russian rouble also dropped.

This followed the decision by Vietnam on Wednesday to cut the value of the dong against the dollar by 1 per cent, the country’s third devaluation of the year. Since Beijing’s yuan devaluation last week, an index of 20 developing-nation exchange rates has been falling fast.

The ructions depressed the FTSE100, pushing the index down into technical “correction” territory, more than 10 per cent below its April peak. Year-to-date, the benchmark index of UK-listed shares, is down 2.9 per cent. The S&P 500 also quickly fell 1.2 per cent after trading opened in America, wiping out all of the US index’s gains made this year.

Last week, the People’s Bank of China caught markets napping by allowing the yuan to fall in value against the dollar by 4 per cent in two days. The perception that the world’s single biggest customer for raw materials is in economic difficulties has stoked fear over the prospects of big commodity producing economies like Kazakhstan, Russia, Brazil, South Africa and Malaysia. The slumping global oil price has also hammered investor confidence in the prospects of the big energy exporters.


“The appearance of China weakening its exchange rate to boost growth has added urgency for policymakers elsewhere to do what they can to grab more export revenue” said Koon Chow, of Union Bancaire Privée.

Many analysts expect further global devaluations if the US Federal Reserve, as expected, increases interest rates for the first time since the financial crisis later this year. “Emerging market currencies, in general, still have high devaluation risks” said analysts at CrossBorder Capital. Analysts predicted the likes of Egypt and Nigeria could be next to devalue their currencies.

Per Hammarlund, of Sweden’s SEB, said Kyrgyzstan, Turkmenistan and Tajikistan could allow their currencies to depreciate by between 10 and 20 per cent. “They simply don’t have much of a choice but to follow Russia and emerging markets more generally,” he said.

Capital has been flowing out of emerging markets at a rapid rate this year, as fears rise of a sharp slowdown in the former stars of the global economy. Over the past 13 months $1 trillion is estimated to have flowed out of the 19 largest emerging countries.
The International Monetary Fund expects global growth among emerging markets and developing economies to be just 4.2 per cent this year, the weakest output growth since 2009.

Nariman Behravesh, of IHS Global Insight, said emerging markets are arguably facing “the toughest environment since the Asia Crisis of the late 1990s” and predicted that they will drag on global growth into next year.

The Ashley Madison hack: What to do if you suspect your partner is having an affair

Following the hack of Ashley Madison, the dating site for extra-marital affairs, many people are looking to find out if their partner was signed up. So if you suspect your partner is cheating on you, should you confront them? Does revenge ever make you feel better? And can relationships survive an affair?

 Ammanda Major in The Independent

There are no two ways about it – affairs can be hugely painful. Feelings of shock, anger and resentment can quickly set in and knowing what to do about them can seem torturous. The mere thought that your partner may be attracted to someone else or actively involved with them is tough enough, but knowing what to say or do about it is usually tougher.Perhaps a starting point is to focus on what has made you suspicious. Do you have ‘facts’? Has someone said something to you? Has your partner become withdrawn or started making more of an effort with their appearance? Have things between you been difficult recently and you have noticed that they are talking more about a specific person, perhaps a friend or work colleague? Perhaps you are concerned about what they are up to online or have discovered unusual texts or emails. Any or all of these are likely to throw most people into panic.

Often, fears about affairs arise when there may be other problems. As a Relate counsellor, I see how family life stages like looking after young children, older children leaving home (or not leaving home), redundancy, ill health, becoming carers or extra work pressures can all wear down our resources and make us feel vulnerable and insecure. It is important to remember this, because any of them might lead to a partner being less attentive or available than before, but that does not mean they are having an affair.

 But what do you do if you still suspect something is going on? Firstly, try and get clear what it is you actually do suspect. Is it sex, an emotional attachment, a cyber relationship or a friendship? Do not be tempted to go down the route of bugging your partner’s devices or using similar methods to track their whereabouts. This is unhelpful, possibly criminal and very unlikely to assist you to recover what you most want, i.e your partner.

Whilst it is true that it is good to talk, beware of telling all your friends and family about your suspicions. Remember, the more people who become involved, take sides and offer often conflicting advice, the more difficult it may be to start thinking about what the two of you want to do, if and when it turns out there has been an affair. Confiding in a trusted friend or family member can be useful to help you get your thoughts straighter and work out how to best tackle your partner about your worries.

Secondly, decide if you actually want to raise it with your partner. It is probably fair to say that many relationships continue for years with the suspicion of an affair, with nothing ever being said. Long term though, this is often a really painful option with years of resentment and feelings of abandonment building up that eat into your confidence and self-esteem. But fearing confirmation of any suspicion is powerful and it is understandable that we may try to put concerns to one side for as long as possible.

Thirdly, if you decide to raise it, choose a good time. Don’t raise it in the middle of a row about something else or when one of you is about to go out. Try and make sure you will not be interrupted. Most importantly, try and stay calm and tell your partner exactly why you are worried. Give them a chance to explain themselves but be prepared for the answer. Usually, we are hoping for reassurance that will reduce our anxieties about being left for someone else and you may not get this. The reality of having a suspicion confirmed by a ‘confession’ may come as a relief for some people but for most, it’s devastating.

However much you ask for information, your partner may not give you what you want. They may deny it outright, or tell you ‘it’s just a friend’. Either way you may be left feeling the matter is unresolved. Once it has been raised though there is often the overwhelming urge to come back to it time and time again, usually with the same outcome. Getting to this point is exhausting for both of you so it could be useful to get some professional help to try to find a way forward – whether that’s together or apart. Ultimately, if you keep suspecting and they keep denying, you may need support to help you make decisions about what to do next.

It is not uncommon for people to consider some form of revenge when they feel they have been betrayed by their partner. Some people might think it is a good idea to have an affair themselves for example, to damage the person’s property, or to name and shame the guilty party. While this may make them feel better at the time, in the long term not only do they end up having to deal with the hurt if it turns out there was an affair, but also the consequences of the revenge. If you find yourself wanting to seek revenge and even more so if you have not got all your facts straight, take a step back to recognise this is because of the level of hurt you are feeling at the time.

People tend to be pessimistic about whether their relationship can recover – indeed, Relate’s 2014 The Way We Are Now survey of over 5000 people found that only 33% thought a relationship could survive an affair. However, this was in stark contrast to the optimism of our counsellors, 94% of whom believed that a relationship can survive and potentially thrive after a partner has cheated.

So the good news is that many relationships recover from suspicions or confirmation of an affair. Despite the pain and anxiety, some couples say that an affair has given them the opportunity to examine all sorts of relationship issues and they feel stronger as a partnership afterwards. But this usually comes after a lot of soul searching and acknowledgement that no one has made your partner have an affair and that by doing so they have turned your world upside down.
Ammanda Major is a Relate Counsellor and Sex Therapist