A firm which provides outsourced property conveyancing services to brokers and others has added its voice to calls for mortgage interest relief on mortgages to be scrapped, claiming the rationale for the relief as a business deduction is flawed.
Legal Marketing Services has called for tax relief on buy-to-let mortgage interest to be scrapped. Criticism has been growing over the relief offered to would-be private landlords, who claimed £14bn in tax breaks in 2012/2013 according to figures obtained from HMRC.
As it currently stands, buy-to-let investors receive tax relief on the interest on the mortgage, rental insurance, property maintenance, letting agency fees and 10 per cent of the rental income each year, to cover depreciation in the value of furnishings, including sofas and carpets.
According to the HMRC figures, obtained by the Guardian via a freedom of information request, in the 2012/2013 tax year some £6.3bn was claimed in mortgage interest relief alone.
According to Andy Knee, managing director at LMS, tax relief on buy-to-let mortgage interest is worth around £3.5bn a year as a “subsidy” to landlords, which he described as a rough calculation based on currently low interest rates and a figure that will surge again as rates rise.
He told FTAdviser the basis for the relief is flawed because it rests on the assumption that landlords operate as a business, with the interest deducted as an expense. He argued instead that most private landlords are individuals using buy-to-let as an alternative form of saving.
He said: “I don’t like tax relief on mortgage interest for landlords and this is simply because for most people buy-to-let is an alternative form of saving, it’s not an alternative form of employment.
“There’s no other form of saving that you can essentially gear up in order to get tax relief. There’s no doubt that the fact that buy-to-let landlords are competing for the types of properties that first-time buyers would buy if they could afford to instead of rent.
“I would certainly change that – I would remove that completely.”
While the number of first-time buyers has increased following interventions, the number of young people saving for a house is falling as house prices have surged. Buy-to-let has been one of a few areas of mortgage issuance growth and returns have far outstripped other asset classes.
Calls for a change to the rules have tended to come from outside the sector and LMS is one of only a few voices from within financial services calling for a change.
Stephen Jones, a chartered financial planner at Clear Solutions Wealth and Tax Management, said: “The buy-to-let market is probably regarded by the private investor as the principal asset class alternative to stocks and shares. We all know the adage of putting your faith in ‘bricks and mortar’.
“The mortgage interest tax relief for buy-to-let properties can be a significant saving during the earlier stages of a property purchase.”
He said: “Whilst the capital element increase over the years, this is a considerable head start and makes the yield on property purchase far more attractive hence skewing the returns when comparing alternative ways to invest.
“If implemented, a number of more professional investors will understand and are likely to be less likely to invest as the total return on capital shifts from being a combination of income tax relief and ultimately capital gains to solely gain for tax purposes.
“I imagine the result will be savings to the government... [but] less rental properties in the private sector, fewer enter the market and some, who have insufficient headroom become forced sellers.”
George Bull, senior tax partner at Baker Tilly, said: “Buy-to-let is not a simple investment like a bank deposit an equity shareholding.
“The landlord’s return is earned after laying out capital on the purchase, perhaps taking on a mortgage to facilitate the purchase, paying interest on the mortgage and incurring other costs such as agent’s fees, ground rent and service charges, repairs and decoration etc.”
He added that it is “only right” that recognised and allowable costs are deducted from the rental income in computing the profits on which income tax is paid.”
Julie Flynn, an independent financial adviser at Bree Wealth and Tax Management said that in practice her clients use this tax relief, but that “morally” she wasn’t sure if it stood up, given other conditions.
Ms Flynn cited a housing shortage and a discrepancy between those who could afford reasonable housing and those who couldn’t, adding “surely what’s better for society is to be equal”.
ruth.gillbe@ft.com
