Buy-to-let investors need to do their sums

Philip Hammond © Getty Images
Philip Hammond: more maths for everyone

I’m not going to complain about the Budget. It wasn’t imaginative, interesting or particularly funny, and we won’t be able to look back on it in a decade as representing any kind of turning point in the miserable state of the UK’s public finances.

But the chancellor did do something if which I approve. There will be, said Philip Hammond, “more maths for everyone”.

His £177m plan to encourage schools to work harder on numeracy includes some extra funding to push Singapore-style maths teaching into primary schools; a bung of £600 for schools for every additional pupil nudged into taking A-levels in maths, further maths or core maths; and a call for more applications for new specialist maths schools in England.

This is all excellent news. For years now, various groups in the UK have been lobbying heavily for cash for personal-finance education in schools, on the basis that if kids understand how mortgages, savings accounts, credit card bills and basic investment products work, they are more likely to be savers and less likely to be ripped off by the UK’s particularly rapacious financial industry.

I’ve never been mad for the idea. There’s plenty of research to show that if people don’t need this kind of information immediately, it goes in one ear and straight out the other. No waiting around. So teaching schoolchildren about mortgages is a waste of everyone’s time – particularly when they will be 50 before they can afford one.

It is better to produce “just in time” personal-finance education as required (this is what the government’s Pension Wise service is supposed to do for the over-50s, for example) and to teach children maths really, really well. This will give them the tools to help themselves financially as and when they need to, and to interpret the financial events happening around them.

Given the gloomy economic backdrop, it’s also worth noting that a good understanding of maths is helpful in another way – it can alert us to the bits of the Budget that pretend to be about real numbers, but are nothing of the sort.

With this in mind, if the Office for Budget Responsibility (OBR) forecasts that UK GDP will grow at a rate of 1.3% in 2020, what rate will GDP actually be growing at in 2020? The answer is maybe a lot more than 1.3%, or maybe rather less. But almost certainly not 1.3%.

Like all forecasters, the OBR has an almost unblemished history of wrongness. There is no mathematical formula that can take into account what will happen to inflation, oil prices, immigration, productivity, technology and that most fickle of all things, human behaviour, over a six-month period, let alone a three-year one.

Better to ignore these numbers and focus on the ones you know will affect you, and you know you can calculate correctly – after your Singapore-style maths class, at least.

With this in mind, let’s do a few quick sums on the Budget – both to see how we might be affected immediately and to get a sense of the signals that Hammond is sending us about the future. As you will see, a bit of maths can often tell us who the government regards as a plus or a minus.

First, if a house is listed for sale at £300,000, how much more will it cost a buy-to-let investor to get their hands on the keys than it costs a first-time buyer?

The answer is simple. The first-time buyer pays £300,000 (their stamp duty has just been abolished). The buy-to-let investor pays £314,000 (theirs hasn’t been abolished, and they have to pay the additional 3% second-home surcharge on top). This gives you a sense of who the chancellor approves of and who he does not (or who he wants to approve of him, perhaps). But the next two sums well and truly make this point.

If a buy-to-let investor bought a house for £200,000 in 2007 through a company structure (something lots of landlords are doing now to avoid the slashing of tax relief on mortgage interest) and sells it this year for £300,000, how much tax on the capital gain will he pay?

The answer is not straightforward. Until now, assets bought inside a company have been eligible for indexation (your gains are adjusted for inflation) based on figures provided by HM Revenue & Customs. You take the number given by them that works for your timeframe – 0.313 in this case, according to tables on the HMRC website – and multiply it by the price you paid.

Then take that sum (£62,600) away from your profit to get your taxable amount (£34,000). Finally, multiply that by 19% (the corporation tax rate). The answer is £7,106.

Hold that thought while you calculate the following. If a landlord bought a buy-to-let property now for the same £200,000 price and also sold it in a decade for £300,000 how much tax on the capital gain would they be likely to pay?

The answer to this is easier. The gain multiplied by the tax rate – which is set to fall to 17%. So £17,000, which is nearly £10,000 more than they would have paid on a similar investment gain a decade earlier. There you have it. A few sums that tell you the current government thinks buy-to-let isn’t all that.

If you were thinking of becoming a landlord, maybe don’t. If you are already, maybe read the runes the way Hammond wants you to and sell your rental property to your tenant (you’ll get good price – all the money they were saving for stamp duty can now be offered to you instead).

There’s a useful sum available as a hint for those with houses that are “substantially unfurnished” and unused as well. You own a six-bedroom holiday home by the sea in Padstow that you are too busy to visit or furnish, what with the demands your international speaking schedule puts on you. How much has Hammond probably just added to your cost of ownership?

The answer to this is £3,371.02, the level of Band H council tax in Padstow – which can now be doubled for empty homes. It couldn’t be much clearer could it? In Hammond’s world, houses are for owners to live in full time and that’s that. Something to bear in mind if you are still convinced that you can’t go wrong with property.

There are many more fun numbers to play around with in the Budget. No doubt FT columnist-turned maths teacher Lucy Kellaway is already planning her next lesson around them.

Given the gloomy economic backdrop, it’s also worth noting that a good understanding of maths is helpful in another way – it can alert us to the bits of the Budget that pretend to be about real numbers, but are nothing of the sort.

With this in mind, if the Office for Budget Responsibility (OBR) forecasts that UK GDP will grow at a rate of 1.3% in 2020, what rate will GDP actually be growing at in 2020? The answer is maybe a lot more than 1.3%, or maybe rather less. But almost certainly not 1.3%.

Like all forecasters, the OBR has an almost unblemished history of wrongness. There is no mathematical formula that can take into account what will happen to inflation, oil prices, immigration, productivity, technology and that most fickle of all things, human behaviour, over a six-month period, let alone a three-year one.

Better to ignore these numbers and focus on the ones you know will affect you, and you know you can calculate correctly – after your Singapore-style maths class, at least.

  • mark oneill

    More maths for everyone: Very good article.
    However, If I sell for £300,000 after buying for £200,000 I’m left with a profit of £100,000. Subtracting £62600 from my profit leaves £37400 not £34000 as stated. (19% corporation tax on £37400 is £7106 so correct answer given but points lost on showing the working out) A-

  • justine

    Are the last four paragraphs repeated on purpose? Looks identical to the ones above.

  • Andrew Crow

    ” There’s plenty of research to show that if people don’t need this kind of information immediately, it goes in one ear and straight out the other. ”

    Merryn, doesn’t sum up the whole of our education system and core curriculum?

    “It is better to produce “just in time” personal-finance education as required (this is what the government’s Pension Wise service is supposed to do for the over-50s, for example) ”

    Sorry, Merryn I have to disagree. ‘More wisdom is required to profit from good advice than to give it.’ A person seeking advice for the first time in an unfamiliar field is like a lamb going to slaughter. So much financial advice is pure bollox, and I’m afraid that will from time to time apply to even your advice 🙂

  • Andrew Crow

    As a side issue (but fundamental) we do need to distinguish between simple numerical competence that is the business of Arithmetic, and Mathematics which is a whole different ball game, and in my recollection is predominantly written in Greek alphabet characters.

    Similar confusion by education ministers and others over the decades results in a confusion of the terms ‘education’ and ‘training’.

    At bottom therefore I suggest more comprehensive teaching of language might be a good start so we all know what we are talking and writing about.

  • Tom Bayley

    On the contrary, I think it would be pretty interesting to learn about money in school. Not mortgages perhaps, but what money actually is (a token of trust), the history of it, how it is created and the way that plays out to fund productive activity, as well as non-productive asset inflation and rent-seeking. I’ve found that kids really do want to know how the world works, if they’re not brainwashed into thinking it’s beyond them. Money has become fundamental to almost every kind of human activity – almost every ill and every cure seems to have a figure attached to it – and yet for most people it remains a deep mystery. Perhaps those who know how it works prefer it that way.

  • Neil

    What an ivory tower you live in… along with the Chancellor. If tenants had the deposit to buy, they would. Landlord’s only want to buy below market property, so a first time buyer will always win that deal as they can pay full price. Also, driving some landlords out of business will only push up the rents for those who actually want to rent. We need more houses not hamfisted attempts to Tax business people, depriving people of jobs…. because landlords do employ lots of trades

  • PhilipCarer

    1 Maths is about much more than money. I have given a little problem in what amounts to pure maths to several children and they have found it fascinating. Money was not involved.
    2 Have I missed something here? The calculations shown are all about capital gain or loss. Don’t the buy-to-letters let the property while they are the owners, and get a (taxable) rent which is often much more than the purchaser of a similar property would pay in mortgage interest and repayments? The total benefit to a BTL-er is much more complicated that your correspondents suggest.

    • Cichlidator

      The don’t do buy to let mantra is something repeated endlessly by Moneyweek over the past several years.

      Now may not be the best time to jump in, but Monetweeks permabear property views mean they would have scared you off with a horror/scare story even at a great time to invest.

      I invested in a property a couple of years ago and made a 200+% profit on the cash I invested. At the same time I shadow traded money weeks share recommendation in their premium investment newsletter, which had I been foolish to put real money into it would have lost me 50% of it in short order. I also remember all the advice that you couldn’t lose by both ng5 sting in oil supply businesses given the coming fracking boom at around the same time…

      I’m not disputing that residential property is likely to continue to attract higher tax and some feally over the top regulation. The result is already declining supply, leading to some pretty steep rises in achievable rents for poor tenants. John Stepek wrote a piece a few weeks ago hypothesising that rents would not be able to rise due to static incomes. I suggest John does some real research and looks at what IS happening. Rents are going up steeply around me, and properties are being snapped up faster than ever, by tenants forced into the situation by the declining supply.

      I feel sorry for tenants (my valued customers) who are affected bythis. I also think that folk should not invest in property unless they are looking to provide a quality and value for money service to the renants who they should value as customers.

      I also feel that moneyweek should seek to offer better more informed commentary on the subject. Clearly if they can contribute to a negative climate around property, they feel they can sell a few more of their newsletters…

      John is right about the inability of most commentators to forecast the future accurately. Unfortunately this applies to sellers of share tip newsletters as much as anyone else!!