Taxing Times Ahead

budget2015This 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.

19 thoughts on “Taxing Times Ahead

  1. Two issues to raise with the treasury –
    1. Landlords unlike personal purchasers have to pay CGT when selling the property. I’m guessing that this won’t be restricted to basic rate tax – so a double lose for landlords.
    2. If a Landlord makes a loss on property in one year, that loss can only be offset against gains in subsequent years, not against income from other areas of business.

  2. But there is a contradiction in the budget with the rent a room allowance of £7500 if you base it on the average price of £200k this equates to 3.75% mortgage relief and it being given to b&be etc!!!!

  3. As a result of this announcement I felt that I had no choice but to e-mailed Geroge Osbourne, my local MP and the housing minister with a list questions challenging his decision as I feel so strongly about the change and I suggest as many landlords as possible follow suit to register our concerns in this matter

  4. With lenders mostly only lending to 60% LTV. How will they act now when the rental income minus new tax and interest shows a loss each year? I don’t think the banks will be lending on a business model that shows a yearly loss so we can only presume the banks will stop lending or reduce their LTV to 20%. Who wants to invest in a flat with no capital gain (because no one now wants them anymore) and a break even balance sheet. Well done George. What are you going to do with all these tenants now? There’s nowhere left to rent !!!!

  5. Can these changes be challenged in law? Surely it is not right treating a service provider such as a landlord in the same was as a property owner.

    1. “Right” and “Law” are not the same thing. The thing is that because it’s the government, they can make these changes and the changes are the law – therefore by definition they are legal ! Only if they contravene some other law can they be challenged – I don’t think anyone could argue that getting full relief is a “basic human right” (c.f. Human Rights Act which can’t be over-ridden because it enacts an EU directive).

      I too will be writing to my MP, explaining that for the very first time in 14 years I will be putting up the rents for sitting tenants, and also asking him to query the Chancellor for more details. The difficulty I see is that at present I take my rental income, deduct costs, and then add any profit to (or subtract losses from) my day job income.
      To apply the “only basic rate”, does that mean I need to add my rental income to the day job salary to determine if any of it might be “higher rate” taxable ? Or does earning just 1p into the higher rate band mean I have to deduct half the interest from my expenses, or what ?

    2. It might be a good idea for the NLA to bring a test case to counter this flagrant attack on a legitimate business cost to provide a service to tenants.

      Successive governments since Margaret Thatcher’s administration have neglected and betrayed tenants, particularly tenants on lower incomes, through a lack of provision of public or council housing. Since the coalition administration the fire sale in public housing has increased rapidly with tenants being evicted from their homes eg council housing estates in North London that are now being sold to private developers at great profit. From the time of Margaret Thatcher’s administration they didn’t want to put taxes into the much higher maintenance costs of public housing hence the start of the fire sale to the council house tenants who could afford to buy their homes. But not even this right of ownership protects these new owners if the council in Tooting Beck finds that it can sell an estate for a greater return to a private developer! Then these owners are given such poor prices for their compulsorily purchased properties that they have to move right out of the area and to a much smaller property in order to stay in London. How does that chime with the traditional belief that an Englishman’s home is his castle?

  6. This is an absolute travesty. Nothing of these ‘hits’ to landlords was flagged up by the Conservatives before the elections.
    At least Labour were honest said they were worried.
    Tories have no right to effectively increase taxes in this manner!

    1. Alas, they do. But they are betraying their natural supporters at the same time as saying that they want to encourage private enterprise. This is just hypocritical humbug.

      I can see that many private landlords will give up, because you can only charge what the market can bear, so to think that you can raise rents to cover this charge is a pipe dream! That will reduce the amount of rented accommodation and the rents will rise again due to scarcity. So how will this help the already difficult housing situation? This is just a raid by the deceitful conservative bandits because they think it will be popular with tenants. They won’t be popular when the effects are realized. I used to be a natural Conservative voter! They have lost my vote for good.

  7. Debbie makes a point that I was wondering. Is a legal challenge possible given that they are now not considering mortgage interest as a legitimate business expense while interest on business loans is. Will the banks be more open to business loans on property now since this only affects buy-to-let mortgages.

    Has he also forgotten that Landlords are already at a disadvantage over home owners as they pay a lot higher interest rates.

    On the other hand, we could have predicted this. There has been a lot of brainwashing against private landlords for years (“benefits lining the pockets of private landlords” “private sector rents out of controls” type comments) so the public will accept any sanctions against landlords.

    What next, landlords not being able to claim tax relief on repairs to damage done by tenants?

  8. I cannot think of another business where the Government imposes a tax against a business cost. What annoys me the most is the way these tax changes have been announced after the election with no hint at all of such a penalties being communicated in the Conservatives manifesto. One reason that I voted Conservative is because I perceived the party as being more in tune and supportive of the contribution landlords make to the PRS.

  9. Landlords run a business and should be taxed accordingly. This is a significant change in tax regulations and should have been mentioned in the conservative election manifesto as it will effect he PRM to the detriment of tenants as well as landlords. Landlords already contribute with the Capitol Gain Tax rules without making further tax payments .

  10. By once again failing to recognise letting property as a Business, the chancellor apparently fails to make the simple link between increased running costs in any business and the consequent rise in costs for the consumer – in this case The Tenant! Equally, if like any other Business letting property becomes unprofitable the sector will contract. So just how does the government propose to house the massive number of professional young rental sharers who comprise the Teaching, Hospital Nurses and Doctors, Local Authority officials etc etc who service the massive needs in those sectors forLondon and the South East?

  11. The main reason I didn’t vote for the Green Party this election was what appeared to me to be a cowardly opportunistic attack on Landlords by changing the rules so that Landlords would be taxed on much more than they earned. But I was absolutely staggered to find the pro-business party, without warning, implement both this Green Party policy (or a significant chunk of it) and the Labour party’s policy which will also result in a significant immediate tax rise for most landlords… together. It seems beyond comprehension, the idea that any Landlord who previously voted Conservative would ever do so again.

  12. We all feel very strongly, but the only impact that will register on the political system is if enraged landlords write to their own MPs. In government circles it is accepted that each letter represents 10 constituent opinions. Therefore please write to your own MP. We have written to our MP as follows:

    “We have deep concern regarding the limitation of tax relief on mortgage costs for buy-to-let owners. This is misguided for a number of reasons:

    1. Buy-to-let landlords are running businesses and, as such, mortgage interest payments are costs, just like any other costs incurred by businesses. It is therefore a fundamental breach of principle to start interfering with the market by penalising legitimate and necessary expenditure in this way. Taxation of companies is imposed on the residue of income less costs, not before costs are properly allowed for.
    2. It starts a slippery slope of possible further increases in tax in this area, which will impact adversely upon the housing market.
    3. Given the considerable reduction in size of the social housing sector, the private rented sector has now become an essential component of housing provision in the UK. A smash and grab raid like this gives little encouragement to further investment and is likely to lead to an escalation of rental levels.

    It is deeply disappointing for a Conservative Chancellor to be seen to adopt the policies of the Green Party, whom we regard as economically illiterate and fiscally innumerate.

    We think that there is a fundamental problem underlying this recent measure and also other fiscal and regulatory measures imposed upon landlords. That problem is the blind refusal of Government to recognise landlords as running proper businesses, as opposed to being passive investors. This is plain wrong.”

    Imagine the impact of 20,000 letters of complaint to MPs. Please feel free to use any parts of our message, refreshed by your own views.

    Good luck

  13. Absolutely ridiculous! The more interest rates rise, the more tax we will have to pay. Some landlords will end up paying more tax than the profit they are making. This is not good business or tax policy, it’s madness.

  14. The thing I don’t understand is with the new rules when the interest rate rises and therefore your overall mortgage cost rises reducing the real profit on a property portfolio will we be taxed more or less as the mortgage costs will then be higher?

    1. We will be taxed less (i.e. get a bigger rebate) but spend more overall.

      Our real profit will decrease, and eventually it will be less than the tax bill.

  15. Angela makes some good point that seems to summarise most points raised by others on this blog. If we nationally (in our thousands) wrote to our respective MP’s it is bound to raise some heads in our favour. We have been far too passive, to the point that we have become soft targets. Stop waiting for others to fight your corner and make your own voice heard! It’s time we stood up for ourselves! A simple straight to the point letter to your MP is all that is needed. Even if the change in taxation does not greatly impact you the principle of implementing such changes should not go unchallenged!

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