Why the new tax on buy-to-let is deeply unfair
08-03-2015
Why the new tax on buy-to-let is deeply unfair
Taxes are supposed to be levied on profitable businesses – not loss-making buy-to-let landlords
George Osborne 'putting the finishing touches' to his Summer Budget
George Osborne restricted mortgage interest tax relief to the basic rate in his recent Budget Photo: Twitter/Getty
Richard Dyson
By Richard Dyson, Personal Finance Editor
For several years this newspaper has warned investors about the fragility of buy-to-let returns and the growing risks facing landlords.
In April 2014, under the headline “Could this be the worst possible time to buy-to-let?”, we pointed out that rising property prices had pushed yields to wafer-thin levels in some parts of the country.
Couple those narrow yields with mortgage rates at historical lows, and landlords were sitting on a powder keg: a small increase in mortgage costs would turn their monthly cash flow negative.
We are now in an even more dangerous place.
Prices have risen since April 2014, outstripping rental increases. Yields are even lower. Mortgage rates are finally, as was inevitable, starting to climb.
Now, on top of this, comes the Government’s proposal to cut the tax relief that landlords can claim on their mortgage interest.
As I’ve argued before, the removal of this tax perk is wrong-headed. Businesses are allowed to deduct costs, including the costs of credit, from their taxable profits, and landlords should be allowed to do so too.
If the tax relief is curbed as proposed then many landlords will find themselves pushed into the red, yet still with tax to pay.
Imagine the very feasible scenario where a landlord’s mortgage costs drift upward to the point where rent no longer covered them. He’s making no monthly profit, or even a small loss.
Under the Government’s proposals, he could not offset all his mortgage costs for tax purposes, giving rise to a tax liability even where his balance is plunging further into overdraft every month.
• Nine ways to increase your buy-to-let profits
The Government has given landlords several years to adjust to this new tax regime. Even so, it casts an alarming shadow over a sector whose fundamentals already look ugly. Values are high, rents relative to prices are as low as they’ve ever been, credit costs are rising and a new tax is about to hit. Could the outlook for buy-to-let be worse?
A part of the Government’s reasoning behind curbing landlords’ tax relief was to prevent the much-discussed “buy-to-let bubble”.
But as so often happens when the Government tries to intervene in any marketplace, the consequences could be unexpected, even disastrous.
Most property investors are turning away from the market for all the reasons above. Mortgage lenders have also been prudent.
The danger now is that this new tax burden will land in a few years’ time when the market, having cooled, is already claiming victims among amateur landlords who cannot cover increased mortgage payments.
Ahead of the Summer Budget many commentators had called for a reduction in landlords’ tax perks, playing to a simplistic idea that buy-to-let is somehow to blame for Britain’s housing crisis. The Chancellor’s decision to increase landlord taxation was therefore an easy, even popular one. It needs to be rethought.