In response to signing the petition to the Government concerning the decision to deny higher rate tax relief on mortgage interest paid by landlords, I and every other signatory have received the following email. I will let you read it and comment further down.
“Hi Jon Stow,
The Government has responded to the petition you signed – “Reverse the planned tax
relief restriction on ‘individual’ landlords”.
The Government is committed to a fair tax system so is restricting relief on
landlord property finance costs to the basic rate of tax, reducing the
generosity for wealthier landlords.
The Government is committed to a fair tax system so is restricting tax
relief landlords can claim on property finance costs to the basic rate of
Landlords are currently able to offset their mortgage interest and other
finance costs against their property income, reducing their tax liability. This
relief is not available for ordinary homebuyers and not available to those
investing in other assets such as shares. Currently the landlords with the
largest incomes benefit the most, receiving relief at their marginal tax rates
of 40% or 45%.
By restricting finance cost relief available to the basic rate of income tax
(20%) all finance costs incurred by individual landlords will be treated the
same by the tax system. This recognises the benefits to the economy that
investment in property can bring but ensures the landlords with the largest
incomes will no longer benefit from higher rates of tax relief.
By unifying the treatment of finance costs for all individual landlords, the
Government is reducing the distortion between property investment and
investment in other assets, and reducing the advantage landlords may have in
the property market over ordinary homebuyers.
Less than 1 in 5 (18%) of individual landlords are expected to pay more tax
as a result of this measure. Taking account of the other measures from the
Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted
their forecast for house prices. The OBR expect the impact on the housing
market will be small. Furthermore, this change is being introduced gradually
from April 2017 over 4 years. This will give landlords time to plan for and
adjust to these changes.”
Not every landlord will be affected by the change, but a
substantial number will be. It will be especially difficult for long-term
landlords with multiple properties and with a higher gearing in terms of
mortgages. As property inflation has progressed, many will have re-mortgaged in
order to buy further properties. In many cases, such a model will not be
viable, because there will be no profit left.
I can sense that some will say sarcastically that their heart bleeds for the
poor landlord who no longer receives net income from their properties. Yet the landlords
affected will be in a trap. How can they divest themselves of their portfolio
in short order, and in this context, two, three or four years is not long? If
they do sell up of course the Government will reap a reward in terms of large
amounts of capital gains tax, but it is hard to see substantial benefit to the
housing market in terms of more property available to first-time buyers. Purely
in terms of numbers it is unfair and will put some landlords out of business.
Of course if the property portfolio is held through a company, mortgage
interest relief will not be restricted. Yet comparatively few portfolios are
overall, especially with the higher mortgage gearing, and that is for
commercial reasons. Mortgage lenders do not like lending to companies because they
have less security. In the past I have dealt with a client who had property
portfolios worth in excess of £3M with borrowing of nearly £2.5M. He would not
be able to carry on.
You might have noted that I mentioned putting landlords “out of business”. The
response from HM Government talks about property investment, but HMRC does see
rental activities as a business in some contexts.
In a business, one expects to deduct in full all one's revenue costs. Is there
a slippery slope which will bring more commercial activities to lose full
relief for finance costs?
Property “investment” is not like holding a portfolio of shares or multiple
ISAs or money on deposit. There is a risk as with stock market investments, but
anyone who has been a landlord will tell you that there is a lot more
involvement as a landlord, even if you use a letting agent. It can be very
Suppose the tenant causes a fire or a flood and you have to deal with the
insurance company, attend the site on multiple occasions to see the insurance
assessor, get builders' estimates, supervise the builders, and get the letting
up and running again. It can take many months, be pretty full-time, and very
stressful. Believe me, I have been there, fire and flood. It definitely feels
like running a business. The time commitment is often very substantial.
The Government and HMRC on their behalf are being disingenuous. It suits
them to make a tax-grab from people whose effectively full-time work is from
their letting business, and who are often providing a real service to local
authorities in dealing with their displaced people requiring housing.
It would not be a “fair tax system” for those whose property businesses will
I believe the new rules will be a costly mistake; costly for the landlords,
but also for those who need a roof over their heads but will never be able to
afford to buy.
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