Last year we revealed an inept and dangerous landlord tax avoidance scheme promoted by Property118 and Cotswold Barristers. They responded with a weird campaign of denial, threats and abuse. HMRC then started to investigate, but Property118 didn’t tell their clients. HMRC’s conclusion? Property118 had unlawfully failed to notify HMRC they were promoting a tax avoidance scheme. Property118 and Cotswold Barristers’ response? Telling their clients this is a normal procedure for “innovative tax arrangements” and nothing to worry about.
UPDATE 16 February 2024: Property118 have published a defence of their position. Per their usual practice, the article doesn’t contain a single reference to legislation, just a series of irrelevant quotes from HMRC manuals. Competent tax advisers always start with the legislation. HMRC guidance can sometimes be of assistance, but it’s not the law, and legally and practically cannot be relied upon. What you certainly can’t do is try to reach your desired result by citing HMRC guidance as if it’s legislation.
UPDATE 11 July 2024: Property118 are appealing against HMRC’s two DOTAS notifications, expect to have to appeal against discovery assessments, and are asking their clients to make donations to fund their appeals. Property118 aren’t telling their clients what their KC has said about their prospects of prevailing – we expect those prospects are very poor. And on 18 July 2024, HMRC issued a stop notice.
Property118 run a popular landlord website and sell a series of incompetent tax avoidance schemes. Nobody at Property118 has any tax expertise, and they rely heavily on a peculiar barristers chambers (“Cotswold Barristers”) who also appear to have no tax expertise.
We published a report on Property118 back in September saying that their scheme didn’t work and, worse, could default landlords’ mortgages. UK Finance, the mortgage lenders’ industry body, agreed.
We subsequently discovered an even worse element to Property118’s scheme that involved throwing lots of money around in a circle and claiming it created a big tax saving – generating a total of £500k+ in “fees” to a YouTuber who then extensively promoted Property118 without revealing his financial interest.1We are shocked to find unethical behaviour by YouTubers, particularly in the landlord real estate world. And then we went through Property118 client files and found a series of serious errors, as well as evidence that Cotswold Barristers was just “rubber-stamping” standard form advice without giving it any independent thought.
Property118’s initial response
Most of the tax avoidance scheme promoters we’ve reported on simply refuse to comment, and hope that if they stay silent then everything will work out.2It generally doesn’t.
Property118’s response was very different.
- They responded aggressively to our requests for comment, and seemed angry that we wouldn’t accept a recorded Zoom call instead of correspondence.
- They then invited me for a drink.
- Next, they hired a tax KC to provide an opinion that their scheme worked. More conventional types would have hired a KC who says any old avoidance scheme works. Property118 instead hired a reputable KC, but asked her to advise on largely irrelevant questions instead of the ones that mattered. In particular: was the mortgage defaulted? Was this a tax avoidance scheme that should have been disclosed to HMRC under the “DOTAS” disclosure rules? Did anti-avoidance rules apply? What did Property118’s ineptly drafted documents actually do? None of this was covered.
- They instructed a law firm to send us a summary of the KC’s opinion, demand we retract our report, say we weren’t permitted to publish the summary, and threaten to sue us for libel. We published the opinion and our analysis of it. We weren’t sued.
- The law firm involved didn’t realise what they’d gotten themselves into; soon after we responded, either Property118 sacked the law firm for being sensible, or the law firm sacked Property118 for being bonkers (we don’t know which it was) .
- They then made a series of weird, conspiratorial personal attacks on me, complete with spooky AI generated pictures. They accused me of being unqualified, and said that the many other advisers critical of Property118 were acting out of jealousy for not having thought of these brilliant ideas themselves.
- Property118 then referred me to the Solicitors Regulation Authority for being mean to them. I’ve heard nothing further about this – I’d hope the SRA see the referral as an obviously vexatious abuse of the regulatory process to retaliate against a critic.
- And finally there were a succession of supposed technical responses to our reports, none of which actually engaged with the substance of what we had said. The peak of this was an article by Mark Smith of Cotswold Barristers claiming that DOTAS didn’t apply (since deleted; this is an archived version), which would be disappointing if handed in by a work experience student.
- Then, at some point in November 2023, Property118 went silent, and deleted their main technical response.
Why did they go silent? Because HMRC had started to act.
HMRC investigates historic incorporation relief claims
On 16 November 2023, HMRC announced that they’d started to investigate incorporation relief claims from as far back as 2017/18.3Because, at the time, that was the furthest HMRC could go back. It’s a kind of triage, first attacking the oldest periods, and then (when they’re done and have time) moving onto the newer ones. The approach is absolutely rational for HMRC, but has the considerable disadvantage for taxpayers that it can be years before your avoidance scheme is challenged. The answer is: don’t do avoidance schemes.. “Incorporation relief” is a tax relief that Property118 relied upon to move landlords’ properties into the structure without capital gains tax. However they got the details badly wrong.
Here’s the key part of a letter which HMRC sent to taxpayers:
It’s the third bullet here which kills the Property118 scheme. Property118 create a director loan through a very peculiar circular arrangement. This means that some capital gains tax will always be due, as CGT will be charged on the proportion of the sale consideration that isn’t shares.4It’s very clear in this HMRC example. From the client files we’ve reviewed, it seems Property118 did not appreciate this, and told their clients there would be no capital gains tax at all.5Our analysis goes further, and says that there are several good reasons to believe the Property118 scheme is completely disqualified from incorporation relief. We expect HMRC will take these points, in the fullness of time, but for now is applying the much easier calculation point, given that it’s just arithmetic.
HMRC concludes it’s a notifiable avoidance scheme
It was always reasonably clear that Property118’s schemes should have been disclosed to HMRC under DOTAS – the rules requiring disclosure of tax avoidance schemes. Property118’s denials of this revealed only that they and Cotswold Barristers had a very poor understanding of the rules. Ray McCann, who when at HMRC led the launch of DOTAS, described their responses as “hopelessly wrong“.
HMRC clearly agreed. They sent a formal notice to Property118, saying HMRC had reasonable grounds to suspect that Property118’s incorporation structures, and its circular funding structure, were notifiable under DOTAS. Property118 then had 30 days to try to satisfy HMRC that the arrangements were not in fact notifiable. Property118 failed to do that and, as a consequence, HMRC issued Property118 with two tax avoidance “scheme reference numbers“. 6As an aside, there is a rather odd paragraph in the Finance Act 2021 legislation that created the new notice procedure. Subsection 311(9) says: “The allocation of a reference number to arrangements or proposed arrangements is not to be regarded as constituting an indication by HMRC that the arrangements could as a matter of law result in the obtaining by any person of a tax advantage”. Of course the intention is to stop promoters using SRNs as badges of approval from HMRC, but quite what the legal effect is of the subsection, we have no idea. Possibly it has none; possibly it would assist in fraud proceedings against dishonest promoters who did try to use SRNs as promotional material?
The rules then require Property118 to notify their client of the scheme names and reference numbers and provide this form7The version of the Regulations on legislation.gov.uk is unfortunately out of date; however the subsequent amendments aren’t material to the scenario discussed here.
How did Property118 explain this to their clients?
This all created a bit of a problem for Property118. Having been adamant that they weren’t selling a tax avoidance scheme, and that they got on splendidly with HMRC, they now have to send to clients a somewhat scary form that starts like this:
Property118 and Cotswold Barristers should have clearly explained what had happened, and what it means for their client. Instead they decided to mislead their clients with an email which manages not to mention the terms “avoidance” or “DOTAS”:
What is an SRN? What is the required action? Why did this happen? Cotswold Barristers don’t say. We’ve uploaded a full copy of the email here.
“You may have to complete form AAG4” is exceptionally unhelpful. Cotswold Barristers should be saying to their clients who used the schemes for past years that they will have to submit this form.
Instead, Cotswold Barristers provide reassurance which is comforting, sympathetic, and completely wrong:
No, the intention of DOTAS is not to enable HMRC to “comprehensively examine innovative tax arrangements”. It’s to enable HMRC to discover tax avoidance schemes as soon as they’re used, so it can decide whether to challenge them and/or ask the Government to enact legislation closing any loopholes. 8DOTAS also means HMRC can, after issuing the SRNs, use its new powers to require Property118 to provide further information about their scheme, including documents and names of clients. We expect this will happen soon, if it hasn’t already This is well known to all practitioners, and was restated when DOTAS was amended in 2021 to enable SRNs to be issued to rogue promoters:
Anyone reading this will realise the truth: that it’s now likely that Property118’s clients will be the subject of HMRC enquiries, and face large tax liabilities, plus interest and potentially penalties.
It’s sweet that Property118 are appealing HMRC’s decision that the “substantial incorporation structure” is disclosable (good luck with that), but that suggests even they can’t defend the circular “capital account restructure”.9It looks like at some point they changed their mind, and decided to appeal that too; quite hard to see what the basis for this will be.
So why did Cotswold Barristers and Property118 provide that those empty, sympathetic and wrong words of reassurance?
In other circumstances we’d say it’s deliberate deception, but we believe Cotswold Barristers and Property118 are simply unqualified and unable to advise properly on tax.
But whether it’s fraud or haplessness, the question is whether a barrister is permitted to act in this way. That is something we’ll be returning to soon.
Thanks to everyone who contributed to the original Property118 article, particularly those who were happy to be credited by name (when they knew Property118’s reputation for bullying and abuse).
“This is fine” cartoon © KC Green, and used with his kind permission.
- 1We are shocked to find unethical behaviour by YouTubers, particularly in the landlord real estate world.
- 2It generally doesn’t.
- 3Because, at the time, that was the furthest HMRC could go back. It’s a kind of triage, first attacking the oldest periods, and then (when they’re done and have time) moving onto the newer ones. The approach is absolutely rational for HMRC, but has the considerable disadvantage for taxpayers that it can be years before your avoidance scheme is challenged. The answer is: don’t do avoidance schemes.
- 4It’s very clear in this HMRC example.
- 5Our analysis goes further, and says that there are several good reasons to believe the Property118 scheme is completely disqualified from incorporation relief. We expect HMRC will take these points, in the fullness of time, but for now is applying the much easier calculation point, given that it’s just arithmetic.
- 6As an aside, there is a rather odd paragraph in the Finance Act 2021 legislation that created the new notice procedure. Subsection 311(9) says: “The allocation of a reference number to arrangements or proposed arrangements is not to be regarded as constituting an indication by HMRC that the arrangements could as a matter of law result in the obtaining by any person of a tax advantage”. Of course the intention is to stop promoters using SRNs as badges of approval from HMRC, but quite what the legal effect is of the subsection, we have no idea. Possibly it has none; possibly it would assist in fraud proceedings against dishonest promoters who did try to use SRNs as promotional material?
- 7The version of the Regulations on legislation.gov.uk is unfortunately out of date; however the subsequent amendments aren’t material to the scenario discussed here.
- 8DOTAS also means HMRC can, after issuing the SRNs, use its new powers to require Property118 to provide further information about their scheme, including documents and names of clients. We expect this will happen soon, if it hasn’t already
- 9It looks like at some point they changed their mind, and decided to appeal that too; quite hard to see what the basis for this will be.
54 responses to “Property118: more denial from tax avoiders who’ve been caught”
Is there an update on the P118 situation Dan?
there is not – HMRC are progressing things at their usual pace. Check back in a year!
Still at it?
https://www.property118.com/ebook/?
Apologies it this message appears twice but I don’t think the original posted
I wanted to see what you thoughts of the discretionary Trusts element of the Property 118.
I understand that holding freezer shares within a discretionary trust is a fairly common practice within FIC’s, however I cant see how Property 118 can state the freezer shares have next to no value despite the underlying assets of the freezer shares being worth hundreds of thousands of pounds?
Yes, the problem is that when serious people create FICs, they issue shares that will have value once growth goes beyond a certain hurdle. This lets them say that the shares have no value today (it’s contestable, but not mad).
P118 issue shares that will have value once the company’s assets grow by just £1. They then claim these shares have no value today. I wrote to the offering to buy some for £100 – clearly over-paying, yet oddly they refused. We know why: the shares do in fact have considerable value today. And this is a point HMRC takes.
So this is not a good approach.
well, exactly. I offered to pay P118 £100 for some of these shares, which is surely a fantastic deal given they’re valueless. They didn’t take me up on it. Wonder why?
You say this as if it makes you seem clever, but instead you have made their point for them. The shares are only worth what someone will pay for them and you have shown that value to be £100, so they are right. Would you offer £500,000 or £1,000,000 for them? Just try, and see what they say. I bet they would bite your arm off. If your answer is “No, I would not offer that much” then you have demonstrated that their value is low. Go on, I dare you, try making a sizeable offer for the growth shares and then post the reply here, but you won’t because you know they are right and you are wrong and you don’t have the guts to prove it.
the claim is that the shares are worth zero. I offered P118 £100. They didn’t take me up.
The argument that the shares are valueless is a non-starter. They have the possibility of future growth, and no downside. It’s not hard to calculate an expected value based upon historic trends, and it ain’t zero. Serious advisers don’t create structures like this. They add a “hurdle” – a level of future growth beyond which the shares start to have value. P118 didn’t do this, because nobody involved had any tax experience or expertise. Total amateurs.
“They add a “hurdle” – a level of future growth beyond which the shares start to have value. P118 didn’t do this, because nobody involved had any tax experience or expertise. Total amateurs.”
In any case, you have still proven their point that the shares cannot be worth much more than zero, because you are not prepared to offer a high figure.
I double dare you – make them a serious six figure offer, if you think the shares should be worth a lot more. I bet you don’t though, because you’re all mouth.
What are your thoughts on the discretionary trust element of the Property 118 scheme?
I know having a discretionary trust within a family investment company arrangement is fairly standard.
Whilst I understand the concept of placing freezer shares within a discretionary trust as a method of mitigating IHT. I cant see how property 118 can argue the freezer shares in the discretionary trust have next to no value despite the underlying assets being worth hundreds of thousands?
James Fraser, the reply button isn’t working.
No, properties aren’t leaving/disappearing the market.
What you are describing is short term disruption. Unfortunate, but the rental market should never have got to this place (leveraged BTL artificially driving up demand).
Supply will revert back as the properties aren’t disappearing. They are being sold to owner occupiers (reducing rental demand) or other landlords (rental supply unaffected).
Your point about shares is (again) confusing property management with leveraged property speculation (you don’t get tax deductibility to acquire other assets like art, shares etc).
I’ll leave it at that. Have a good weekend.
Dear Dan,
I would like to express my gratitude for the valuable work you are currently undertaking. I am curious to know your thoughts on the potential benefits that could arise if the term “Accountant” were subject to regulation similar to that of “Solicitor.”
Furthermore, I am interested in any updates regarding the report you submitted to the ICAEW regarding an Accountant.
A Fellow Tax Professional
I did lots of due diligence and visited various experts regarding incorporation relief before going with property118 who basically guaranteed I would qualify and would be covered by the barristers liability insurance. I was already happy I qualified after carefully considering HMRC v Ramsay [2013] but wanted a ‘professional’ to actually check and do it for me. Other ‘professionals’ had previously said get a non-statutory clearance first but others confirmed this isn’t possible. My incorporation was straightforward and I refinanced with limited company mortgages. But I did do the capital account restructure and was assured this wasn’t avoidance as I had already paid tax on this parcel of money. If HMRC subsequently say the restructure wasn’t valid then I would lose the directors loan account. If they say the restructure means the incorporation relief fails then my bill would be hundreds of thousands of pounds and I’ll probably lose my business. This seems unfair as I did my best to be careful and have not knowingly avoided tax. What view are HMRC likely to take if I have been the victim of bad or even fraudulent advice if it turns out property118 are wrong in the advice they give?
You are responsible for your own tax regardless of what your advisers said. If they get it wrong then your recourse is to sue your advisers.
I would suggest you urgently obtain independent advice. The “this isn’t avoidance as you’ve already paid tax” is a completely made-up argument that has no support in any legislation or caselaw. Property118 and their peculiar associated barristers chambers are not tax experts and simply don’t understand the rules.
I don’t really accept your argument. I know HMRC consider you as liable even if you have used an agent but this isn’t as simple as you make out, people have different opinions. The tax laws are complicated and not many of the professionals understand it so how are the people that seek advice supposed to know better than those who advised them. I know you say all your panel was in consensus but they either didn’t understand the complexity themselves, are yes people, or are answering based on ideology and would be better off writing for the Guardian. Maybe this is why HMRC has such a low prosecution rates for tax avoidance. Unless you are in the top 10 of wealthy blatant tax cheats then I think you are safe. It’s scare mongering to say landlords who incorporated fall under this category.
Almost everything you say is wrong:
– you are liable even if you use an agent. Anyone who has a different opinion has never read the tax legislation. You are free to think this is fair or unfair. It is, nevertheless, the law.
– tax laws are complicated. So hire someone who has tax qualifications. Don’t hire a firm made up of salespeople and a random barrister who until recently was a criminal lawyer.
– feel free to try to find tax experts who disagree with any of the statements here. You won’t.
– HMRC’s “prosecution rate for tax avoidance” is zero, because tax avoidance is not a crime. On the other hand, HMRC’s rate of successfully challenging tax avoidance in the courts approaches 100%.
– nobody says landlords who incorporated are avoiding tax. Landlords who use weird complicated structures to incorporate, involving LLPs or trusts, may well have avoided tax.
– now HMRC has the DOTAS scheme number it will have the complete list of P118 clients. They can expect enquiries in due course.
However is giving you this information is not a reliable source.
I said I know HMRC consider you as liable even if you use an agent and then you say I’m wrong and you are liable even if you use an agent. So technically you are wrong to say I’m wrong because we agreed on this. Do you see how easy it is? Yes I do think it’s unfair if you pay someone who is supposed to know more than you for HMRC to pop up years later and say it’s wrong even though they have signed off on over 20 of these structures previously. If they had a problem they should have said then rather than let more and more people do it in a rather trap-esqe manner. Property118 work with accountants and not just the legal side of things. Of course there is the tax side. Tax laws are complicated but previously you have implied anybody would be able to give you a straight answer about incorporation. That’s not true and I went to 5 tax professionals and even the HMRC helpline and they all said slightly different things along a spectrum from can be done to can’t be done. If HMRC’s own helpline gets it wrong then it doesn’t bode well and of course it changes following case law like in Ramsay [2013] where surprise surprise people had different opinions on what you could and couldn’t do which is why it went to the upper tribunal. Nobody agrees on any of this stuff and it’s disingenuous to suggest it’s straightforward. You now say landlords who incorporated using complicated structures may have avoided tax. In your comments to the opinion of Felicity Cullen KC you suggested the only people who used property118 did so for tax reasons therefore making it tax avoidance. I used them but refinanced so therefore it wasn’t to avoid section24 tax. So not everybody who used the scheme did it for tax avoidance. There is an absolute hatred of landlords from certain sections of society who don’t stop to think that actually many people would be worse off if you destroy the private rented sector BEFORE we have built more social housing and the people waging this campaign say it’s due to a love of tenants but actually they are driven by hatred just like the conclusions in The Road to Wigan Pier by Orwell. Socialists aren’t driven by a love of the poor but rather by a hatred of the rich. Once you realise that you see why organisations like Shelter push policies that will ultimately hurt the most vulnerable in society. They operate out of hatred for landlords and tenants are collateral damage.
You will go really wrong on the tax if you keep thinking about the politics and peoples’ motives. Tax law doesn’t care. You will end up ripped off by charlatans who appear politically sympathetic but in fact have as much tax knowledge as my pet hamster.
Jonathan, for some reason I did not see a “reply” link to click on but anyway the numbers are far from insignificant in some places. Again from Generation Rent ” ………..We looked at data published by Zoopla on the number of listings and the average rents in each region, on 15 July 2019 and 16 July 2021. In Wales, listings have fallen by 53%, in the same time that rents increased by 26%. In South West England, listings have fallen by 49% and rents are up 23%. In Scotland listings are down by 28% and rents up by 24%………..”
While writing I may as well mention something else impacting rentals but not to do with tax. Another unwelcome consequence of inference with the Private Rental Sector is with student accommodation. Students typically want to rent from October til May. So, they pay rent for eight or nine months. Then those properties are rented to tourists in the summer in most of our cities. It suits everyone involved BUT it is to be due outlawed meaning the students would be forced to pay rent for the year even if not living there in the summer months. Mr Gove is supposed to be tweaking this bit and might have already done so but I expect that that is a reason for the delay in the Renters Reform Bill.
So you honestly think mortgaged landlords selling up impacts housing supply (excluding temporary disruption over a year or two?).
I assume when a landlord takes out a mortgage a fairy gets its wings and if they sell the property disappears? Without a leveraged landlord these properties wouldnt exist?
Utter nonsense. Leveraged BTL shouldn’t be allowed to exist. It is a completely parasitic activity. Rental demand would be perfectly well served by non/low leveraged landlords without tax advantages creating artificial demand.
It’s got nothing to do with “manufacturing houses”. Supplying accommodation doesnt imply building new houses. Even existing assets and businesses have an optimal capital structure and an optimal risk-adjusted level leverage. That applies to a corner shop, a billion dollar power plant, an S&P 500 business, a PE fund, a hairdresser. Optimal. Leverage. You could try a Udemy course in Corporate Finance 101….
If you want to treat property differently you need a defensible reason to do so.
Providing accommodation is an asset- heavy business. Landlords have substantive obligations. Have a look at a typical AST. Pages and pages of real actual contractual obligations. Utterly nothing like owning a portfolio of index tracker fund ETfs.
Why should the nature of the legal person- corporate or natural person- have any bearing on the issue of deductibility.
Personal BTL interest is deductible in the US, Japan, Australia, France etc etc. in some of these places, it can even offset personal income.
I am in no way defending these tax avoidance schemes. And i am supportive of the investigation work done by TPA.
I do however have a big issue with the policy aim of denying interest deductions to personal BTL landlords.
Perhaps when the tenant calls me to fix a broken boiler i can plead “it’s just a passive investment, HMRC says i can’t and shouldn’t help you”.
You aren’t supplying anything. You are just overlevered. Another (better capitalised) landlord or owner occupier will come and replace you.
You aren’t supplying anything. You are just overlevered. Another (better capitalised) landlord or owner occupier will come and replace you.
Of course i am supplying something. Read the AST! What planet are you on? Read the AST. I am supplying accommodation, and taking on a lot of positive obligations and potential liabilities.
I didn’t day overlevered. I said optimal leverage. Please inform yourself, take this course, run a financial model, learn some basics:
https://www.udemy.com/course/crash-course-on-cost-of-capital-and-capital-structuring/
Every single business takes on leverage, whether directly or indirectly. Do you have any clue about how modern economies work? How corporates, sovereigns, businesses finance their balance sheet??
A sole trader running a coffee shop or taxi business, has a need for an asset. He borrows to buy it. The interest is deductible. This is Corporate Finance 101.
“Not supplying anything” is a low IQ argument.m
S24 policy is inconsistent and incoherent.
I’m happy to hollow out my next AST to reflect a truly “just a passive investor, not a manager of any thing, take or leave it” risk profile. Come to think of it, this is a great idea. The passive investor landlord’s AST.
That is such a poor argument.
-individuals running a cafe, taxi or any other non-property business can deduct interest.
-corporate landlord entities can deduct interest
But individual landlords cannot deduct interest. This is purely arbitrary and inconsistent. I get the policy but it’s dumb and unfair policy.
“Better capitalized”: so you like some leverage but not too much? It seems obvious you have never run a financial model in your life. Do you know what the required breakeven rent increase needed would be for a s24 scenario for just a 1% increase in interest rate, on a conservative LVR? You clearly do not.
So to sum up your incoherence:
-some leverage is ok, but not too much
-corporate debt is good
-but people debt, is bad
-unless you buy a coffee machine or taxi with it
Wow, such principled policy making there. A winning formula
Jonathan you are confusing supply with availability. For example there are thousands of empty properties. They are unavailable for long term tenants either because the owner does not need the money from rent or the owner prefers to have them as holiday lets (short term). Private landlords are not the only ones issuing Section 21 Notices either Social housing providers are too https://www.lgcplus.com/finance/tenants-served-no-fault-evictions-to-pay-debt-to-council-07-02-2024/.
It does not matter if you approve or not but the facts are that the Private Rental Sector is responsible for providing homes for about 20% of the population over all with that percentage rising to 46% for those aged 25 to 34 .That we have a housing crisis is not in dispute but how we solve it is. Lots of people cannot house themselves and there is not enough social housing hence the birth of the PRS. Time will tell if Section 24 has much of an effect on availability.
So you and the other leverage landlords who are impacted by section 24 are not going to sell up, but either leave the property empty or knock it down are you?
Excellent strawman argumenting John.
The leverage historically used was completely inappropriate which is why rates going up and the change in tax law has destroyed the leveraged PRS model. Perhaps you could do a course on business risk?
You both appear to be confusing property management with the leveraged ownership of property which is not the same thing. The other examples you give are value creating businesses, not asset speculation (HMRC agree hence separate section in Tax Return).
I agree the costs incurred by your handyman activities (boiler example you used) should be tax deductible.
You can use leverage for BTL. Just use your Excel skills to figure out how much the property should be worth using the new tax/legislation regime, and a conservative view on interest rates.
Anyway the market will be the ultimate decider (you can already see rents coming down) as they are determined by Tenant affordability, not landlord costs.
Have a good weekend.
Quality riposte Dan, I had a look on the P118 site and the ‘article’ they printed is devoid of verbs but accepted as gospel by what can best be described as a Cult. Are all those responses real? Or is there a ‘collaboration’ being enacted to provide comfort and reassurance to others who may actually be currently sweating in February? Time will tell.
Calling you Evil etc (one of the comments) for stating a professional opinion backed by legislation is nothing short of “I WANT this NOT to be a Tax avoidance Scheme so it ISN’T a Tax Avoidance Scheme” denial.
If any of these supposedly intelligent individuals still can’t see that they have ‘probably’ been sold a house of soggy cards, they might as well get in touch with me because I have a great new investment scheme I’m putting together where they can purchase a tall tower in Westminster with a big clock face on it. It’s very cheap and no stamp duty or CGT will be payable…………probably…………maybe…………….I’ll just check with HMRC………….Yeah, it’s all sound, nothing at all to worry about.
All the best.
I agree, it’s a sadly common human reaction
“Are all those responses real?”
I think that there might be a selection bias. Some of the comments are selected to be retained on that website, and the rest are deleted.
You ought to explain why these schemes started in the first place, but you’re strangely disinterested in the ludicrous tax rates of 100%, (or sometimes infinite when taxed on a loss), that landlords suffer under Section 24. Maybe you should bring that to the public’s attention more, given how much you care about ‘fair’ tax policy? Might help them understand the devastating results of the policy too.
I have written a little about section 24 here: https://taxpolicy.org.uk/2023/09/15/section24/
However it isn’t obvious to me why landlords should receive even a 20% credit for their interest costs. If I borrow to buy a share portfolio, I’m carrying on a business of investing in shares, but I don’t get to deduct any of the interest. Why should a landlord’s rental business be different?
I don’t think you can compare this at all. For a start, if you buy shares in an ISA you get 100% tax relief and tax advantages in a SIPP too.
If you borrowed money to start a car rental business or a hotel you would be able to offset your borrowing costs.
If the government wants to change the rules, it should be going forward, not retrospectively going back when landlords have spent years to build up property investments, many to help provide them a pension longer term. I also think that if HMRC have decided this is a Tax Avoidance Scheme why didn’t they say that in the first place?
Plenty of people buy shares outside an ISA; there are no tax benefits, and loan interest isn’t deductible. It’s not obvious why a landlord’s interest should be deductible.
Trading businesses are different – and you can deduct interest cost for a property trading business, just not for a property investment business.
This isn’t retrospection. Many or even most tax changes impact stuff people have done previously… that’s inevitable.
Owning properties isnt the same as property management. It isnt a business and shouldnt get any tax deductability (even 20%) for using leverage.
Landlords also dont add to supply (unless they are developers/builders) and supply isnt affected if they are sold (either an owner occupier buys or sold to another landlord).
HMO numbers are not big enough to have any material affect.
yes, it’s often claimed that s24 results in higher rents, but from an economic perspective I don’t see why that should be – the price is determined by supply/demand of rental properties. If s24 caused properties to leave the rental market then the claim would be true, but I’m not aware of any evidence of that.
If a landlord sells a property, it is either sold to an owner occupier (reducing renter pool) or to another landlord.l (no impact).
HMOs do not make up a large enough proportion of housing stock for owner occupiers deconverting to make any real difference.
Well if you google “margin cash cost of production” you’ll see there isn’t one cost for supply, Dan. Perhaps stick to the law, or take a course in microeconomics 101?
Interest for BTL is deductible in many countries. Similarly for share investments.
Interest incurred by a property management company is deductible.
The entire PE and LBO industry, indeed capitalism generally, revolves around deductible interest cost.
Are you saying that 10+ pages of Landlord obligations “must do”, in a typical AST, are irrelevant? Last time i checked a landlord has many many many positive obligations to do things in respect of a property. Totally unlike a set and forget share investment. Even in cases where delegated to an agent or manager, the landlord is principally responsible. In cases where not delegated, well…you have no case.
Stick to the law, Dan.
“There isn’t one cost for supply” is word salad.
In the UK tax system, individuals are never entitled to a tax deduction for interest costs unless they’re carrying on trade. There is just one exception: landlords, who receive a 20% credit. It’s not clear to me why that is.
(A rental property business is almost never a trade. The extent of obligations is not relevant.)
Acquiring property via debt is not a trade (unlike construction, development or property management).
Supply of property is not affected one iota by the change in tax regime. You simply sell to someone who becomes an owner occupier or to another landlord who buys at a price that makes the numbers work (ie the existing landlord makes a loss).
The leveraged landlord model is quite correctly being stamped out…and no houses are disappearing.
Section 24 has caused a significant number of properties to be switched over from long term tenancies to holiday lets. Figures show that 2,426 holiday let companies were set up in 2022. Generation Rent published a report in May 2022 called Your holiday, our home? Understanding the impact of holiday homes on the private rented sector. They say “……England’s housing supply lost nearly 11,000 properties to the second home and holiday let sector between 2021 and 2022, according to our new analysis of local tax data……”
I don’t usually concern myself with rights and wrongs because I prefer to deal with cause and effect. Or how incentives impact behaviour. The landscape of the private rental section is changing and that is undoubtedly deliberate. If another sector becomes more fruitful then the money invested in property will be moved elsewhere. I think that if the government wanted to attract the investment into more social housing it could do worse that to offer hypothecated bonds or an ISA for just that purpose.
Those numbers are insignificant vs c.27m houses in the UK. However, I agree that tax advantages for holiday lets should be eliminated. 20% deductibility for leveraged BTL should also go.
It absolutely isn’t a word salad and any economist would understand what i said. Supply, as in supply and demand. But i will spell it out for the layperson: there is no single cost for the economic supply of a widget. Producers have varying all-in costs of production. Some cheaper some more expensive. The equilibrium or marginal clearing price is that at which the cost of supply meets demand.
Same goes for existing let properties: some have higher short run marginal costs, some have lower costs. Every landlord’s cost of capital is different.
To say interest rates have no bearing whatsoever on the cost of the “supply” of rental accommodation is just wrong. All costs are relevant and included in the cost of supplying a property.
You aren’t manufacturing houses.
Your overleveraged capital structure has no bearing on supply or pricing power (otherwise put the rent up to a million pounds per week).
If you throw in the towel, the house doesn’t disappear and supply isn’t affected.
Seriously? You don’t have any evidence of properties leaving the rental market? That must be why tenants and their charities are wailing about their landlords selling up and letting agents have no stock at all. It must be some other reason that rents are rocketing and councils say they can’t cope with the sudden rise in evictions. I’m selling out of 26 properties. The tenants tell me they have nowhere to go, but I’m sure they’re lying… right?
You don’t think shortening supply pushes up the price, no? You don’t think extreme taxation causes people to sell and withdraw the rental supply? And you don’t think landlords are selling at the fastest rate in history with 300,000 properties leaving the rental market since 2016? Interesting. You’ve clearly got your finger on the pulse of the PRS!
A share business has no responsibility between hitting the ‘buy’ and ‘sell’ buttons. Share trading benefits no one but the owner of those shares. It requires no input whatsoever. Try running a daily property portfolio that consumes hours and carries responsibility for people’s lives. It is a service to society and a necessary one: try asking a tenant or a council housing team how important it is to them! Then ask how contract workers can move around the country without a ready supply of rental housing (and how tax has shrunk that supply so that they now can’t so easily). Shares do nothing and require nothing. They are not remotely compatible.
This has just appeared on the P118 website. Difficult to know where to begin with such utter drivel!
https://www.property118.com/unravelling-the-dotas-controversy-so-whats-next/
Thanks – updated above. It’s notable how they never cite legislation, they just google guidance. A sign of someone who never trained as a tax lawyer?
From 118 in 2022
https://www.property118.com/journalistic-support-required/?
But he got a lifetime achievement award ! https://www.youtube.com/watch?v=primrJUGJvU
It’s a minor point, but someone putting MBA after their name in an email signature should be an immediate red flag.
It’s great that you’re doing this work to expose these so-called ‘tax avoidance’ schemes. However, isn’t it time that tax avoidance schemes were outlawed altogether? People on lower incomes have to pay their tax, so why should those with considerably more resources ‘avoid’ tax? Those with less, plus small businesses should get much better tax breaks.