Is the New Buy to Let Tax Unfair?

The Institute of Chartered Accountants [ICAWE] in England & Wales, has attacked the Chancellor’s controversial new tax on buy-to-let tax as “unfair and unreasonable”.

It suggests the new legislation is “unthought-through” and predicts it will lead to “extreme confusion”. It also suggests that some landlords will not be able to cope & will ultimately put them out of business, massively impacting the UK’s property market, distorting it and making life most difficult for first-time buyers.

The newly proposed tax has been included in the Finance Bill which currently progresses through parliament. It has been suggested that this new tax on rental income will be bought in between 2017 & 2020. The new regime will stop landlords offsetting their mortgage interest costs against the rental income before calculating the taxable profit.

George Osborne’s intention is to “create a more level playing field” between property investors and owner-occupiers who, as Mr Osborne said, do not enjoy tax relief on interest payments.

Various accountants all over the country are claiming this new buy to let tax is “unfair, unreasonable and unworkable”

The ICAEW are suggesting that this new tax will only impact smaller property investors, middle class savers who are renting property out as a way of adding to their pensions.

The larger companies who rent out property will not be affected and will effectively be able to continue claiming tax relief. Any cash buyers are also excluded as they have no mortgage interest to factor into the equation.

“Far from being level, it leaves the playing field with a cliff edge in the middle,” ICAEW said.
It suggested the measure was unfair in applying not just to new investments but to buy-to-let investors’ existing properties.

“Taxpayers will have priced and borrowed according to the tax relief they expected, and these borrowing decisions would necessarily have a long timeline. Many will not be able to restructure their debt.”

As Telegraph Money has pointed out in our examples of future tax returns under the new regime, some landlords will end up paying tax on zero income or actual losses.

The ICAEW said: “Landlords’ real losses will become ‘profits’ when the interest restriction is introduced.”
It pointed out that some landlords would find themselves being pushed from the basic-rate tax bracket into the higher rate – even though their real incomes had not increased. Tax credits could also be lost, “with no real economic change in income”.

Other consequences could be the loss of tax relief on pension contributions or the loss of the new 0pc savings income band, which takes effect next year.
All of the above occur because, with the inability to offset mortgage interest costs, landlords’ “income” will suddenly appear higher – even though it will not be.

Anita Monteith from the ICAEW said: “It’s very confusing legislation and not thought-through. There needs to be a holistic review of property taxation, looking at how property is taxed from a capital and income point of view. This approach is piecemeal.”

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 40% tax.

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 – New Regime

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 40% tax on £20,000 (ie £8,000), less the 20% credit (20% of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93%.

Now, let’s say the bank base rate increases – and in turn your mortgage rate rises a small amount, increasing your mortgage cost to £15,000, while your rent remains at £20,000. You will have to pay £5,000 tax, so you make no profit at all!

The question we are all asking is – will this actually happen!? I for one cannot see how this is sustainable. Will a huge number of private landlords decide to dispose of their stock to avoid this ridiculous tax… only time will tell, watch this space!