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Tax threat for buy-to-let
How far will the Chancellor go to raise money from landlords?
By Richard Dyson
7:21AM GMT 01 Dec 2013
30 Comments
George Osborne will take centre stage on Thursday when he unveils his “mini-budget”, announcing a range of measures likely to touch on tax-free personal allowances, pensions – and property.
Moves to increase stamp duty and other taxes that apply to top-end homes and investment properties have been widely trailed ahead of his speech and are considered almost a certainty. But could the Chancellor go further and home in on the booming investment phenomenon of buy-to-let?
A controversial report last week sought to put a figure on the tax reliefs claimed by landlords. Using data obtained through a Freedom of Information request submitted to HMRC, the Intergenerational Foundation, a think tank, estimated that private landlords claimed £13bn in allowable expenses to offset against rent. Depending on the landlords’ individual rates of tax, the value of the tax being forfeited by the Exchequer was calculated at between £3bn and £5bn.
The report, which won support from organisations representing tenants and young would-be home buyers, called for reliefs to be scaled back, claiming that “favourable” tax treatment of landlords “contributed to rising house prices and sharpened economic inequalities”.
The biggest relief relates to mortgage interest, which landlords can deduct from rent before calculating the tax due.
The report chimed with an earlier campaign by PricedOut, a lobby group, that focused on MPs’ property interests and found that 17pc of sitting MPs were landlords – compared with 4pc of the wider population. Despite this, many MPs across the political spectrum are unhappy about the growth of private landlords and would support measures to tax them further.
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But any significant move by Mr Osborne to curtail landlords’ tax reliefs would ignite immediate controversy. One reason for the astounding growth in buy-to-let – apart from the handsome returns that residential property has generated over the past two decades – is that other forms of long-term investment, such as pensions, have been made less attractive by a succession of official policies.
The current government has diminished pensions’ appeal by reducing the lifetime amount to which tax relief can apply and by cutting the maximum annual contribution. These reductions apply from April 2014. It is feared that Mr Osborne may go further on Thursday by introducing a limit to the tax-free lump sum available to savers on retirement. A similar rule applies in Ireland.
Alex Henderson, a partner at accountant PwC, said such measures would “push investors even further towards buy-to-let, where there are fewer restrictions and where the property assets can be bequeathed”.
The tax situation now
Landlords are treated largely as any other business, giving rise to an array of expenses that can be offset against income for tax purposes. Of the 1.2 million taxpayers claiming allowable costs each year, the single biggest expense is mortgage interest, of £5.3bn. Repairs and maintenance come next at £2.5bn, with insurance, legal, letting, broking and other professional fees amounting to more than £3bn.
But buy-to-let is treated differently from other businesses in two major respects. Where their property is furnished, landlords can claim a “wear-and-tear” allowance equivalent to 10pc of annual rent.
Landlords claim that this is the reasonable equivalent to the “depreciation allowance” granted to commercial property owners – but critics say it is needlessly generous. The Intergenerational Foundation, for instance, accused many of “taking this relief as additional revenue without having to justify what they did to deserve it”.
The second area of relief relates to capital gains. A provision allows owners of properties – including those that have been let for any period of time – to exclude the previous three years’ ownership from capital gains tax if “the house has been your main residence at some point”.
This concession became highly controversial when, in 2009, MPs’ use of expenses to pay for multiple properties was exposed. By moving from property to property MPs could crystallise gains with little or no tax applying.
Likely imminent changes to property tax…
Until now Mr Osborne has restricted his interest in property taxation to the top end of the market, raising stamp duty on properties costing more than £2m to 7pc last year and introducing a more penal 15pc rate for those using corporate structures to own property.
He is expected to introduce capital gains tax on properties owned by non-residents in Thursday’s statement. Other changes could see adjustments to stamp duty lower down the scale.
…and what might come next
Mr Osborne’s stated aim of assisting first-time home buyers, shown through Help to Buy and other initiatives, could switch into more targeted reductions of landlord benefits – including, some suggest, the removal of the relief exempting a property from capital gains tax if it was at one time the owner’s home.
But it’s more likely, said Richard Mannion of accountancy firm Smith & Williamson, that the Chancellor will concentrate on anti-avoidance. “There is a strong suspicion that a lot of evasion takes place around rented property,” he said. “The legislation as it exists is probably adequate, it just needs tougher enforcement.”
HMRC is already on the warpath following a two-year campaign launched in September. It estimates that as much as £500m each year is being underpaid under the current regime.
How far will the Chancellor go to raise money from landlords?
By Richard Dyson
7:21AM GMT 01 Dec 2013
30 Comments George Osborne will take centre stage on Thursday when he unveils his “mini-budget”, announcing a range of measures likely to touch on tax-free personal allowances, pensions – and property.
Moves to increase stamp duty and other taxes that apply to top-end homes and investment properties have been widely trailed ahead of his speech and are considered almost a certainty. But could the Chancellor go further and home in on the booming investment phenomenon of buy-to-let?
A controversial report last week sought to put a figure on the tax reliefs claimed by landlords. Using data obtained through a Freedom of Information request submitted to HMRC, the Intergenerational Foundation, a think tank, estimated that private landlords claimed £13bn in allowable expenses to offset against rent. Depending on the landlords’ individual rates of tax, the value of the tax being forfeited by the Exchequer was calculated at between £3bn and £5bn.
The report, which won support from organisations representing tenants and young would-be home buyers, called for reliefs to be scaled back, claiming that “favourable” tax treatment of landlords “contributed to rising house prices and sharpened economic inequalities”.
The biggest relief relates to mortgage interest, which landlords can deduct from rent before calculating the tax due.
The report chimed with an earlier campaign by PricedOut, a lobby group, that focused on MPs’ property interests and found that 17pc of sitting MPs were landlords – compared with 4pc of the wider population. Despite this, many MPs across the political spectrum are unhappy about the growth of private landlords and would support measures to tax them further.
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But any significant move by Mr Osborne to curtail landlords’ tax reliefs would ignite immediate controversy. One reason for the astounding growth in buy-to-let – apart from the handsome returns that residential property has generated over the past two decades – is that other forms of long-term investment, such as pensions, have been made less attractive by a succession of official policies.
The current government has diminished pensions’ appeal by reducing the lifetime amount to which tax relief can apply and by cutting the maximum annual contribution. These reductions apply from April 2014. It is feared that Mr Osborne may go further on Thursday by introducing a limit to the tax-free lump sum available to savers on retirement. A similar rule applies in Ireland.
Alex Henderson, a partner at accountant PwC, said such measures would “push investors even further towards buy-to-let, where there are fewer restrictions and where the property assets can be bequeathed”.
The tax situation now
Landlords are treated largely as any other business, giving rise to an array of expenses that can be offset against income for tax purposes. Of the 1.2 million taxpayers claiming allowable costs each year, the single biggest expense is mortgage interest, of £5.3bn. Repairs and maintenance come next at £2.5bn, with insurance, legal, letting, broking and other professional fees amounting to more than £3bn.
But buy-to-let is treated differently from other businesses in two major respects. Where their property is furnished, landlords can claim a “wear-and-tear” allowance equivalent to 10pc of annual rent.
Landlords claim that this is the reasonable equivalent to the “depreciation allowance” granted to commercial property owners – but critics say it is needlessly generous. The Intergenerational Foundation, for instance, accused many of “taking this relief as additional revenue without having to justify what they did to deserve it”.
The second area of relief relates to capital gains. A provision allows owners of properties – including those that have been let for any period of time – to exclude the previous three years’ ownership from capital gains tax if “the house has been your main residence at some point”.
This concession became highly controversial when, in 2009, MPs’ use of expenses to pay for multiple properties was exposed. By moving from property to property MPs could crystallise gains with little or no tax applying.
Likely imminent changes to property tax…
Until now Mr Osborne has restricted his interest in property taxation to the top end of the market, raising stamp duty on properties costing more than £2m to 7pc last year and introducing a more penal 15pc rate for those using corporate structures to own property.
He is expected to introduce capital gains tax on properties owned by non-residents in Thursday’s statement. Other changes could see adjustments to stamp duty lower down the scale.
…and what might come next
Mr Osborne’s stated aim of assisting first-time home buyers, shown through Help to Buy and other initiatives, could switch into more targeted reductions of landlord benefits – including, some suggest, the removal of the relief exempting a property from capital gains tax if it was at one time the owner’s home.
But it’s more likely, said Richard Mannion of accountancy firm Smith & Williamson, that the Chancellor will concentrate on anti-avoidance. “There is a strong suspicion that a lot of evasion takes place around rented property,” he said. “The legislation as it exists is probably adequate, it just needs tougher enforcement.”
HMRC is already on the warpath following a two-year campaign launched in September. It estimates that as much as £500m each year is being underpaid under the current regime.
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