As part of its special Summer Budget, the Government has announced that it will introduce reforms to the taxation of buy-to-let property which are very similar to ones proposed by IF. David Kingman reports
The Intergenerational Foundation’s 2013 report Why BTL (buy-to-let) equals “Big Tax Let-off” estimated that UK buy-to-let landlords were writing off up to £13 billion a year in mortgage and depreciation costs, at a cost to the Exchequer of between £2.5 and £5 billion annually. This is both regressive and intergenerationally unfair, as these landlords are predominantly middle-aged and older savers with significant asset wealth who benefit at the expense of the less well-off. Given the UK’s chronic housing shortage, it also gives landlords an advantage when they compete against would-be first-time buyers to purchase new properties.
What has the Government pledged to do?
In policy 1.190 of the Budget document, the Government declares that “the current tax system supports landlords over and above ordinary homeowners… tax relief for finance costs is particularly beneficial for wealthier landlords with larger incomes, as every £1 of finance cost they incur allows them to pay 40p or 45p less tax.”
The Government announced two fundamental reforms to address the unfairness in the current system which IF identified. Firstly, while landlords will still be allowed to deduct the cost of mortgage interest from their rental income for tax purposes, this relief will be restricted to the 20% rate of tax even for landlords who are 40% taxpayers in order to make the system more progressive.
Secondly, the system under which landlords can claim tax relief for their depreciation costs will be completely overhauled. Currently, landlords can claim 10% of their rental income as a tax-free “wear and tear allowance” without having to provide any proof showing what they spent the money on. Arguably, this creates a perverse incentive for landlords to claim the money without investing anything to maintain the quality of their properties – an effect which appears to be borne out by the finding that 1 in 3 privately rented properties in the UK is classed “non-decent” by the English Housing Survey. Following the announcement in the Summer Budget, this system will be scrapped and replaced with a new one under which landlords will need to claim for each item they replace individually and provide proof that they have done so.
What impacts will these changes have?
The Government produced a document showing policy costings alongside the main Budget which gives an indication of how much additional revenue they expect these reforms to raise. According to the Treasury’s statistical modelling, which factors in how they expect each policy change to affect the behaviour of taxpayers, they expect these two changes to be raising an extra £835 million per year by 2020/21, the last financial year of the current parliament.
Of course, this isn’t simply a matter of increasing the amount the government raises in taxes: these reforms should also have the effect of levelling the playing field between landlords and first-time buyers when they compete to buy new properties, and improving the standards of privately rented housing so that tenants can enjoy a better quality of life.
However, these reforms can only go so far: IF’s report drew on survey evidence which showed that the vast majority of Britain’s young renters would still like to own their own homes one day, and while levelling the playing field between them and buy-to-let landlords is welcome, that won’t happen until as a nation we start building many more homes.