Navigating Tax Challenges and Market Trends in London Real Estate: Insights from Patrick Bullick

In this episode of the London Property Podcast, host Farnaz Fazaipour talks with Patrick Bullick from Stanley Property, London, about the current state of the London real estate market. They discuss several key issues:

1. Market Trends: Despite challenges, Patrick notes an increase in transactions due to landlords exiting the market because of unfavorable tax policies, particularly those affecting private landlords with mortgages.

2. Impact of Tax Policies: Patrick explains how changes in tax regulations, such as the inability to offset mortgage interest against income, have driven many landlords out of the market. This has led to a drop in supply and a rise in rental prices.

3. Future Predictions: The conversation covers predictions for the future, including potential impacts of a Labour government and upcoming legislation like the Renters Reform Bill. Patrick expresses concerns about these changes further driving landlords out and increasing rental prices.

4. Non-Dom Tax Status: They also discuss the implications of changes to the non-dom tax status, which have already led some investors to withdraw from the market.

5. Solutions and Alternatives: Farnaz and Patrick touch on potential solutions, such as encouraging institutional investment in rental properties and adjusting tax policies to stimulate market activity and investment.

Patrick emphasizes the need for lower taxes to create a free-flowing market, while Farnaz highlights the importance of professionally managed rental investments. They conclude by discussing the broader economic implications and the potential for property values to rise in the long term.

Tune in for a comprehensive overview of the current real estate climate in London and insightful predictions for its future.

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Transcript

Speaker 1  0:01  
Welcome to the London property podcast, your go to source for navigating the complex and ever changing London real estate market. Our digital marketplace provides informative and educational content from industry leaders. Through podcasts and videos. We cover various aspects of the real estate experience, including buying and selling finance, law, tax construction, design, and more. Join us as we delve into the latest trends and developments in the market and gain valuable insights from our panel of experts.

Farnaz Fazaipour  0:33  
Hello, and welcome to London property, the home of super prime. I'm your host Farnaz Fazaipour. And today we're delighted to invite Patrick Bullock back to the show. Welcome back.

Unknown Speaker  0:43  
Hi, Farnaz. Good to see you again.

Farnaz Fazaipour  0:44  
And, Patrick. For those listeners who hadn't seen you before on the show. Just give us a quick summary of what area of the market you specialise in.

Speaker 2  0:55  
Okay, well look at my have a small firm, Stanley property, London, I've run it for years, a lot of our clients are landlords who've been in the market for a long period of time. But of course we do do the sales out of the back of that landlord portfolio and other sales too.

Farnaz Fazaipour  1:10  
Okay. And what would you say the markets been like for you the past 12 months?

Speaker 2  1:15  
Well, the weird thing is we've actually been busier than transactionally than we have been in some years before. And I think the reason for that is because a lot of our landlords out of our portfolio are exiting the market, they have found that all the taxes for private landlords have gone against them, they now have to pay their income tax before paying the interest on their mortgages. So if they've got a mortgage, they are having to get out of the market because they can't afford it anymore. It's not really so much the fact that interest rates have risen, it's more which they have, it's more the fact that they can't offset it against the income before tax, which is preventing them to run it like a normal business. So they're exiting in droves are private landlords with mortgages. We've also got overseas landlords quite a few. And they look around the world they think why on earth am I hear investors in the UK, I've had no gain on my asset value in the last eight 910 years in prime central London, which is the case there has been zero gain. In fact, it's gone down in the last couple of years with the interest rate hikes. So they're looking at it, their capital gains tax is benchmarked to 2015. So they actually don't have any capital gains tax. And they decided that they're going to take that cash element in their property and put it off in some other investment elsewhere, that's going to get them a better return. Personally, I think there could be an element of mistake in that, because having had no gain in the last 10 years, those taxes that cause the extra taxes that caused the prices to go sideways. I mean by that the elevated stamp duty for Prime central London property, the capital gains tax at 28% rather than 20% on other assets. Now it's come down to 24% in the last budget, but fundamentally, it's been quite a difference between property and other assets. Those taxes have now worked through in the pricing, keeping them level until the interest rate hikes. And then they've sort of sagged further since the interest rate rate hikes. So you could argue that the prices in the next five to 10 years might escalate quite quickly, as they have done, I think every decade since 1953, I did some research 1953. If you took 10 years later, for any year from 1953 to 2003. And when 10 years after that, the prime central enterprises had doubled or more. So if we get that back again, people may regret having come out of the market.

Farnaz Fazaipour  3:45  
And also, just to add to that point, I think that some of the hikes that we've had over the last 1015 years have been a bit unnatural, because of the benefit of overseas people buying in London, that there have been a rush from them to buy. So the demand hasn't really been normal domestic demand, but it's been influenced by this other layer, people coming off a plane saying, Oh my God, I've got to buy something in London because of x, y and Zed. And then I think that's also where the correction is coming in.

Speaker 2  4:19  
I agree with historically that was absolutely the case. We have clients with half a dozen properties here in London, bought from overseas, and up until 2015 When they were exempted from capital gains tax when they sold and that created a really artificial draw for capital into the UK and London in particular. There were virtually no other countries that had that exemption from capital gains tax. The French certainly didn't the Spanish didn't. The Italians did for a bit, you know, but there were but on the whole, if you invested in the European property from outs outside Europe, when you exited there would be an exit tax. So we'd be equalised in that sense and that equalisation, has taken away the extra draw of London over other jurisdictions. So we've suffered that. And now, I think it's a more level playing field, perhaps a more natural market. In that sense, I still think that having high stamp duty and high CGT is unnatural, because it makes people hang on to the asset for longer than they might. One of the interesting things when labour get in, which they inevitably will, is they're talking about putting CGT or they actually they're not talking about it, but the likelihood is that they'll put CGT, up in line with income tax. My direct observation is that if the CGT is higher, people do not do the transaction to exit and therefore, if they're not doing the transaction, the tax isn't payable. And so we don't actually the Treasury don't gain any more income. That way, it's just a silly silly way of doing it, what they need to do is lower the taxes on the exit from property, lower the taxes on the way in, get the flow going. And with sustained flow of property, we'll find that prices don't go up at the same pace as they perhaps do or aren't artificially sustained. And that would be better for most people getting onto the market. All this nonsense that the Tories talk about, and labour talking about about, you know, mortgage relief, you know, 5% mortgages underwritten by the taxpayer. For first time buyers just don't need any of that artificial nonsense. All that does lie in the pockets of the big developers, the big house builders, who in the meantime, are land banking, their property is waiting for the prices to eke them on to the market says the same sustain the prices.

Farnaz Fazaipour  6:39  
So I'm going to read into that the answer to my next question, which is, which is your prediction of what's to come is that you know, we are going to have a bit more of a stable market, and things are going to increase naturally.

Speaker 2  6:54  
So one of the things that might happen with Labour coming in is the renters revenge bill, as I call it, it's was known as the renters reform bill, which fell before the end of the last parliament and didn't get through that you can be damn sure that the civil servants behind that are just going to bring it up with all of the other bits that Michael Gove chopped off the edges that were, you know, terrible bits of legislation, they'll all be back on there. And Anjali Marina, who's in charge of these things are going to be in charge of these things, supposedly, you know, that it will come on steroids as a piece of legislation. So I actually am not convinced that that I think that I am convinced that that's going to be a further problem for landlords, more landlords will exit the market, rental prices, as a consequence will go up helping no one. So that's a problem. I also think that Labour will bring in all sorts of other taxes, which will not actually generate the growth that they want to create. I mean, we all want growth, we all want the income and extra taxes that come from growth. But I don't think that any of the policies that I've seen, will do that. And whilst the Tories are in disarray, they won't be able to oppose it. So I do feel that we're going to have a difficult time in property. But I go back to the historical thing, which may or may not be the case going forward is that actually under Labour governments because people don't want to invest in business, they do have a tendency to invest in property as a safe as houses type approach. And if you look back at Labour governments, the inflation in property value has been greater under Labour governments than under Tory governments. So it could be that would be a factor as well. But I'm thinking specifically about prime central London, where the prices have gone sideways for eight years down in the last couple, I see that we're at a point where the asset value could go up quite quite quickly. And in the meantime, the rental returns are quite high for those who are in the market, because that's because interest rates are higher, but more because of the shortage of supply on

Farnaz Fazaipour  9:02  
the subject of the rental market. So with these landlords exiting, what do you feel is the future of the rental market? What's going to replace the stock that we're losing? What's going to happen to the rental market in prime central London?

Speaker 2  9:16  
Yeah, well, just to get my griping about George Osborne, who was probably our worst Chancellor's, I think he was the one who brought in the fact that you could no longer offset the interest on a mortgage against the income before tax, driving private landlords out of the market. I think on the basis that the big developers and the big development companies had managed to lobby very much. Government only listens to big companies managed to lobby that they were going to be able to do a lot of bills to rent, which would fill that market. Well of course, they haven't been brought forward the supply in the same way. So we've got a tightening so I see that prices with undulations will continue to rise on the rental market. I don't see the supply side there at the moment. And we've got landlords, some of UK based landlords who have held the property for a long period of time, and don't have the 2015 benchmarking that the overseas landlords have. So if you bought certainly something in 1997, and you've seen a big escalation in your rental VA, in your value over asset, and they have, and you can't feel sorry for them for that. But if you've got a capital gains tax bill to pay, and on the other hand, you've got a decent income coming in, and you haven't got a mortgage to pay, then that's actually quite a nice asset to get an income in as you get older. And I've got a number of older clients who are in that situation and holding on to the asset. I think one of the interesting things will be how quickly will the Labour Party bring in an increased capital gains tax, if they do, and if they trail it and say, Well, we're going to bring it in, in six months time, nine months time, a year's time, that would probably be the clever thing to do from the Treasury's point of view, then a whole raft of people would sell up, whilst CGT was still at 24%, or whatever it is, when Labour's come in straight away, they might raise it to 28. Again, in the knowledge that it's going to go up to 40%, they will get out. So that could bring in money to the Treasury. I'm not suggesting it is a good idea. But that's could raise more capital for the Treasury. But I think the principle of putting up capital gains tax to the same as as income taxes is wrongheaded, because it's doesn't elicit investment. So we've got a real issue, particularly in central London, with with with supply side, and I don't see it being resolved until we build on the Greenbelt. Well, I

Farnaz Fazaipour  11:41  
mean, I think that I think that the most of the bill to rent supplies are actually in zone to an outside, because you know, it's just not possible not to have 200 units built in Kensington, although I've got my eye on. But but the thing is that, you know, what needs to happen is you need to get genuine rental investors interested in coming back to supply the proper portfolios. So you encourage them to buy in bulk to buy together, have a minimum hold period, so that, you know, they're providing stock that is professionally managed. I mean, this was, supposedly, the intention of the government when they introduced all these taxes, you know, going back 10 years, is to try and normalise the market. And one of the things they wanted to do was to get rid of the mom and pop landlords to have institutional landlords a bit like the German model, where you know, people can be a tenant for the rest of their life if they wish, because if that landlord decides to sell their 200 units, they'll sell it to the next landlord who holds 200 units. So that's, that's the theory. But in order for you and I to actually then go to rental investors and say, look, we've got a solution for you. We know you've been penalised on your own. But if you group together, and we buy 120 units, all within a one mile radius of each other, your management will be easy. You can let the properties out, you don't need to do anything, you just sit back and take dividends. And that is supposed to come with the institutional benefits.

Speaker 2  13:12  
That's the theory. That's the theory and I completely get the theory but the problem was that they put the the mucked up the market first by withdrawing the the ability for the private landlord to be in the market by not allowing them to offset the interest against the income. So you can as a landlord, as you know, with if you're holding it in the company name, you can still borrow in the usual businesslike way, the interest against thing and that's perfectly good, valid, but the problem is by taking it away from the private landlords, before having the actual solution of the supply side, they've ruined the market in the meantime. And personally, I have to say, whilst I understand the principle of having big landlords who do things well and openings to a high standard, as you point out, the practicality of building in central London is not there. And actually, my favourite landlords and our nicest clients are the mom and pop landlord. They're the ones who actually care about the tenant. And don't put the rent up every year by inflation. I've got landlords, lovely old ladies, landlords say, oh, no, I can't be charged with tenants anymore. Just let them be. Let them be. Oh, no, it's far too much. They're young. Let them be, you know, and we don't put much more heart

Farnaz Fazaipour  14:28  
and soul into it. Much more action. ICER Yeah. And the other thing is that, you know, as you say, to solve the problem first before giving the stairs Yeah, they should have also said okay, if you're genuine rental investor, you've been in the market for X number of years and you intend to carry on providing rental stock, we will give you the opportunity to reincorporate into into a company without having to.

Speaker 2  14:54  
They could have they could have done that. They haven't. Yeah, I have to say I'm not One I'm hearing what you're saying. And I'm hearing the the the sort of ethos behind it and the ideas. But this is a big CELT government interfering in the market, trying to change the way people do things. Fundamentally, if you it all comes back to tax tax, the tax tail wag the investment dog, that's one of my favourite old phrases. And the fact is, if you give, and it's proven by the fact that, you know, people are pulling out because they can't get the tax offset. What I'm trying to say is that if you need to lower the taxes around property and make it easy for people stop trying to manipulate the market, this is constant attempt to manipulate the market. The best way to make a market free flowing is to make it transactionally easy. If you make a transactionally easy market, the better flow just be better. All round.

Farnaz Fazaipour  15:55  
How about non Dom's? Are you hearing anything? I mean, obviously there's market chatter amongst everybody about the non DOM changes. You know, interestingly, one of my first conversations with a non DOM was panic panic, and we've got to go that. And I said, but didn't your non DOM status ran out five years ago? Yes, yes. How does that affect you? But there's a lot of people just reacting. But have you seen actually any non DOM related transactions?

Speaker 2  16:27  
Yes, literally within a week or so of this new status being suggested. And in fact, of course, now that it's clear that they were going to when they're going to get even tighter on non dorms, I, we had a fellow pull out of a purchase on something so straight away that was just like that. So yes, it has had an effect. But probably more fundamentally, I know a shrink, who works at the very, very high end of the market with a lot of non Dom's. And her point is that actually all her clients have or are leaving the country. And it's not even so much I didn't think about the non DOM bit. Albeit, I think that's important to give people the status to be able to work here without taxing them on their own. But I did work and live here that taxing one, although overseas income, I just think that's unfair. But it drives those people away, but just about everything else, that this government that we're in now, or just exiting, and labour are suggesting, will drive a wave further investment. I mean, what was Rishi doing, raising corporation tax from 19% to 25%. Now, I know that within the Treasury, there can catch out a few businesses who have not realised this was coming and suddenly had to pay 25% rather than 19%. I have that from personal experience. But but that disincentivizes new people to invest. You know, the latest announcement in the labour manifesto is that they're going to add another 1% onto the stamp duty for non residents buying in the UK. So that means that for central London that, you know, we're talking about 1011 15 16% stamp duty, again, a complete disincentive for the inward investment. And we mustn't think of it as Oh, those foreigners buying property, Baba Baba. But the reality of those foreigners buying property are people who are coming to invest in the country, to lead a business to set up a business to work within the country, they're a good thing. And we need to spend money on spend money on services and, and generate wealth. These people have been driven away.

Farnaz Fazaipour  18:45  
And the thing is that everybody always says, Well, we're just getting aligned with the rest of the world and with all the other markets and the stamp duty. And it's like, yes, but the rest of the world, also not as expensive as living in London. So on top of all those things that we're paying, they also cost so much more to do all the other things in London that you know, you've got to find that there is that too, they couldn't be coming for the sunshine.

Speaker 2  19:09  
Well, we have got sunshine today. But actually, on that point, you made a good point, because actually, it's very interesting that Ireland have just had to be enforced by Institute of International pressure to put their corporation tax up from 12 and a half percent to 15%, which is sort of now the internationally acceptable, lowest figure, but the most of Europe are at 25%. And so and we are just aligning us and despite Brexit we're aligning ourselves with Europe why we shouldn't be doing the opposite and going in the direction of Ireland and making our corporation tax 15%. I mean, if you're someone wishing to invest from overseas and within into the European market, you are not going to come to London, where you have to pay 25% corporation tax if you can go to Dublin where they speak English and only charge you 15 percent. Actually, Ireland has problems with housing as well, and shortages and cost as Germany, as does I mean, I think but France is about anyone it doesn't really. But, you know, the we are not the only place that suffers from a shortage of rental stock a shortage of supply on the on the property side. I mean, the Germans are doing not about it at the moment. And it's become a real issue for them, too. Yeah.

Farnaz Fazaipour  20:29  
Well, it's always really, really interesting having you on the show. That is not surely I could go on, you can go on and I can go right on with you. But what we're gonna do is definitely have you back after we've had the results of the elections. And I think in our next autumn market update interviews. So I just wanted to thank you for coming again and taking time out of your day to be with us. Thank you, Patrick. All right. Thank

Speaker 1  20:49  
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