Gestaltz

A slight change in focus can produce a profoundly different understanding https://twitter.com/gestaltz

Strong and Stable Leadership

Identity is about how we see ourselves and present ourselves. Character is about how others see us based on their experience of us. Psychometrics attempts to place individuals in terms of a set of character or personality dimensions and is now widely used in recruitment to assess suitability. It is an understandable exercise but quite dangerous and essentially flawed. Character cannot be judged out of context and context can change in radical ways.

There are no character strengths or weaknesses. There are just character traits. These may or may not be stable over a lifetime. They are made strengths or weakness by context. Winston Churchill often comes to mind when I think about this issue. Before becoming Britain’s pre-war leader he was not highly regarded. The same character ‘flaws’ that elicited mocking before he assumed the role of pre-war leader became strengths once he took over. Britain needed this package of traits at this point in time. There are no great men or women just important moments in human experience. Greatness rather depends upon the outcome.

Seeking leadership characteristics is now a booming industry. During one employment I was tasked to form a group session with my team to establish what they thought constituted great leadership (presumably as a clue for me). Part of the exercise involved each team member stating who they regarded as a great leader. I, and some of the team members, were astonished to see Stalin written on the flip chart. Two of the team were Russian nationals. An interesting and very illuminating discussion followed. It transpired that Russians admire ‘strong and stable’ leadership. This was in 2006. I was never in doubt about Putin’s future success after this session. I also recognised the potential of Erdogan. The appeal of strong and stable leadership should never be underestimated whatever price it charges.

The issue now swings back to identity. The appeal of Strong and Stable leadership is only with those that identify as part of the group being led. It signifies a Strong and Stable group and by association a Strong and Stable us, as members of the group. Any prior ethics that we have are subsumed under the need for a Strong and Stable leader. The Leader does what is necessary. You can see where this might lead (and if you cannot you should stop reading my blogs).

Ironically when I look around at leaders of today only one emerges as strong and stable, objectively; Angela Merkel. I have never heard her use the term but she has provided strength and stability for Germany and the EU for some time. I have never agreed with the response to the eurozone crisis but it may be that it was the best available response at the time. The fact is,the EU is stable despite enormous economic and social pressures. It is united. It is strong, and this strength is about to be tested by Putin, Erdogan, and Trump. Members of the respective groups will have their own view on who constituted the strong and stable leader but I suspect only one will emerge as ‘Great’. My money is on Angela Merkel. People that repeat strong and stable as a mantra are perhaps whistling in the dark.

 

 

A Letter to My Younger Self

Born into abject poverty (not enough food let alone anything else) you were transported to a state of relative poverty (enough food but not much else), but opportunity. London is and has always been a place of opportunity. You recognised from an early age that it was not a level playing field and that you faced more obstacles than most, but still less than some. Despite the best efforts (not always conscious) of many around you to make you feel bad about yourself, you retained an enormous sense of a self-worth. You recognised that, as an outsider, you would always be subject to greater scrutiny so adopted a strategy of being whiter than white in all your interpersonal and official dealings. Scrupulously honest and frank you maintained a spotless record. So scrupulous in fact that you often drew criticism for being too honest and frank.

The opportunity you grasped was education or more precisely, qualifications. You recognised that qualifications gave you power and some capacity to come ‘inside’ society. You were an excellent student. The power of qualifications was so intoxicating that you lingered in the university system a little too long. You were not by nature an academic. The academic life requires specialisation and you preferred to know something about everything rather than everything about very little. Apparently random events took you into banking where you discovered a remarkable talent for seeing things that others missed. This formed the basis of a financially successful career. Given the origins and obstacles you should be pleased. But it was not all as simple as it can be painted.

The conditions in which you had to study were cold, not well-lit, and subject to interruption. You learned to use public libraries. You had no opportunity for learning beyond books and this limited your personal development. You grew up in a family that originated elsewhere. Your father was an invalid and effectively had no interaction with you. Your mother spoke no English and came from a parallel reality. You grew up with a fractured identity. Legally you are British, born to parents that were also born British. This status was imposed on you by Britain (the Empire). It was not a choice. You do not have dual citizenship and no automatic right to dual citizenship in your country of birth. Nevertheless, you can never be wholly British. This is partly because the host community will not allow it. As long as you are dark and have a non anglo-saxon surname it is not fully permitted by the host community. Realisation of this led to a choice of partner that retained an element of your origin. The result however was not to heal your fractured identity but removed all notion of national identity.

The EU seemed to offer a resolution to your lack of national identity. It contained both the UK and your country of origin, although their connection predates the EU and originates in Empire. The decision to withdraw from the EU has triggered an intense identity crisis. You must step back completely from your country of origin and be unequivocally British. You are happy with this except that you are still dark and have a Greek surname and some of the host community will still deny you this privilege. Or perhaps this is less true than it once was. The EU exit is also redefining the concept of Britishness.

There are many lessons from your life. Do not worry too much about national identity. Be where you are and it will ultimately sort itself out. Your pursuit of knowledge is sound but unfocused. A little more focus might have led to more recognised success but would not have been satisfying. Stay unfocused and knowledge hungry as long you can. You pursued financial security rather than wealth. This was wise. You have lived with the wealth seekers and know what they are. They regarded you as having limited ambition. You had broader objectives and you have achieved them. Be pleased. Your uncompromising honesty and frankness earned you a reputation for being difficult. Be proud. The accusation of difficult usually comes from those that are frustrated that you do not unquestioningly support their agenda. You have always set your own standards and objectives and lived by them irrespective of what others are achieving. You envy no one. This is a path to contentment.

 

Migration and Technology

Migration is increasingly being met with political friction. Countries that once encouraged migrants are now placing obstacles. The UK departure from the EU is about migration. In part it is fear of the overwhelming flows generated by geopolitical events. In part it is simply xenophobia and even outright racism. There is however also an economic logic. I have been slowly exploring this logic in many previous blogs, the most recent being Fertility, Freedom, and Artificial Intelligence.

The countries restricting migration are wealthy. They have an abundance of capital and access to modern technology. In recent decades ageing population has restricted growth and migration has relieved this constraint. The migration has brought with it social stress but successive administrations in wealthy states have ignored this stress for sound economic reasons. Technology is providing an alternative to migration for relieving the constraint of ageing population, and one that has less social stresses. Indeed technology is creating new problems which will encourage further restriction of migration.

The silicon chip is the basis of this new direction for migration. Yesterday I went shopping in Tesco and was accosted by a check-out lady. She insisted I try the new hand scanner. Reluctantly I did. I scanned everything into my trolley, went to self-service where she did a random check. I paid by credit card and rolled off to the car. How long before I take a trolley and activate it with my credit card, I shop, the trolley scans, and I roll off to the car with my card charged as soon as I leave the shop? That is a lot of check-out staff jobs gone.

Technological change is often incremental and thus its power and extent not fully grasped at the time. The problem of electricity storage batteries stands between humanity and an energy revolution. The efficiency of conversion of natural energy (sun, wind, wave, thermal) into electricity is proceeding at a rapid pace but it has already reached a point where storage efficiency is becoming the constraint. Concern over climate change will keep the pressure on research and innovation if nothing else does. Everyday I come across a little snippet demonstrating how technology has economised on another previously labour intensive function (junior clerks in chambers would you believe). It is not just manufacturing. Law, banking, finance, and retail are all impacted. Robots and software do not need pensions, benefits,and do not strike. They do not need large HR departments to manage the staff issues. The implications are enormous.

Technology is on the verge of annihilating jobs in every industry. Productivity is about to jump. New but very different jobs will be created. Wealthy countries that have the capacity to benefit from this new technology will become even wealthier. The ageing population will become less of an issue. The biggest social challenge will be how to redistribute the new wealth without disincentivizing the creation. The solution is likely to include a basic benefits package for citizens as of right. One can see how this might make the state wish to control the number of citizens whether through fertility or migration.

This type of brave new world prediction is invariably ignored until it is self-evident. I raise it only because I think it gives a new insight into political developments. If they have a compelling economic logic then resistance may be doomed to fail. It is also wise to anticipate developments that emerge from this logic. Citizenship becomes a valuable commodity not to be taken for granted. The state will demand something back for its gift of basic economic rights. If we do not choose our politicians carefully it may demand things we ultimately come to regret.

Postscript

I shall add links to snippets on the advance of technology over time.

Farm robots

AI and Junior Lawyers

 

The UK Election Gamble

The UK Parliament has 650 seats. The Speaker’s seat is uncontested and takes no part in-house voting so it is effectively 649. In addition Sinn Fein absent themselves. At the moment the make up is;

Cons 330

Labour 229

SNP 54

LibDems 9

DUP 8

UUP 2

The Bar 12

Sinn Fein 4

Vacant 1

Speaker 1

The DUP and UUP typically vote with the Cons which bumps up their vote to 340. Sinn Fein abstain which limits the potential votes against to 305. The Cons have a comfortable effective majority. The election could not however have been called without the agreement of the Labour Party.

The betting this morning has Cons gaining 45 seats, Labour losing 58, LibDems gaining 27 and SNP losing 4 seats. This does rather beg the question as to why Labour enabled the election (I have offered an explanation in my previous blog The Madness of King Jeremy). The betting implies a huge swing to the LibDems who typically emerge with 10-14% of the voting intention share in the polls. The opinion polls have not served the gambler well in recent elections so perhaps there is a steepening learning curve here. There is also a huge area of uncertainty.

The LibDems are promoting themselves as the party of Remain. They are not about to ignore the referendum result. This is no longer possible as parliament effectively validated and ratified the referendum. However, they are taking a glass half full approach to the negotiations in contrast to the government. The latter will put any deal to a vote in parliament but with the proviso that if it is rejected the UK will leave the EU with no deal; Hard Brexit. The LibDems are promising that if the deal is rejected we will remain in the EU. If Brexit is the compelling issue of election then it is a straight choice between voting Cons or LibDem. The betting thus makes some sense. It does not make enough sense though. If the election is a straight choice between the LibDems and Cons on Brexit the LibDems should logically make much bigger gains. My guess is that as the election unfolds the betting odds will move in favour of LibDem seats.

The Labour Party has declared that the election is not about Brexit and has set out a left-wing manifesto. The Labour leadership has enabled Brexit and this election. It has used the whips to force pro-Remain Labour MPs to support the leadership position. The leadership is proceeding as if Brexit is done and desirable and only their left-wing agenda matters. Remain Labour voters thus face a dilemma. Should they ignore Party and vote for the LibDem position on Brexit? Judging by the many conversations that I have had since the election was called, some very personal and heated, Labour Remain voters are in denial. They want tactical voting agreements with LibDem and Green voters. This is not possible. With Corbyn as leader a vote for Labour is a vote for the Cons position on Brexit. If there is tactical voting it will have to be one-way; Labour Remain voting for LibDems. If it transpires this way (big if of course) then the LibDem seat gains could be 4 or 5x what is expected. The trade for the gambling gender neutral person is buy LibDem seats.

Gamble Responsibly!

 

 

The Madness of King Jeremy

Theresa May has called a general election for June 8. The media is full of reasons why this is a good idea, even though no one predicted it. If it is such obviously good idea why did no one predict the event or at least discuss the possibility? The media response is because Theresa May ruled it out herself. Since when do we take statements from politicians at face value? All very odd.

Reasons to call a general election are plentiful. First, the opinion polls suggest the Tories will increase their majority. Second, the next election date is pushed forward two years giving more time for the Brexit negotiations to be completed. As it stands there would have been an election in the middle of the negotiations and this was very risky for May and the Brexit camp.  Third, she might well have been faced with many bye-elections as the electoral expenses corruption scandal came to a conclusion. She might even have lost her majority. An election wipes over this mess. So calling an election now is a no brainer that has surprised everyone.

If such an election is so beneficial to the Tory Party why is Jeremy Corbyn enabling it? The Tory party does not have the requisite 2/3 majority to overturn the fixed-term parliament. Only Labour can enable a general election. Why is Labour so keen to do so? The same polls suggest Labour will do badly. Indeed if the Lib Dems manage to make the election a second referendum then Labour could be crushed between the Tory Party and the Lib Dems. The most likely outcome would be a substantial majority for the Tory Party and a much larger Lib Dem presence possibly making the Lib Dems the official opposition. Why would Corbyn risk this when he could wait until 2020 and have time to prepare?

The only possible conclusion is that Corbyn does not have the interests of the country at heart. More important he does not even have the interests of the Labour Party as currently constituted at heart. He does not mind how far Labour shrinks so long as what is left is in his own image. He does not mind how much damage is done to the UK economy or society by May because the ensuing chaos will create the conditions for a socialist revolution, enabling his Labour Party to rise like phoenix from our ashes and lead those of us that are left to the promised land. Alternatively, Corbyn is several bricks short of a pile.

The only hope lies with the Lib Dems and their attempt to be the party of Remain, and the fact that opinion polls are not very reliable. There is much to criticise within the Lib Dem Party but their commitment to the EU is not open to question. The overriding issue of the day is Brexit. The election needs to be fought on this single issue unless you share Corbyn’s vision of salvation through chaos and destruction. Be careful for whom you vote but vote, for all our sakes, vote!

Anchored in Time

I have made use of the concept of being anchored in time in two previous blogs (1 and 2. In these two blogs I suggest that humanity is stuck at a point in time we call ‘history‘. Individuals can also remain anchored in time. Traumatic events can keep us locked into a point in our ‘past‘. It is not however out past if the event dominates our lived experience. It is our present even if we understand it to have occurred earlier on the linear time scale. We are anchored in time.

In order to move on we need to disconnect from such anchors emotionally. We do not and cannot forget the event (or events). Nor should we want to do so. There is valuable information contained in these events. We must aspire to treat them as archives of disembodied experience, but as if they happened to someone else and we observed. In a sense they did happen someone else. They happened to a previous us. There is a powerful urge amongst individuals to connect past events and create a continuous narrative of ‘self’. It is this urge that connects us emotionally with our past and can anchor us somewhere traumatic but not much fun and unrelated to our physical existence in the present.

It is possible and desireable to live in the present both physically and emotionally. To do so we must continuously renegotiate our relationships and our relations to others. We should not take family, friends, alliances, enmities etc for granted. We need to constantly renew them and make them relevant to the physical present. Forget past emotions and form new ones that are relevant to now.

I was reflecting on this view for other reasons but disinclined to write about it until I came across a Tweet from someone asking why she/he should vote for the Lib Dems given they had once been in coalition with the Tories. My response was that the coalition is the in the past and this person should not remain anchored there. In the present, where I live, it is the Labour Party that is enabling the Tories. This is the emotional fact that needs to be dealt with. The Tweet originated from a Labour Party supporter.

Whatever we have been, whatever we have done, or said, things change. The quicker we adjust to the changed conditions the sooner we will fulfil our needs. Does this mean everything Labour has ever done is wrong? No. Does this mean everything espoused by the Lib Dems is good? No. The issue of the day is the EU and UK membership of the EU. It is a profound issue that overwhelms all other considerations. To deal with it correctly from a personal perspective you must unanchor yourself and deal with now. If you want Brexit vote Tory. if you want to Remain vote Lib Dem. If you vote Labour you enable the Tories. This is true irrespective of past voting behaviour, preferences, or views.

Student Loans

Being of a generation for whom higher education was free, the student loan situation has passed me by somewhat. Far fewer people went university in my generation so the cost of providing it free was less onerous and justified on the basis of efficiency and social justice. The desire to expose many more to higher education led to constant debates about how to fund and I gave some suggestions in a letter to the FT published 12/12/1984. The  ideas that I espoused there may well have led to the present situation.

My proposal was for a graduate tax to finance higher education but still provide it free to those that might be deemed capable of benefitting. The student loan structure now in place (from 2012) may well amount to the same thing but with the tax rate somewhat obscured and collected in such a way as to confuse and disincentivize. The logic of my argument was that, since we are used to the notion of progressive taxation, a hypothecated tax related to higher education would not affect willingness to attend university. The education would be free and repayment proportionate to income, so why not? The present system amounts to the same thing but takes the form of a massive debt up front which varies with a visibly high interest rate. This is quite off-putting.

The present system collects loan repayments at the rate of 9% per annum of all income above £21k per annum. The interest rate is RPI plus 3%. It is odd that the government chooses RPI as the index has been discontinued. Moreover, it is typically about 1% higher than CPI, the government preferred inflation index. So in reality the interest is inflation plus 4%. Well I would like some of that! A 4% real interest rate. Nothing offers 4% real interest on such a quality of loan and indeed has not done so for decades. Is the marginal rate of return on university qualifications higher than 4% real?

If you never earn much then the real interest rate may not matter because after 30 years the loan is cancelled. Your repayments are based on income not the amount outstanding. You pay 9% of income over £21k until the loan is repaid or cancelled. At RPI + 3% this means the loan may be growing. If you owe 20k and earn 30k you will repay £804 in a year. The loan interest at 6.1% (latest RPI 3.1%) is £1220. If you earn £50k you will repay £2610. The high real rate has thus introduced a very regressive element in what was meant to be a progressive tax. High earners can pay down quicker.

Indeed the whole system now discriminates against poorer students. It is possible for wealthier families to borrow for much less than 4% real from the private sector. It is only those that have no other means (or very low-income expectations) that will resort immediately to student loans. It may also be those that do not explore their options carefully. Let’s face it, financial illiteracy is rife and the student loan structure is not the least complex system available!

The student loan repayment calculator provides some guidance. If you expect to earn little then a student loan makes sense because it will be cancelled before you pay it all back. If you expect to earn a lot it is not so bad because you will pay down quickly. It is the medium earners that suffer most and are most vulnerable to the high interest rates because it extends the amount and duration of the loan. For example for an initial loan of £40136 someone starting on an income of 25k and finishing on 50k will pay a total of £56065 over 24 years. Someone starting on 19k and ending on 30k will pay £23563 over 30 years and the loan is then cancelled. Importantly, someone starting on 36k and ending on 80k will pay back £50062 over 14 years. Even the least numerate can use this calculator.

The student loan system is an implicit graduate tax system. However the incidence of tax falls on the most vulnerable. Those that have no other means of finance and have only intermediate income expectations are penalised by the system. The high real interest rate effectively acts as an additional tax on this group. This is not a fair system.

 

The Psychology of Investment

It is somewhat incongruous that someone with my background has read so little of the burgeoning academic literature on behavioural finance. My study of economics, finance, and psychology, all at postgraduate level, has barely cross-fertilised. Perhaps it is because my professional career involved ‘living’ behavioural finance and a deep suspicion that those that research it have no clue as to the complexity of the issues. I also do not read psychology self-help or how to trade books. It occurs to me that my own experience of investing, trading, and market analysis may have some relevance to others.

Somewhere on a column in Delphi once sat the maxim γνῶθι σεαυτόν; know thyself. This is possibly the most important thing to remember in investment. It does not matter what Warren Buffet did, says, or thinks, you are not Warren Buffet. What can you achieve? The users of psychometrics in many spheres of life (recruitment especially) imply faith in the idea of stable and identifiable personality traits. It does not require that personality is immutable. It requires that the measured traits are stable and accurate for the practical future. It does seem that these tests can say a great deal about who you are at some point in time and certain traits seem to linger. If one accepts that there is a ‘you’ as a well-defined set of traits then there is a ‘you’ as an investment personality. This should be everyone’s starting point in investment. Who are you?

The robo-investment-advisors that are now springing up everywhere put you on a ten point scale of risk, low to high. You are meant to choose one. Great if you have any idea about your risk tolerance and if a ten point linear scale captures it! The reality is that no one knows who you are (including you and psychometricians) until the proverbial hits the fan. Investment is thus a process of self-discovery as much as a rational exercise in strategy. The trick is to stay solvent during the discovery phase and to accept what you find. It may be that your personality limits what you can achieve. This is true of life in general. Despite the exhortations, you cannot be anything you want. There are always limits. The limits may be your own personality but this does not mean it is a simple matter to change and expand. In investment it is best not to breach these limits. It can be financially fatal.

I have recently got to pondering which dimensions of personality would make sense when defining an investment personality (in retirement one does a lot of pondering and occasionally blogs about it). Interested-Disinterested seems the place to start. It is not an obvious dimension. Why should an interest in finance be a personality trait? Logically it should not and it is almost certainly a manifestation of a more fundamental dimension. Nevertheless it is evident that people have a consistent (lack of) interest in finance issues. It is a chore, like doing the dishes, and something to be  got out-of-the-way. Cynical-Trusting is a more obvious dimension.

If you are interested and cynical, DIY investing seems the inevitable route. If you are interested and trusting, discretionary management with careful research into advisor choice is the likely approach. If you are disinterested and trusting, discretionary management is the probable choice but with less research into advisor selection. But what if you are disinterested and cynical? Here lies real danger. Even these simple dimensions give some helpful guidelines. If you are not interested in finance then it may be wise not take too much risk. The danger is you will do a poor DIY job, or a poor job in advisor selection and engagement. If you are interested then you can afford to take more risk. Note that this is independent of time horizon or how much money you have or what you are trying to achieve, which is what most ‘experts’ will focus on.

If your eyes glaze over whenever a conversation involving investment begins and you regard all investment advisors and discretionary managers as charlatans, then you really ought not be taking very much risk. You might get lucky (in which case buy premium bonds) but most likely things will go wrong. If you perk up when the news gets to the financial section and you feel there are good expert advisors and discretionary managers, then you can afford to take more risk. Chances are you will identify a manager with whom you feel comfortable, engage, and monitor progress judiciously. Your personal interest and degree of trust will influence outcomes as much as anything else.

 

The Lifetime ISA

The Lifetime ISA or LISA is now with us. If you want a reference then the government website provides some cold hard facts, and the Money Saving expert website provides more discussion. The LISA allows those between 18 and 40 to save up to £4k p.a. and get a 25% annual bonus from the state (maximum £1k p.a.) provided the conditions are met. The conditions are that you do not access the money until you are 60 or unless you are a first time buyer (never ever owned any property) and will use it to purchase a property up to £450k. If you withdraw outside of these conditions you will be penalised (unless you are terminally ill). You get a 25% bonus on up to £4k but you will also be penalised by a 25% deduction if you withdraw outside of the conditions. The arithmetic means you will lose more than £1k if you withdraw and not simply the bonus. To illustrate 25% of 4k is 1k but 25% of 5k is £1.25k. You lose £250. This is an effective 6.25% exit penalty. The LISA only makes sense if you will fulfill the conditions. There are a few issues.

The investment strategy for long-term saving is quite different to short-term, so the LISA could lead to muddled thinking and falling between two stalls. If you are going to invest £4k+£1k p.a. for 32 years (bonus only paid until age 50) and not touch the funds, then investing 100% in equities makes a lot of sense, especially as you are investing continuously over the whole period. If you are expecting to need the funds as a deposit on a property in the next 5 years then holding cash may be the better option. The idea that the LISA offers flexibility is an illusion and a dangerous one. You need to be clear why you have it.

If you are saving for a property then it may make sense*. If you plan to buy in the next 5 years then the state will effectively give you up to £5k of capital to add to your own £25k saved in the LISA. Interest will add a little more but at current interest rates not very much. If you go for equity then there is a risk that, when you come to buy, the value of your LISA will be less than the capital paid in. If you are buying in London then the £450k limit may not be high enough for you to use your LISA. If you are buying jointly the limit is still £450k. It does not double even though you and your partner will have separate LISAs.

The LISA makes more sense as a pension supplement. Employer pension plans are normally preferable because the employer also makes some contribution even if you marginal tax rate is only 20%. You get tax relief at your marginal tax rate up to the allowable limit. The problem with pension plans is that they are taxable when in payment whilst the LISA will payout tax-free. The lifetime allowance and restrictions on contributions limit what high marginal tax payers can pay into pension plans so having a LISA can be an effective booster and one that pays out free of tax. The LISA was not however designed to help high marginal tax payers, at least I hope not.

If you are a 20% marginal tax payer, and do not have a pension plan into which your employer contributes ,then the LISA offers an interesting alternative. The 25% bonus compensates for the fact that your contributions are not tax-deductible. Your withdrawals after age 60 are tax-free. The LISA may make more sense than a personal pension to top up your employment pension. Over 32 years you can contribute £128k and get a £32k bonus. Investment growth will almost certainly leave you with a lump sum at least double this amount. It makes sense but how many 18-40 year old 20% marginal tax payers have £4k in extra savings?

My own conclusion is that the LISA, like many government schemes, is dangerous. It requires quite a lot of financial sophistication to grasp and apply effectively. It may lead to muddled thinking and misapplication. The demographic it is designed to help may struggle to make much use of it and those that perhaps need it least may well be able to exploit it best. For house purchase it is only of marginal value if at all and probably not at all in London.

*If you need to rent your property having used a LISA to buy it you may have a problem. The state must be satisfied that you intended to live in it when you bought but your circumstances have changed. Quite how you prove this is not clear. They may clawback the bonus and treat the use as a withdrawal with the 6.25% effective exit penalty applied. You may however use the rent-a-room scheme.

The Death of the Personal Property Portfolio

Purchasing a second property already incurs an additional 3% stamp duty. Some of the income tax advantages from letting a second property will be phased out from this month and be completely removed April 2020. What were these advantages? Previously, if you owned a buy-to-let property you could deduct all interest paid on the mortgage from rental income as an allowable expense. The rental income could be reduced or eliminated for income tax purposes. So instead of higher rate tax payers paying 40% tax on the net rental income they might pay nothing. The system subsidised leveraged holding of personal property portfolios. A nice little earner for the high tax bracket. The result was to encourage a lot of personal property holdings for BtL and squeeze the first time buyer out of the market.

If you own your home outright you do not get interest relief on any mortgage interest. You pay the mortgage interest out of taxed income. Other things being equal, the effective interest cost for the first time buyer is much higher than for the personal BtL landlord. The government (well George Osborne to be precise) has reduced this difference. By 2020 the maximum allowable expense on mortgage interest will be 20%. This is still more than a private householder gets. There have been press reports that this is forcing the marginal BtL investor out of the market and reducing BtL supply (The Guardian). This is unlikely to be the case.

First, if you sell a personally owned property you will be potentially liable for capital gains tax. It depends upon you personal circumstances whether selling up or continuing with a reduced tax allowance makes sense. Secondly, the tax regime for corporate holdings of property is quite different so it may be the released properties are snapped up by corporate landlords. Finally, if there is some net release of affordable properties into the market they will be snapped up by first time buyers desperate to get on the property ladder and just have a home. In so far as first time buyers are also renters this offsets the loss of BtL properties. So on balance this is a healthy move.

The personal property holder may now become a rarer entity however. It is a simple matter to set up a company and sell your properties into this company. Unfortunately (for you) this elicits a potential CGT liability so it is not a painless experience. Future growth in the rental sector may now be biased towards corporate holdings. Personal landlords may try to raise rents but the market rent will increasingly be set by the corporate residential landlord.

The personal landlord still gets a 20% allowable expense against mortgage interest and is encouraged by the banking system to leverage property investment. It may still be attractive to hold the right kind of property as an investment. It depends in what else you can invest your capital. It is less attractive but not necessarily relatively unattractive. Tears for personal landlords should not be shed yet, and certainly not by the Guardian.

The bigger risk for the personal property portfolio may be Brexit. Personal property investors generally are dependent upon rental income to fund their investments. If Brexit results in a large net outflow of tenants this could cause some localised indigestion and significant distressed selling, with price falls. This may be particularly a problem in big cities, notably London, where the migratory population is high. There would be knock-on effects and would probably impact low-end property most of all. The queue of first time buyers might limit this indigestion some, but localised distress is conceivable. Fortunately for property investors, all the signs are that not even the new flow of migrants will necessarily slow very much.

In conclusion, whilst, at the margin, the tax changes may change the character of the rented property sector, availability is unlikely to be much affected. If it is affected it will be transitory and benefit tenants and first time buyers during the transition. Much depends upon the actual migratory consequences of Brexit.

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