Government Issue Response To Tax Relief Petition

Government Issue Response To Tax Relief Petition

Government Issue Muted Response To Tax Relief Petition

The Government has published a response to the online petition that opposes the proposals to change the amount of tax relief on buy to let mortgages announced by the Chancellor, George Osborne, in the post election summer budget.

From April 2017 onwards landlords will only be able to claim the basic rate tax relief rather than the higher rate tax relief on buy to let mortgage payments. It is widely feared that the move will severely affect the profitability of the private rented sector (PRS).

The online petition to reverse the planned tax restrictions on individual landlords has attracted more than 23,600 signatures since being posted.At 100,000 signatures, this petition must be considered for debate in Parliament, so don’t delay sign the petition!

The Government response to the petition reckons that the Government is committed to a fairer tax system and maintains that the changes will affect less than one in five landlords.

It also claims that residential property is a passive investment like shareholding, and that the interest relief on mortgage payments is unfair because it is not available to homeowners.

The difference between passive investments like shareholding and property investment is that stocks and shares don’t call you in the middle of the night to tell you that there is a problem and passive investments don’t cause damage to your assets and then try to blame you.

If that is the case then why are the Government forcing additional responsibilities and regulations on to the sector, including immigration checks on tenants and minimum energy efficiency standards for rental properties and the introduction of selective and mandatory licensing schemes for landlords operating in the UK’s private rental sector (PRS).

Property investors and landlords mainly operate as sole traders and as such they incur costs in the course of running and operating such a business. The planned restriction will unfairly target landlords and property investors by preventing the offsetting of operational expenses in the same manner as other businesses are encouraged to do. This means that the planned restrictions need to be reconsidered because of the unfair implications.

Property investment is a bone fide business and it is apparent that the Government want to tap into a lucrative and profitable market, however, they cannot do so openly, due to obvious failings in other related areas, such as failing to address the housing shortage.

The private rented sector is heavily reliant on individual landlords and the planned tax relief change is likely to result in higher rents, due to landlords looking to offset higher tax liabilities. In some cases, employed individuals who own buy to let properties as investment vehicles for their retirement would be adversely and unfairly affected by the planned restrictions.

The Institute for Fiscal Studies had already stated that individual landlords were already taxed more heavily than other homeowners, following the controversial budget announcement.

The response from HM Treasury states:

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 income tax.

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.

HM Treasury

The Residential Landlords Association (RLA) and Scottish Association of Landlords (SAL) claim that the tax changes will affect many more landlords and tenants than the Government claim, and the result will be increased rental prices, that will in turn cut the available rental property supply and irrevocably damage the private rental sector.

RLA Chairman - Alan WardRLA chairman Alan Ward responded to the Government response stating: “The Government continues to peddle the line that letting out residential property is a passive investment, while piling on new regulations and responsibilities like immigration checks, minimum energy efficiency standards and licensing. It is a false comparison. The letting of residential property needs to be recognised as the trading business it is and be allowed to offset legitimate business costs, including mortgage interest. Equally bogus is the comparison with homeowners. As the Institute for Fiscal studies has demonstrated, buy-to-let landlords are already taxed more heavily than homeowners. Unlike homeowners, landlords pay income tax on rental profits and capital gains tax when a property is sold. If the Government is going to make these sort of comparisons they should be honest and fair.

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