IEA paper – Tax measures that discriminate against private rented housing

14:56 PM, 4th May 2019, About 6 years ago 9

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Professor Philip Booth of the Institute of Economic Affairs and our own member Dr Rosalind Beck have written a paper titled “Taxation Without Justification” An economic analysis of the Treasury’s treatment of privately rented housing. You can click here to download the full document.

The summary states:

“The private rented sector has played a critical role in increasing and improving housing provision in the UK. Around 80% of private sector tenants are satisfied with their homes and satisfaction in the sector compares favourably with that in the social rented sector. This contribution has gone unrecognised: instead, landlords have been made scapegoats for a housing crisis primarily caused by land-use planning restrictions.

“The government has recently passed tax measures that discriminate against private rented housing, both as an asset class and as a form of housing tenancy. The most damaging of these measures is ‘Section 24’1 which prevents landlords entirely offsetting interest against rents before taxable profits are calculated. This move is unjustifiable and will raise rents. The Treasury’s rationale for the tax change has no justification in public finance economics and it is concerning that the Treasury would make the arguments that it has made.

“As a result of Section 24, many landlords will pay huge amounts of tax as a proportion of profits. Interest rate rises are likely to cause the tax rate to exceed 100 per cent of their underlying profit in some cases. Tax will even be payable by some landlords who make a loss.

“The government has also increased Stamp Duty on buy-to-let properties. Stamp Duty in general is widely regarded as one of the worst taxes from an economic efficiency point of view. The late James Mirrlees, Nobel Prize winner in economics wrote: ‘There is no sound case for maintaining stamp duty and we believe that it should be abolished’ and ‘Stamp duty and business rates defy the most basic of economic principles by taxing transactions and produced inputs respectively’. The government’s decision to increase Stamp Duty on buy-to-let properties will also damage the market and raise rents.

“The increase in Stamp Duty was introduced with the expressed intention of promoting buying over renting. This may happen at the margin. However, any such effects will benefit a small minority of potential purchasers who will be relatively well off.

“Increases in taxes on landlords are likely to reduce the supply of rental housing, increase rents, reduce quality and reduce the size of the ‘professional’ landlord sector which is most affected by the changes.”

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Comments

Chris Novice Shark Bait

10:21 AM, 7th May 2019, About 6 years ago

Thank you. This article drills down into the fallacies of political engineering. The clarity regarding imputed rent and its historical
context are important, but such arguments were lost on Kenneth Clarke. Overall It begs the question as to why exactly we were denied a judicial review.
It may prove to be a very important piece of writing. The lack of other comments is surprising. Perhaps all are now pr- occupied with mitigation maneuvers.

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Fen Jen

10:39 AM, 7th May 2019, About 6 years ago

Yes we all know that but the government couldn't care less. It gives them massive income to solve their crisis and at the same time solves their housing crisis so they think as the new additional section 21 removal means that tenants can stay in properties for many months without paying rent as housing benefit does not cover the full cost of rent and section 8 takes for ever. Also councils in London are now building massive blocks for rent only with housing associations so they are determined to remove the private landlord from the market completely.

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Frederick Morrow-Ahmed

13:55 PM, 7th May 2019, About 6 years ago

At one time owner-occupiers and landlords were on the same playing field when MIRAS was available to the former. It can be argued that when MIRAS was abolished for owner-occupiers the same should have happened to landlords. All that meant was that landlords would have had to have a far higher equity and correspondingly lower gearing to become a landlord. No bad thing. This should apply across the board, to both corporate landlords working under a limited company wrapper and to non-corporates. Those landlords that let only to HB tenants and to other unfortunates could be made an exception as long as they are structured to do so, much like housing associations.

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Gromit

15:46 PM, 7th May 2019, About 6 years ago

Reply to the comment left by Frederick Morrow-Ahmed at 07/05/2019 - 13:55So you'd also think it fair that Landlord should not have to pay tax on rent collected, just owner-occupiers don't have to account for imputed rent?
"Owner-occupiers benefit from two major tax incentives, which arise because the returns on investing in a property are taxed differently according to whether the owner lives in that property or not. One is an exemption from capital gains tax on owner-occupiers’ main homes. Landlords are taxed on the profit they make from house price appreciation; owner-occupiers are not. Wilcox and Williams estimate the cost of this relief to have been £18.7bn in 2016/17. The other tax advantage enjoyed by owner-occupiers is an exemption from income tax on the imputed rent. A landlord pays income tax at their marginal rate on the rental income, net of the cost of mortgage interest on that property, which is an allowable expense; an owner-occupier does not. Wilcox and Williams put the cost of this at £21.3bn in 2016/17."
http://www.civitas.org.uk/2018/11/23/imputed-rents-forgotten-but-not-gone/

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Luke P

16:01 PM, 7th May 2019, About 6 years ago

Reply to the comment left by Frederick Morrow-Ahmed at 07/05/2019 - 13:55
And should we apply CGT to owner-occupiers upon sale?

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Appalled Landlord

16:04 PM, 7th May 2019, About 6 years ago

Reply to the comment left by Frederick Morrow-Ahmed at 07/05/2019 - 13:55
Why have you posted fallacious propaganda from David Kingman and the house price crash trolls under an article about a report which, on page 14, explains why it is a fallacy?
https://iea.org.uk/publications/taxation-without-justification/

What’s your game?

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Kathy Evans

16:21 PM, 7th May 2019, About 6 years ago

Reply to the comment left by Frederick Morrow-Ahmed at 07/05/2019 - 13:55
That tired old MIRAS argument is such a fallacy. Every other type of business can offset its finance costs against profits. A taxi company can claim for car fuel; a private motorist cannot. A shop can offset its rent and rates against tax; a private person cannot - ALL because of the way profit and loss is traditionally calculated and the general principles of Accountancy. Comparing a private householder with a landlord business is like comparing apples with eggs.

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Simon Williams

21:10 PM, 7th May 2019, About 6 years ago

It's also crucial to remember that the ability of a landlord to deduct all interest costs against tax is very standard in other countries. It's not some whacky idea dreamt up in the UK and now abandoned. In most other European countries it's just standard practice.

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Sean Graveney

15:24 PM, 8th May 2019, About 6 years ago

Reply to the comment left by Gromit at 07/05/2019 - 15:46
Most tenants do pay income tax on the money they then use as rent. Surely you’re not suggesting Landlords shouldn’t pay any income tax?

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