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Britain’s buy-to-let tax regime will be one of the toughest around

Alan Ward
Written by Alan Ward

Landlords will be battered by one of the most hostile tax regimes in the western world come April – but the Treasury is being warned that rather than just penalising landlords, it is tenants who will be the real losers.

There is a move to tax landlords not on the profit they make, but on all their income.

The phasing restriction of mortgage interest relief to the basic rate of income tax along with other recent measures will make renting a much less attractive investment option for many.

At a time when increasing numbers of people rely on the rented sector, which will account for 25 per cent of all housing by 2025 according to forecasts, this will only reduce the growth in supply, driving up the cost of rents.

How the UK’s tax on landlords compares to other countries

As the UK moves towards to the more common international model of more people renting and fewer buying, it is striking that the previous Chancellor of the Exchequer, George Osborne, has sought to take policy in the opposite direction of that in comparable countries.

In Germany, seen by many as the model to follow when it comes to the private rented sector, landlords are able to deduct all mortgage interest from their property income, deduct rental losses against other income and claim depreciation costs.

Capital gains tax is also not paid on disposal of property owned for more than 10 years.

In Australia, mortgage interest relief is allowed in full and investors can discount rental losses from their other income and gain a 50 per cent deduction on capital gains tax when they sell a property owned for more than one year.

In the United States, landlords are able to deduct mortgage interest from their rental income as well as offset a certain amount for depreciation each year.

The amount of capital gains tax also falls depending on the length of ownership.

The list goes on, but the point is that no other comparable country has a tax system that is so hostile to private rented housing provision.

The crackdown is wrongly-targeted

Rather than seeking to address the housing crisis, many of the policies introduced by Osborne were based not on evidence but played to the myths that have too often dominated debate around the sector.

It is argued that the changes are to level the playing field with owner occupiers, yet the Institute for Fiscal Studies has noted that landlords are not now, and never have been, taxed more favourably than home owners.

It is argued also that the tax rises support first-time buyers, yet the Government has produced no evidence to back up the assertion that landlords are crowding homeowners out of the market.

While there is undoubtedly anecdotal evidence of competition between landlords and buyers in specific cases the issue is whether this is a widespread phenomenon.

A report by the London School of Economics last year in fact concluded that only a ‘minority’ of house sales involved bids from landlords and first-time buyers.

As the National Audit Office recently reported, since 2006 the cost of private rented housing has broadly followed changes in earnings across England.

These tax changes will inevitably place upwards pressure on market rents that can only make life more difficult for the Prime Minister’s so-called JAMs (those who are just about managing) and those tenants wanting to save for a deposit.

How to change the tax to help renters and first-time buyers

If we are to secure the new homes to rent we need the new Chancellor, Philip Hammond, in his forthcoming Budget should get behind the majority of good individuals that make up the country’s landlord population and who supply the overwhelming majority of rented housing.

That means halting the planned changes to mortgage interest relief, or at the very least only applying it to new borrowing for new homes to rent.

Retrospective taxation cannot be right.

It means also reviewing the 3 per cent stamp duty on the purchase of homes to rent.

This is in effect a tax on new homes which is nonsensical when more homes, of all types, are desperately needed.

Instead this levy should not be applied where landlords are investing in housing which adds to the overall number of homes available.

Help could also be given to tenants wishing to buy by applying the new lower 20 per cent rate of capital gains tax where a landlord sells a property to an occupying tenant.

The Budget provides an important opportunity to support a thriving rental market that is good for tenants, good for the economy, and good for Treasury revenue.

We urge the Government to seize the opportunity with both hands. 

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About the author

Alan Ward

Alan Ward

Alan is the Chairman of the RLA. He has been a landlord and property developer in the PRS since 1993, became a founding director in 1998, and has been the RLA chairman since 2008.

He believes the PRS provides an essential service to the nation with little recognition for its economic contribution. He says regulation is pointless without effective enforcement, and that requires an intelligence-lead approach to target the criminals.

He has faith in the well-meaning majority of landlords to self-regulate. He despises the criminals and frauds who disproportionately concentrate the minds of those in Westminster and town halls.

1 Comment

  • “or at the very least only applying it to new borrowing for new homes to rent.” To accept that would be to tacitly accept the rightness of an insupportable policy. Furthermore it would deter a landlord from altering their portfolio which could directly disadvantage would be home owners as many tenants (of private landlords) buy unlike those of corporates such as L&G who will never be able to.

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