Will tax relief reforms prove ‘apocalyptic’ for buy-to-let?


Chancellor George Osborne has incurred the wrath of landlords with his move to curb mortgage interest relief.

Landlords argue the cuts to tax relief will push up rents and could force buy-to-let investors out of the sector altogether. But not everyone is convinced this “apocalyptic” scenario will come to pass.

Osborne unveiled plans to restrict relief landlords can claim on property finance costs to the basic rate of income tax from 2017 in his July Budget.

The Treasury argues that landlords are currently able to offset mortgage interest and other finance costs against their property income, reducing their tax liability.

At the same time, it says the move will reduce advantages to landlords in the property market over homebuyers, who are not able to claim similar relief.

At the time of going to press, a petition launched by London-based landlord Ruhal Uddin calling on the Government to reverse the plans has almost 25,000 signatures, while the Residential Landlords Association last week wrote directly to Osborne to ask him to pause the plans for further evaluation.

Uddin argues the changes will drive some buy-to-let landlords out of business, while others will be forced to increase rents, affecting the UK’s broader housing market, as well as the ability of renters to buy.

He says: “If the changes do come into place, some landlords will be force to increase rents to offset the higher costs, but others will be forced to sell properties, and that might result in oversupply in the for sale market which will push prices down.

“Homeowners could then find themselves in a position where they are in negative equity which might prove difficult when they are trying to arrange mortgage finance in future.

“And if landlords do increase rents that will result in first time buyers having to wait even longer to save up for deposits.”

In its letter to the Chancellor, the RLA further argues that the proposals will only exacerbate a lack of accommodation for those currently unable to buy in property hot spots such as London and the South East.

“This measure should be re-cast so that the right of deduction is retained even if interest is only relieved at the basic rate,” wrote RLA chairman Alan Ward.

“This would mean that the landlords would only be taxed at the same rate as is applicable to their true profits, i.e. as if the interest paid was still deducted. This would avoid landlords being dragged into a higher rate of tax.”

Despite the popularity of Uddin’s petition, the National Landlords Association, a rival trade body to the RLA, is reluctant to lend its own support to the campaign.

NLA head of policy Chris Norris describes the prospects of a reversal in Treasury policy as unlikely, and suggests instead the current regime could be tweaked to allow landlords better treatment under capital gains tax rules.

“[Petitions] are quite limited. We are certainly not suggesting people don’t sign the petition, and they can be quite good for raising awareness, but in this case we need to be a little bit more targeted and more focused to get things changed,” Norris says.

“As much as we would love to see a U-turn, we are realistic, and we have been told categorically that is not going to happen.

“We are focusing on changes like getting business asset rollover relief, so that landlords don’t end up paying capital gains tax twice if they decide to restructure their portfolios when this change comes in.

“Almost any other business can sell underperforming assets and reinvest and defer that tax until they sell the whole business.”

However, others are less than convinced that the Chancellor’s current plans for landlords will be as destructive as feared.

Capital Economics property economist Matthew Pointon says: “Because the change is not happening until 2017, and it’s happening quite gradually, we don’t think it’s going to have the apocalyptic effect that some people are complaining about.

“We do think there will be some upwards pressure on rents and there will be a few less people looking to get into the market, but we don’t think it will trigger a mass sell-off in the private rented market.

“No one like tax rises, and the people affected are always going to complain, but there’s no sign at this point that the Treasury is going to change its mind.”

Buy-to-let index The Model Works founder Brian Hall says the number of landlords in the market at present is both inflating house prices and maintaining a shortage of properties. He argues the Government is intervening partly out of a desire to prevent renters falling into housing benefit in later life if they are unable to get on the housing ladder at all.

Hall says: “The alternative is that more and more people will rent and as more people move into buy-to-let it will suck up all property. And this unhealthy market will continue.

“I estimate someone who is excluded from home ownership for life is £750,000 worse off.

“Those people are going to finish up on housing benefits and the Government is waking up to that and asking where it’s all going to lead to.

“The landlords can do as many petitions as they like but that is the result.”