High time to stop tax perks for BTL landlords

Tony Hazell

Tony Hazell

With the Budget approaching and George Osborne keen to bolster the public coffers he might like to look at buy-to-let.

Private landlords were supposed to create a more flexible housing market after much of the public rented stock was sold off in the 1980s.

But they have also helped to stoke house price inflation while making entry to the market more difficult for first-time buyers.

Article continues after advert

Many landlords treat it as an investment but it receives the tax perks – and those perks are increasingly unwarranted.

First-time buyers not only have to compete with those buying property for investment, they are also placed at a financial disadvantage.

The cheapest buy-to-let mortgages are priced at less than 3 per cent. Take tax relief off and a higher-rate taxpayer could be paying 1.8 per cent on an interest-only loan.

First-time buyers must generally pay around twice this with the lowest interest rates at around 3.5 per cent. And they would usually opt for a repayment loan.

The ‘investor’ can claim income tax relief on property maintenance, which the first-time buyer must pay out of taxed income. The investor can claim three years’ capital gains tax relief if they live in the property for a short time. Capital gains tax relief can also be claimed on any initial work to upgrade the property.

Figures disclosed by HM Revenue & Customs last year, following a Freedom of Information request by think tank the Intergenerational Foundation, suggested private landlords could be claiming as much as £13bn a year against their tax bills.

If these figures are accurate then it may be costing the Exchequer (that is, taxpayers) up to £5bn a year depending on the tax bands of the individuals. It is, I think, reasonable to assume most would normally pay tax at 40 per cent or even 45 per cent.

I have not got a beef with private landlords but I see no reason why they should be given tax advantages not offered to first-time buyers and others ‘nesting’ rather than investing.

Nor should they be given advantages not available to those who put their money into other forms of investment.

Someone who chose to borrow to fund their pension or an Isa would not be given tax relief on the interest. Those who take a pension income must pay full tax on it, while investment property owners can offset notional expenses against income.

The most recent figures show that about £2.6bn of tax was payable on £25bn of rents in the 2010/2011 tax year – so just more than 10 per cent.

The crux of the issue is whether buy-to-let is a business like any other or, as most would admit, an investment often used as an alternative to a pension.

The case for tax relief on their mortgage interest is tenuous in the extreme and in our straitened times there is a strong argument that it should be phased out.