Buy-to-let investors to challenge tax hike in court
12-28-2015
Landlords are clubbing together to fight the Tory's tax hike – and they have appointed Cherie Blair's law firm to help them
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Landlords will argue that the tax move flouts a long-established principle of taxation that expenses incurred for the purposes of the business are deductible when calculating taxable profits. Photo: ALAMY
By Richard Dyson
Wealthy property investors are mounting a legal challenge to the Government's proposals to increase tax on buy-to-let investments.
They hope a judicial review will overturn the controversial "Clause 24" of the 2015 Finance Bill, in which the Government introduced plans to prevent landlords offsetting mortgage interest costs against rental profits before calculating tax.
These tax changes, which will apply to existing investment properties as well as future purchases, will result in some buy-to-let investors paying tax even where they generate no profit or are loss-making.
In this case the judicial review – a legal process in which a court reviews legislation or administrative decisions – needs to be submitted by February 17, 2016.
The challenge is being led by millionaire private landlords Steve Bolton and Mark Alexander.
Mr Bolton, who owns about 20 residential and commercial properties, is also the founder and owner of Platinum Property, a buy-to-let training franchise whose members' portfolios are worth a total £200m.
Mark Alexander is founder of online buy-to-let forum Property118.
The third figure involved in the action is Chris Cooper, a modest investor and part-time landlord who - like hundreds of thousands of others - is using buy-to-let as part of his pension.
In an ironic twist law firm Omnia Strategy, founded and chaired by Cherie Blair QC, the wife of Tony Blair, has been appointed to represent landlords' interests.
Scroll down for a worked example of how the tax change will impact buy-to-let investors
• Use Telegraph Money's buy-to-let calculator to see how your own property investments will be affected
Landlords will argue that the Tory's tax move flouts "a long-established principle of taxation that expenses incurred wholly and exclusively for the purposes of the business are deductible when calculating the taxable profits".
Although buy-to-let investors have met with little support from any political party, their objections to the tax changes are widely supported by the accounting and legal professions.
The Institute of Chartered Accountants in England & Wales (ICAEW) has attacked the removal of mortgage interest relief as "unreasonable, unworkable and unthought through".
It has pointed out that those worst-hit will be small property investors, including middle-class savers adding one or two buy-to-let properties to their pensions and other portfolios.
• ‘Buy-to-let tax will cut our income by 25pc'
Large companies investing in residential property will be unaffected and will continue claiming tax relief.
Wealthy landlords investing with cash, rather than using mortgages, will also be untouched.
The ICAEW said this factor could exacerbate the property crisis and make it more difficult for first-time buyers. “The interest relief restriction will favour cash buyers who want to buy to let and may increase the competition even more at the lower end of the property market, hindering first-time buyers.”
The professional body also warned that tenants would be hit with higher rents.
Steve Bolton
Steve Bolton said: “It’s not clear why the Government has chosen to attack only buy-to-let owner-operators with mortgages. Not only is it unfair, but we believe that it could also be unlawful."
Another large investor close to the legal challenge said "it is ironic that buy-to-let investors, who are as a group almost all Tory voters, are using a law firm founded by a Labour leader's wife to fight a Tory policy."
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Cherie Blair Photo: Clara Molden
It is not known whether Cherie Blair is personally aware of the case, but her own buy-to-let investments have in the past attracted publicity and criticism.
Along with her husband Tony, Cherie Blair reportedly owns properties worth over £30m in a portfolio which has included buy-to-let flats in Bristol and Manchester.
The action is initially being financed by Mr Bolton and Mr Cooper but funds are being raised from other investors via crowdfunding website Crowd Justice.
A worked example: how landlord tax is changing
When George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords.
It’s true that every mortgaged landlord who pays 40pc or 45pc tax will indeed pay much more under his proposals.
But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.
In fact, contrary to Mr Osborne’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.
At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.
Here is a worked example assuming you, the landlord, pay 40pc tax.
NOW
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
2020
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.