This was billed as a ‘big’ Budget, and frankly the best opportunity George Osborne would have to drive through the difficult financial policies which he may deem necessary to meet the Government’s objectives.
However, it has also proved a significant – if not outright damaging – budget for private landlords in the UK where Mr Osborne seemingly borrowed policies from Labour and the Green Party.
The Chancellor made two major announcements under the headline of ‘landlords’ reproduced below as they appear in the ‘Red Book’:
1.191 The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax. The restriction will be phased in over 4 years, starting from April 2017. This will reduce the distorting effect the tax treatment of property has on investment and mean individual landlords are not treated differently based on the rate of income tax that they pay. It will also shift the balance between landlords and homeowners.
This is a major blow, and one the NLA feared based on speculation in the weeks leading up to Mr Osborne’s statement. In fact we wrote to the Chancellor directly ahead of the statement seeking assurances that the rumours were unfounded.
Contrary to common sense, loan interest is no longer to be considered a straightforward revenue expense, as the available relief will only be available at the basic rate of income tax.
It seems frankly ridiculous that the Treasury can announce such a cutting proposal, likely to increase operating costs and inevitably rents at a time when the private-rented sector is under such pressure to house a growing share of the country’s population. Based on a typical rental property, valued at around £160,000, this move will hit a landlord’s margin to the effect of more than £800 per year; potentially forcing rents up by £70 per month.
This is apparently based on a belief that the ability to deduct interest payments from taxable income puts landlords at an unfair advantage over owner-occupiers – completely ignoring the fact that landlords are providing a service by way of business, while households are buying a home for their personal use.
It suggests a complete misunderstanding of landlords’ businesses and a lack of recognition for the work undertaken for largely unremarkable yields.
I suspect many landlords will be crunching their respective numbers to see if private renting remains viable post-2017 from when these measures will be phased in.
1.192 The government will also reform how landlords of residential property can account for the costs they incur in improving and maintaining rental property. Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear, irrespective of their expenditure. This means landlords can reduce their tax liability even when they have not improved the property. From April 2016, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur
This point requires a little more consideration. It is difficult to understand exactly what the implications of replacing the ‘wear and tear allowance’ will be, and may result in a positive outcome for many (despite appearances).
It could be a response to the concerns raised by many in the NLA since HMRC removed the option to make ‘like-for-like’ deductions based a short while ago.
It could be that those who claim the 10 per cent allowance, without necessarily facing significant costs in that tax year will lose-out. Although this may be balanced by offering a solution for those landlords of unfurnished, or part-furnished property who are currently unable to recover any of the cost of replacing white goods, curtains or carpets etc.
The NLA will be seeking an urgent meeting with the Treasury and HMRC to discuss these issues, and the wider implications for landlords’ tax status and will update readers soon.
All in all private landlords have some hard decisions to make about where they invest, what return is possible and whether letting remains a worthwhile activity in the future – 2017 could well be make or break for many in the PRS.