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‘Scrapping landlord tax relief could add billions to rents’

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The Chancellor has been warned that scrapping tax relief for landlords could add billions to rents.

In an open letter to George Osborne, National Landlords Association chief executive Richard Lambert asked for “assurances” that the Chancellor is not planning to scrap tax relief on mortgage interest for landlords in tomorrow’s Budget, as has been reported by some parts of the consumer press.

He argued that landlords not only support the housing industry and contribute to tax but provide “flexible accommodation which enables a dynamic workforce”.

The letter says: “It has been suggested that private landlords receive too many ‘perks’ or reliefs which give them an unfair advantage compared to owner-occupiers. This ignores the fact that letting residential property for profit is a business.

“Like any other business, landlords can deduct legitimate costs before declaring their taxable profit and the NLS is frankly dumb-founded at the notion that any private business should face the prospect of paying tax on their gross turnover alone.”

The NLA estimates that the aggregate costs in the private rental sector would increase by more than £2.6bn if the tax breaks were reclassified as non-deductible.

The letter adds: “Landlords would be left with no other option than to recoup their increased costs through higher rents.”

Association of Mortgage Intermediaries chief executive Robert Sinclair believes scrapping landlord tax relief could be a bigger problem for the market than the fallout from the Greek crisis.

He says: “I hope this does not happen. Everybody is writing big headlines about Greece but for me this would have a much bigger impact [on the UK housing market].”

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Comments

There are 38 comments at the moment, we would love to hear your opinion too.

  1. Duncan Deaves 7th July 2015 at 5:06 pm

    Showing my age but I can remember tax relief on personal mortgage payments. Those were the days:-)

  2. Shailain Shah 7th July 2015 at 5:07 pm

    A Labour tinged policy from a Conservative Chancellor? It may not be fair, but it is definitely a soft target. It would also deflate the amateur landlord bubble that is affecting first time buyers prospects of getting on the housing ladder.

  3. Steven Pearman 7th July 2015 at 5:13 pm

    Just another hidden way of taxing the public. FTB’s struggle to get on the ladder because they are having far to good a time spending rather than saving Shailain.

  4. I don’t agree. With the aiding of the banks and easy money private landlords have created the false high property values we have today, with many landlords incorrectly claiming tax relief when they shouldn’t be. Residential property with easy gearing has been seen as an easy way to make money by many inexperienced investors, if all of sudden the asset is treated the same as other investments the landlords will have to do the math and think twice about the true viability and risk. Yields on capital after all costs and repairs are already very low due to tenants ability to pay, with higher rents the default rates will increase and properties will become vacant, this in turn will either release the housing stock to the general market or require landlords to maintain the rent levels in order to let the property at a rent that is affordable. I have long said, we don’t have a housing shortage or crisis, the housing stock is just owned by the wrong people! Yes, it will be painful initially with a power struggle with landlords thinking they can continue to dictate the market, but if a release of rental properties become available this too will help bring affordable property to the market as availability will increase and demand form investors will subside, giving the first time buyer a chance at a realistic rather than inflated price.

    • Steven Farrall 11th July 2015 at 8:00 pm

      Precisely. All tax breaks to landlords distort since land is the only true monopoly. Rents are already at the market clearing level so landlords will not be able to increase rents. And hopefully, there will be serious reform of housing benefit which acts to increase rents and subsidise landlords.

  5. Frazer Horton 7th July 2015 at 5:15 pm

    Calling it tax relief is very misleading. Its not tax relief, it’s a business expense like any other.

    • Steven Farrall 11th July 2015 at 8:02 pm

      Nope. There are two rent components. one the location rent and the other the building rent. The landlord does nothing to earn the location rent. There is no ‘business’ in the location rents. They are just ‘rents’.

  6. Not so – just impose Rent Control at the same time QED. While he is at it he should also scrap tax allowances for corporate debt. Our penchant for indebtedness is bad enough without the tax payer subsidising it.

  7. @Frazer It is not a business expense generally. If I borrow to invest in anything (property, shares) why should I get tax relief? Frankly, I have 5 children, none of whom can even get near to buying a property. Instead they pay someone else’s mortgage and house prices continue to rise. We need to free up housing, not concentrate it the hands of the few. Personally, I would not only remove the tax relief but I would also levy an additional tax based on the value of the let property. Existing tenants could be protected from unwarranted rent increases. As Craig says, it may be painful initially but something has to change long term.

  8. Christine Brightwell 7th July 2015 at 5:32 pm

    I agree that this is a business expense. My concern is for the tenants who will not be able to absorb any higher rents. We do not have enough social housing to absorb those who may well become homeless is landlords insist on higher rents to take account of the increased tax take by the Chancellor in refusing to recognise business expenses. I run my own small business (not property) but an beginning to wonder when my travel expenses to meetings, data bases and computer and accountant fees etc will no longer class as business expense.

    And – the possibility of higher rents coupled with the determination to cut in work benefits leads me to wonder if anyone there has rubbed any brain cells together at all. I know this is a revelation to some in Government, but there are lots of people who do not have a trust fund to fall back on and do not even have a moderate bank of mum and dad to help out.

  9. I don’t agree, Frazer. I’m with Craig on this one. Since, from the evidence I’ve seen (eg factfinding prospective clients), these aren’t really ‘Businesses’. In the main they are private individuals, owning residential properties registered in their personal names largely financed by mortgages in their personal names in pursuit of personal profits. The dual catalysts of (i) a plethora of get-rich-quick property-development TV programmes and (ii) cheap credit have helped fuel the fire. The result = over-inflated prices + a large swathe of potential first-time buyers priced-out of the market. If the tax relief is scrapped, some say it’ll all end in tears for the landlords……well, it already has ended in tears for many youngsters upon the realisation that, unlike their parents, they’ll never be able to afford their own home.

  10. It clearly isn’t a ‘business expense like any other’ because most buy-to-let investing is not a ‘business like any other’!
    How many businessmen in real life do advisers know that massively gear their main assets with interest only loans as many have done, in order to generate very low net returns or income year on year, with the main aim being to generate returns at some point in the future from unspecified and hoped for capital gains!
    We come across BTL ‘businesses’ / investors (outside London) who are faced with one or a combination of the following problems: –
    1. They are unable to remortgage because the historic LTV on the original loan is way higher than is allowed currently, and house prices have not increased enough to provide enough equity to remortgage at current LTVs.
    2. The original mortgage is on interest only, and the lender would now require capital repayment, but the increased payments would more than wipe out the meagre net profit currently being generated.
    3. The original mortgage is on a very low tracker rate and the business / investor is unwilling or unable to remortgage as the repayments on the new higher rate would wipe out the meagre net profit currently being generated. These are basically hoping that rents can keep increasing in the future and will do so faster than the BoE will increase the base rate, or they will find themselves in trouble at some point.
    At the end of the day, if a BTL investor wants to run it as a business and keep the tax breaks, surely all they need to do is convert to company status and borrow on a commercial basis like any other bona fide business? Or is a lot of the BTL market not actually viable on this basis?

  11. Frazer Horton 7th July 2015 at 6:19 pm

    Well,there may be perfectly reasonable ideological reasons to support this measure. I also agree that there are massive problems for FTB’s which are exacerbated buy the boom in BTL mortgages. I just make the point, which is still valid, that owning a buy to let property and renting it out for a profit literally IS a business. It’s illogical to say otherwise.Whether or not one is a sole trader or limited company is not a real distinction. Fortunately as @kevin Neil helpfully points out, the way round this may well be to set up a limited company. There are plenty of lenders out there who will do a buy to let mortgage to a limited company at sensible rates. If this does happen i suspect their will be even more. I may well be suggesting that all my clients think about Ltd Co Status.

  12. Presumably the supporters of this will cease forthwith to claim mileage costs from HMRC for travelling to see clients?

  13. Richard Clinton Green 7th July 2015 at 9:02 pm

    I cannot see the problem with this as there are a great many young families that would still not be able to buy a property owing to the affordability and deposit requirements of lenders and limitations put on borrowers, particularly the self employed, that without the buy to let properties they would have nowhere to live. The council estates are not being built and in many ways I think that we should be grateful for that and the only hope for the younger people ( and some older ) is the buy to let landlord.

  14. So move a BTL property from personal ownership to LTD = CGT, can’t see the landlords liking that

  15. @ Gordon: Don’t see how you can claim PPR relief on a BTL anyway, so where’s the downside to limiting liability for that reason? SDLT’s quite another issue though. As an aside, if you know landlords who’ve claimed a BTL was their principal private residence for tax purposes, I hope you’ve filed money laundering reports and/or reported them to police/HMRC/Action Fraud. Five years for failing to report, or 14 for conspiracy – neither’s pleasant.

  16. John Hutton-Attenborough 8th July 2015 at 8:57 am

    How many clients have resisted saving into pensions stating they prefer to invest in B2L instead? They consider it an investment not a business and can then gear up with tax relief as an incentive that they cannot get in any other investment. Perhaps the levelling of the playing field will be a painful experience for some who have over extended.

  17. Nicholas Bage 8th July 2015 at 9:30 am

    Most by to let investors are using it for an income stream. If you restrict relief on pensions then it logical to do so on BTL.

  18. @Sir Arthur

    Thank you. Most kind.

    @Paul Barnard

    Visit clients? That’s so 1980’s. Why don’t they come to you? Does your solicitor, accountant, stockbroker etc. make house calls?

    From the above comments I am heartened tom see that many share my view that BTL is often a pretty naff investment.

  19. This is something that should have been done years ago as buy to let investors have had an unfair advantage for too long.

    It is clear to many that the tax relief offered to buy to let investors is causing a property to be overvalued compared to national average earnings. If we want to control house prices and encourage more house building to happen in the UK we also have to make sure that the housing market is fair to all. Giving tax relief to one part of the property market is clearly an unfair advantage and stop landlords simply passing this on to hard-pressed consumers the government should also consider rent controls. This may indeed force some amateur buy to let investors who are heavily geared to sell property but that is not bad news for the housing market as there are plenty of first-time buyers desperate to buy houses particularly using some of the government schemes.

    I’d question whether an individual buying one or two houses is actually a business, as often amateur investors simply believe the property gurus on TV programmes and newspapers believing that they going to make a pot of gold for doing very little work – yeah right.

    Is clear that the buy to let investors need a lesson that assets values can go down as well as up and so can profit. I also welcome any changes that government brings in respects to housing benefit as for too long private landlords seem to be profiteering out of this benefit which we must not forget is funded by taxpayers.

    Wonder how many buy to let gurus will still be saying how great BLT are when and if tax relief is with drawn.

    Even if he doesn’t do it this time around, he should seriously consider doing it soon as like many I feel incredibly sad for youngsters trying to get on the housing ladder as they find themselves priced out by buy to let investors.

    Just illustrate the effect the below doesn’t take into consideration other expenses can be claimed but does illustrate the effect:

    At present the person receiving £12,000 in rent and having £9200 in interest payments would only have £2,800 in profit to add to his or her income taxed at marginal rates.

    If the proposed change comes into place the entire £12,000 rent income could be added to his or her income taxed at marginal rates having a massive effect and could effectively put some clients in a negative situation with mortgage payments. Of course clients do have other expenditure. I think this example illustrates the point nicely. E.g. a 40% taxpayer receiving just £7200 net leaving a £2000 shortfall in mortgage payments.

  20. Dear Right Honourable, you are wrong and Shailain Shah is correct. If Gorgeous George EFFECTS a change to tax relief, then others are AFFECTED by it. Assuming that you are a financial adviser, I suggest you ensure you get your suitability letters right if using either of these words – otherwise the FCA might see this as an excuse to close you down for making vague or misleading statements!

  21. Dear Right Honourable, it’s Telegraph, not Telegrap. The FCA will DEFINATELY be watching you!

  22. Steve: Oh, and you were doing so well! It’s ‘definitely’. Another victim of Muphry’s Law.

    (Muphry’s Law – anyone who points out someone else’s spelling/grammar error will inevitably make one of thier own)

  23. James Hurdman 8th July 2015 at 1:25 pm

    Might a bigger issue be those landlords who have rental income and don’t declare any of it, irrespective of whether there is a mortgage or not?

    • Yeah, let’s all demonise BTL investors and completely overlook the fact that govts for the last 30 years have failed to even aknowledge the unfolding housing problem.

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