IFS report counters George Osborne’s justification of Section 24

The Institute for Fiscal Studies (IFS) report written in February 2016 titled “The Effects of Taxes and Charges on Saving Incentives in the UK” countered the arguments used by the then Chancellor George Osborne to justify the introduction of Section 24 of the finance act 2015.

Paul Johnson of The Institute of Fiscal Studies said “This line of argument (about the ‘level playing field’) is plain wrong. Rental property is taxed more heavily than owner occupied property”.

On pages 50 and 51 of the report, Stuart Adam and Jonathan Shaw wrote:

“In his Budget speech announcing this reform, the Chancellor argued that it was intended to level the playing field, arguing that at present ‘landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot’

It is true that landlords can offset their mortgage interest payments while owner-occupiers cannot. However, this does not mean that landlords are treated more favourably overall. Landlords are liable for income tax on their rental income and CGT on any rise in the value of their property, whereas owner-occupiers do not pay tax on their ‘implicit rental income’ (the in-kind reward enjoyed by owner-occupiers as a return to their investment: the notional rent they pay themselves as simultaneously tenant and landlord) and main homes are exempt from CGT. Deductibility of investment costs is simply the natural counterpart to taxation of investment returns: essentially, mortgage interest payments are deductible from rental income just like companies can deduct their debt interest payments (and other costs) from profits for corporation tax purposes, so that only the net income from investment is taxed.

Tables 5.3 and 5.4 demonstrate that the existing system in fact treats rental housing less generously than owner-occupied housing. The ETR [effective tax rate] on owner-occupied housing is zero: it is entirely untaxed. The ETR on rental housing is significantly positive because of the taxes on rental income and capital gains, notwithstanding the deductibility of mortgage interest payments. The reduction in generosity of tax deductions for landlords’ mortgage interest is not reducing a net tax advantage of buy-to-let but increasing its tax disadvantage relative to owner-occupation.

Indeed, this change in the tax treatment of mortgage interest is only one of several recent announcements increasing the tax advantage of owner-occupation over rental housing. The other main ones are the following:

• the July 2015 Budget confirmed a Conservative manifesto commitment to introduce an additional inheritance tax allowance specifically for main residences, to be phased in between 2017–18 and 2020–21;

• the 2015 Autumn Statement announced that, from April 2016, a three percentage point stamp duty land tax supplement would apply to purchases of residential properties not intended to be the buyer’s main home.

As explained in Section 3.1, our calculations do not take account of inheritance tax or stamp duty land tax. However, while it would be hard to quantify the effects of these reforms on saving incentives with any precision, it is clear that the overall tax advantage of owner-occupation when all these reforms are implemented will be even greater than the figures in Tables 5.3 and 5.4 (see below) suggest. And with the introduction of the personal savings allowance taxing most interest income out of tax (see Section 5.1), rental housing looks set to become easily the most tax-disadvantaged of the major asset classes we consider in this report. (emphasis added)”.

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