Landlords to Challenge Clause 24 Tax Change
Landlords are bringing a legal action against one of George Osborne’s new taxes, says David Lawrenson of www.LettingFocus.com
Landlords to Challenge Clause 24 Tax Change
Clause 24 is the tax grab within the Finance Act 2015. It is being challenged by two landlords who are seeking a judicial review in the courts and have engaged the services of law firm, Matrix Chambers.
The legal challenge is being funded by a crowd funding site to fight the case. Launched on Boxing Day it raised a target of £50,000 in just a week, with contributions from over 700 backers.
The organisers say, “In simple terms, the government now believes it is OK to tax property owners on that part of their rent that has already been paid to the lender as mortgage interest, as if that money was still in the property owners’ bank account.”
I rather like that summary and though I have doubts the action will succeed, I hope it does and I wish the challengers well.
Essentially, Clause 24 overturns a simple and fundamental business principle, whereby income less cost equals profit (To deduct in full the interest cost on loans against income, before declaring for tax, has always been the prerogative of all businesses, ever since accounting began).
The government says Clause 24 is designed to provide a level playing field between home owners and what it and the media like to call, “buy to let landlords”. However, this level playing field argument is surely nonsense.
First, owner occupiers, unlike buy to let landlords, pay no tax on capital gains. Landlords have to pay 18 or 28% capital gain tax rates – and now will have to pay within 30 days of a property’s sale too. (This was another change contained in the same Act).
Second, owner occupiers do not have to meet any of the 200 odd regulations and laws that landlords must comply with.
Third, owner occupiers only have to find between 5 and 10% of a property value as a deposit and benefit from lower mortgage interest rates than landlords enjoy. Landlords have to find at least 25% deposits when they want to buy a property.
Fourth, owner occupiers can earn £7500 per annum tax free on the rent a room allowance, whereas landlords have to pay tax on rental profits of between 20% and 45%, depending on their total income.
Fifth, really rich property buyers, many of them foreign and who have no borrowings on the properties, will be unaffected anyway. (And as we know, many foreign buyers like to leave their properties standing empty and unlet. As long as their cash has been safely laundered away from their host governments, many don’t care about renting them out. So, Clause 24 hardly seems equitable even within the landlord space itself).
Taxed on Losses
The Clause 24 change will lead to many small landlords being taxed on loss-making buy to let properties or being pushed into a higher taxed bracket, even though they may not be making a penny in extra profit. The sector may shrink, leading to fast rising rents as tenants scramble for a smaller amount of available property to rent.
Sure, there are ways around the tax – and if you come to my seminar on 2nd March 2016, (see links below), you can hear Stephen Fay look in more depth at what some of those are. However, landlords might like to hope that the action succeeds.
Small landlords will note that Osborne’s big institutional investor friends, who have long been aching to get into buy to let will not be affected by Clause 24 nor by the SDLT changes. But as we have said many times, the institutional investors will still not be able to make enough returns to compete with small landlords – their cost base is just too high. Also, we think they will not be remotely interested in letting to people on housing benefits or to people on low incomes. Where exactly are these folks to be housed in the future?
If you want to support the action go to www.crowdjustice.co.uk/case/clause24/
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