Landlords lose their interest tax case

[Me2017]

Higher rate tax paying landlords have lost their legal challenge which may be of interest to some mumsnetters whether tenants or landlords. Landlords had formed "Axe the Tenant Tax" group for the High Court challenge . The result is that landlords with a mortgage and who pay 40% + tax will be taxed on profits they have not made and in fact taxed as if they made a profit even if they made a loss.

This might result in more property sales and more properties for those wanting to buy homes to live in which is the intention of the change or it may result in increased rents or it may mean richer landlords who buy for cash rather than have mortgages and those with incomes including rent under the 40% tax band become the main buy to let buyers.

www.cchdaily.co.uk/buy-let-landlords-lose-case-bring-judicial-review-interest-relief-cuts

I do not think their official website of Axe the Tenant Tax covers the latest decision yet www.tenanttax.co.uk/

[mumofone1234]

It is a bonkers rule. How can you tax somebody on money that they haven't actually made? Funny how those with 15 or more properties are exempt . God forbid it affects the rich! Just slap down those in the middle daring to try to plan for their old age and not rely on the state pension/benefits.

[prh47bridge]

How can you tax somebody on money that they haven't actually made

People are not being taxed on money they haven't made. What is happening is that landlords will no longer be able to count mortgage interest as a deduction from their profits for tax purposes. This will increase their tax bill. If the mortgage interest is more than 75% of their rental income the profit will be completely wiped out. They will either have to put up rents or get out of the buy to let market completely.

Contrary to what campaigners are saying, it is fairly common for the profit figure used for tax purposes to be different from that shown in the company accounts. Many companies incur expenses that are not allowable for tax purposes so are taxed on a higher profit figure than the one they report. Where a company has a low level of profits and significant expenses that are not allowable for tax it is possible for tax to wipe out the profit completely.

Funny how those with 15 or more properties are exempt

They aren't. The initial consultation on the change suggested that "significant investors" should be exempt but George Osborne rejected this idea.

These changes are driven by a concern that buy to let is causing the property market in some parts of the country to overheat, encouraging builders to build investment flats rather than family homes and making it difficult for first time buyers. Whilst some experts disagree with the assertion that landlords are taxed more favourably than home owners, the Intergenerational Foundation disagrees. They point out that:

• home owners do not get tax relief on mortgage interest. Buy to let landlords do. The "tenant tax" is intended to address this.

• landlords also get a tax allowance of 10% of their rental income. This is intended to ensure they maintain the standards of their properties. Evidence suggests that many are simply pocketing the money and not doing the repairs.

The central question is whether buy to let landlords are small business owners or investors. Many regard themselves as small business owners. The government clearly regards them as investors, hence these changes.

The Intergenerational Foundation's report mentioned above can be found here.

[ReallyTired]

I don't have a problem with the changes to tax relief on buy to let mortgages. I want my children to be able to buy a property one day.

[mumofone1234]

prh47bridge that report is from 2013 and so out of date. The 10% wear and tear allowance no longer exists, for example.

These changes affect landlords who maybe have one or two additional properties in lieu of a pension. Wealthy individuals who can make cash purchases or with multiple properties in a ltd co will not be affected. If anything, the new rules advantage the wealthy property owners, putting them in a much stronger position to monopolise the market as the amateur landlords are priced out

[prh47bridge]

I'm aware of the age of the report but much of what it says is still accurate. Indeed, some of the problems it highlights have become worse. The point about mortgage interest is still correct.

Wealthy individuals almost always use companies to invest in the property market. It is true that limited companies with multiple properties are not affected by this change but they face several disadvantages compared to private buy to let landlords:

• There is no annual allowance for Capital Gains Tax so the company has to pay tax on the full gain in price when a property is sold

• When the profits are paid to the owners they have to pay additional tax on top of the Corporation Tax paid on profits. If all the profits are paid to the owners they face a significantly higher effective tax rate than an amateur landlord

• They generally have to pay higher mortgage interest rates than amateur landlords

If the size of the rental market remains constant you are correct that larger landlords will benefit from amateur landlords dropping out of the market. However, that is not what is expected to happen. There is strong evidence that many of those currently renting want to buy but are unable to do so due to property prices being forced up by buy to let. There is also strong evidence that buy to let is distorting the housing market in other ways and some experts believe that, if unchecked, it could lead to another financial crash. The expectation is that making buy to let less remunerative will take some of the heat out of the market and rebalance back towards home ownership.

[mumofone1234]

Well hopefully house prices WILL drop. They're still far over-priced compared to salaries

[Me2017]

The state can make whatever rules it likes on tax and it has done so here. The impact may well be that 40% tax payers with mortgages on their buy to lets put up rents or sell and those properties may be bought by first time buyers, people buying without a loan to let out and landloards who don't pay 40% tax. We shall see what impact it has.

[DiegeticMuch]

Plenty of landlords will pass the costs on to tenants, many of whom are in no position to buy a property (even in cheaper parts of the U.K., saving up a deposit is problematic with the current cost of living being pretty high). I can see why this policy has been brought in, but I wonder whether it'll really benefit people in lower socioeconomic groups by cooling the housing market at all. We'll have to wait and see.