Photo: HM Treasury
From April 2017, a buy-to-let tax hike in the UK could put small landlords out of business – but landlords still have a chance to fight back.
The change, which was introduced in last year’s Summer Budget without consultation, will cut the amount that landlords can claim as tax relief on their mortgage interest to the basic rate of 20 per cent.
In other words, if you are a landlord, you will pay tax on the rent you receive, not on what is left after you have paid your mortgage interest – something that Alexandra Cook, a landlord based in London, says makes buy-to-let possibly the only business in the world where you are taxed on a non-existent profit.
“In virtually no other business could you say this is a profit,” Cook tells TheMoveChannel.com. “The interest landlords pay on loans is a business cost that has to be paid to the bank; the money does not stay in our accounts. Dramatically increasing tax in this way will only put smaller landlords out of business.”
By focusing on mortgage tax relief, Clause 24 in the Finance Act 2015 unfairly excludes wealthier landlords, who can buy properties with cash. Institutional investors will also not be affected. Some current basic-rate taxpayers, though, will suffer, as the change pushes them into a higher tax bracket.
Smith & Williamson has calculated that landlords with mortgage costs of 75 per cent or more of their rental income will ultimately see all of their profits erased. For example, if your interest-only mortgage costs £15,000 a year and your income from rent is £20,000, you will end up making nothing whatsoever.
Clause 24 will be phased in gradually from April 2017 until it is fully implemented in 2020.
Now, though, is the time to fight back.
Steve Bolton and a fellow landlord, Chris Cooper, are already seeking a judicial review to overturn the tax grab.
Bolton is the owner of Platinum Property Partners, a buy-to-let specialist with a portfolio worth £200 million, while Cooper is a part-time landlord, who, like many hard-working landlords, is using his investment as part of his pension.
The law firm supporting their challenge is headed up by Cherie Blair CBE, QC, the wife of former Labour Prime Minister Tony Blair. The lawyers supporting the campaign believe there may be a basis in Human Rights and European law where Clause 24 can be overturned, with Bolton suggesting it could be “unlawful”.
“Those involved fully support the elimination of [unscrupulous landlords] in the private rented sector,” wrote Bolton on a crowd-funding campaign to raise money for their challenge, which was launched on Boxing Day. “We also welcome fair measures to cool the housing market. However, Clause 24 is not the fair or intelligent means of achieving that.”
The crowd-funding campaign raised £50,000 in just nine days, as landlords clubbed together to combat the unconsulted decision.
They are not the only ones making a stand.
The Residential Landlords Association is now also taking legal advice on whether to challenge the Government.
“The Government needs to understand that not everyone will be able to afford to buy a house or indeed want to,” warns the RLA. “Its whole policy towards the private rented sector needs to change. If it does not, it will only make the housing crisis worse.”
Indeed, if landlords find their investments no longer profitable, they will be faced with two options: raise their rents or sell up.
The potential impact on the wider housing market should not be under-estimated. The tax change follows an announcement of an additional 3 per cent Stamp Duty for the purchases of second homes and buy-to-let properties, effective from April 2016. At the start of this year, Rightmove has already noted a 6 per cent rise in supply of two-bed homes newly listed for sale, which it says could partly be a result of landlords selling up.
What can be done to reverse this unfair tax grab?
Bolton and Cooper’s judicial review has a “reasonable chance of success”, their legal team confirmed this week. The next step is for their lawyers to send a letter outlining the case to the Government to commence proceedings.
A petition was also started last year by landlord Ruhal Uddin to get the issue debated in parliament.
It has 56,395 signatures and one week left to reach its target of 100,000 by 27th January, which will then put the matter forward for discussion in the House of Commons.
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