Why BTL (buy-to-let) equals “Big Tax Let-off”

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David Kingman


25 November 2013

The private rented sector in the UK has witnessed explosive growth since rent restrictions were abolished by the Thatcher government in the late 1980s, a period which has seen thousands of new property investors take up the opportunity to become landlords. Owing to Britain’s acute shortage of new housing, much of this growth has come at the expense of today’s younger generation – often dubbed “Generation Rent” by the media – who are facing higher house prices and longer and longer waiting periods before they can get on the property ladder themselves.

But do first-time buyers and landlords compete on a level playing-field? Despite the political rhetoric that Britain should be a “property-owning democracy”, direct support from the taxpayer to help owner-occupiers get on the property ladder has been whittled away to almost nothing ever since Gordon Brown finally abolished MIRAS (Mortgage Interest Relief at Source) during his first term as Chancellor. However, landlords have been far more fortunate: this study estimates for the first time the full value of the enormous range of tax reliefs which landlords are currently able to claim, which IF argues are worth around £13 billion per year.

This report probes some of the questions that ought to be at the heart of Britain’s housing debate. Why does the Exchequer give so much support to landlords when it gives so little to young families who dream of owning their own home? And is it fair to give such a large subsidy to a group who are predominately wealthy and middle-class? IF argues that only if we reform the way landlords are taxed to create a level playing-field between them and first-time buyers can the ambition of a property-owning democracy ever be realised.

Posted on: 25 November, 2013

5 thoughts on “Why BTL (buy-to-let) equals “Big Tax Let-off”

  1. Matthew Ryan

    I think this report is spot-on. I would call it timely except it should have been written years ago.

    I’m a professional buy-to-let landlord myself and I’m constantly amazed by the generous treatment I receive from HMRC. I’m grateful, I take advantage – but in all honesty I can’t say it’s just.

    My only caution is that tax deductibility should be removed from all new mortgages rather than existing ones – or give a period of grace of say three years for existing ones.

  2. M Tredwell

    Matthew – I am a landlord too and I despaired when I read this report. There are some practical things that would help the younger generation access more affordable homes, the most obvious of which is to find some way that the spare cash of the older generation could be used to fund mortgages for the young without the intervention of the banks. Local authorities are perfectly placed to act as intermediaries for such schemes.

    So why did I despair at the report? Because it will cause massive homelessness and most adversely affect those it intended to help. It does not recognise that buy to let is a rather poor investment. The interest repayments on a £150,000 mortgage for a property that rents out at £700 are around 5.00% for buy to let ( a lot higher than residential mortgages with a large junk of the costs being the arrangement fee). This is roughly £625 per month. Out of the difference – £75.00 – the landlord has to cover the insurance, void periods, repairs, and ‘buffer cash’ to put a side to refurbish the property every so often. Even with tax relief, the figures only stack up if landlords make capital gains over the long term. Unlike shares, houses cannot be held inside an ISA so when the house is sold, the majority of the profit will be hit for 40% tax. Given that house rises are likely to be modest for many years, this does not make for an attractive investment and nothing like as attractive as holding shares inside an ISA. There are landlords in many parts of the country with enormous and highly geared portfolios. If they lose tax relief they will simply go bankrupt – there are not the margins to absorb the loss. The net result is that thousands of people will be left homeless. The IF has raised some important issues which need addressing but we need solutions that will improve things not make them worse.

  3. AW1983

    A solution to house prices and tax benefits:

    1) Reform CGT so that all people with more than one property are assumed at the point of sale to be selling a second property so they cannot flip between properties;

    2) Force landlords to pay 90% of the council tax on all their properties. Implement rent controls to ensure compliance;

    3) Raise interest rates by 0.5% each quarter until they reach 3% to offer a return on other investments;

    4) Tax rental returns in the same way as dividends;

    5) Treat property like any other investment. Limit gearing (lending to buy stuff – oddly most fund managers can’t gear as much in their management of an investment fund as a 22 year old with a £7,500 deposit can) and force banks to hold a capital buffer over and above the collateral held in the deeds of the house to make lending large mortgages less attractive.

    Mortgage interest could continue to be offset against returns, but only to the same extent as other investments. If we could simply make property as liable to tax as securities, it would immediately be less attractive and encourage investment in other areas. That;s what most of the western world desperately needs.

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