1:00 AM, 26th December 2015, About 9 years ago 280
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Private Buy-to-Let housing providers have chosen Boxing Day 2015 to begin their fight back at Chancellor George Osborne and his discriminatory tax regime, announced in the Summer Budget, which only targets private landlords with mortgages via the Judicial Review process.
New tax rules will treat mortgage interest as though it is earned income and push many rental property owners into higher tax brackets. Knock on effects can also include increased CSA payments and removal of other vital benefits but Osborne’s tax measures will not affect the wealthiest landlords (those with no mortgages), or indeed limited liability companies which borrow money to fund buy-to-let property investment portfolios.
Social Media has been buzzing in recent weeks calling for legal action to be considered.
The first step to instigating a Judicial Review is to obtain a detailed Legal Opinion from specialist legal counsel. Omnia Strategy LLP, established in 2011 by Cherie Blair CBE, QC, has been appointed.
The organisers of the campaign have launched a fund-raising appeal via the Crowd Justice website. Thousands of landlords are expected to donate funds.
Letting Agents and Mortgage Brokers are also being encouraged to contribute to the fund raising campaign. This is because their businesses are likely to be hit too if landlords stop investing or choose to sell up.
A member of ICAEW commented;
“It is a long established principle of taxation that expenses incurred wholly and exclusively for the purposes of the business are deductible when calculating the taxable profits. Clause 24 of the Summer 2015 Finance Bill contravenes that principle and will result in proprietors of property businesses being liable to tax on a fictitious profit – even if the proprietors really make a loss.
The tax change does not just affect new borrowings. Landlords with existing borrowings will be affected. Portfolio landlords will be particularly badly hit.
As a consequence of the tax change, major changes in the private sector will take place. Some landlords will pass on their increased tax by increasing rents. Others will be forced to sell, as they will not be in a position to pay the extra tax demanded by HMRC. Homelessness will increase as some tenants will not be able to afford higher rents and many will be evicted by landlords forced to sell”.
Mark Alexander, founder of the Property118 Landlords Forum said “it is important for the whole country that funding is raised to win this legal battle. Millions of Britons simply do not qualify for mortgages to be able to purchase a home of their own. The number of people seeking to rent privately has been increasing in line with the growth of the population for decades. It is all very well the government having an ambition for everybody to be a homeowner but they must be made to realise that isn’t realistic. The UK has an ever growing reliance on the Private Rented Sector. Investment and building needs to be encouraged, not taxed into oblivion”
In a letter to the Chancellor, Conservative Lord Flight said “A lot of Buy to Let investment has been an alternative to saving for old age via pension schemes. Up until World War II investing in rented property was the main method of providing for an income in old age. Given the poor performance of the Stock Market over the last 20 years, it is hardly surprising that many people have opted for Buy to Let investment as an alternative source of retirement provisioning. But Buy to Let does not enjoy any of the major tax advantages of pension saving, i.e. tax credit on the amount invested and accumulation of income and capital gains tax free within the pension scheme. The only Buy to Let “tax advantage” has been the ability of the interest cost to be offset against an individual’s income to determine their tax rates/bill – the very thing which you have attacked.”
When Lord Flight referred to offsetting the interest cost against an individual’s income he of course meant rental income only, not total income. Buy-to-Let interest is not deducted from any other income that a landlord might have – unlike the way MIRAS used to work.
Nor can Buy-to-Let losses be set off against any other income. A BTL property has to pay its own way. If it gives rise to a loss, the owner has to make good the loss out of other taxed income. Landlords do not receive any tax “breaks”.
BTL has increased housing stock by 2.5 million between 1996 and 2013.
BTL was only responsible for one-twentieth of the 150% price increase between 1996 and 2007, which is insignificant. Prices would have gone up even more if BTL had not financed the 2.5 million increase in supply – and so would homelessness.
Deducting finance costs from rental income is not a tax relief it is normal accounting practice everywhere, and for every business. That is why Lord Flight put “tax advantage” in inverted commas.
Disallowing finance costs for existing rental businesses is iniquitous and will be damaging for the economy. Rents will rise. Tenants who cannot afford the rises will be made homeless, to be put in temporary accommodation in whichever part of the country it can be found, at greater cost.
For these reasons, it is vital for private landlords, tenants and the entire rental sector that this funding campaign is successful.
The window of opportunity to submit an application for Judicial Review closes on 17th February 2016.
The Crowdfunding website page for making donations to the legal action fund can be found via a Google search for “Crowd Justice Judicial Review of Clause 24” or CLICK HERE.
Dr Rosalind Beck
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Sign Up18:54 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Lisa S" at "16/03/2016 - 18:44":
Hi Lisa.
This could be really important. I love the simplicity of a complaint to the EU. We should definitely look into this.
Lisa S
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Sign Up18:58 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Ros ." at "16/03/2016 - 18:54":
Yes, it struck a chord with me too.
Landlord Lucan
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Sign Up19:03 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "michael fickling" at "16/03/2016 - 18:38":
Thanks for clarifying, Michael.
I understand what you're saying, and I'm more than willing to be proved wrong here, but surely if 'profit' has now been re-defined as turnover minus non-finance-related expenses only, then in order to make an overall 'loss', you would need to have spent more or allowable repairs etc than you had received in rent. It that scenario, then you wouldn't have been liable for any tax in that year in the first place, and so logically wouldn't be able to claim a 'tax credit' in order to get it back.
The question is (and I apologise if this has already been covered) does that mean you then lose out by being unable to carry over the 20% of your finance costs for that year as a loss? If so, then surely that will just discourage spending on repars, and thus ultimately disadvantage tenants?
Landlord Lucan
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Sign Up19:14 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Landlord Lucan" at "16/03/2016 - 19:03":
Possibly answered my own question - the answer being that you can indeed carry the 'lost' relief forward:
"New section 274A(5) allows for an amount of relief to be carried forward where the relief given under new section 274A is restricted by the property business profits at subsection (3)(b) or by the individual's adjusted total income at subsection (4). The individual can carry forward the difference between the relief given under new section 274A divided by the basic rate of income tax and the costs that were disallowed under section 272A, including brought forward amounts"
I still may be missing something, but I can't immediately see why this situation is worse overall than just being able to claim the 20% deduction from profits.
Michael Fickling
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Sign Up19:36 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Landlord Lucan" at "16/03/2016 - 19:14":
The point is accrued losses accumulated perhaps over many years are denuded by this formula at an accelerated rate.The aim of the clause is perhaps to stop people accumulating "losses" moving forward and diminish the benefit to those of us who have steadily accrued significant losses from the past ...........making its effect very much post dated.
Simon Hall
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Sign Up20:22 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Landlord Lucan" at "16/03/2016 - 19:03":
Landlord Luncan,
I have following information from my accountant today:
On mortgage interest relief, there is an intriguing documents entitled “clarification to finance costs restriction for landlords” which is intriguing in so much as it is very hard to interpret. It *looks* like some back peddling from the original quite bonkers legislation, but it is hard to tell how much or how far. The key line for me is as follows:
“ It ensures that the basic rate tax reduction applies and is calculated as intended.”
This could mean more or less anything. But is this a climb down? I daren’t hope too much, but it does smell a bit like one. This didn’t make the speech, and could be nothing more than a basic tidying up of some horrible legislation, but it could a major redraft such that only genuine higher rate tax payers have a restriction, and basic rate tax payers are not affected.
It seems unlikely, so don’t get your hopes up just yet.
Landlord Lucan
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Sign Up20:40 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Simon Hall" at "16/03/2016 - 20:22":
Thanks for sharing your accountant's advice, Simon.
I posed a question about the semantics of that very same document on one of the other threads. I'm glad it's not just me who finds it impossible to interpret accurately!
Appalled Landlord
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Sign Up22:11 PM, 16th March 2016, About 9 years ago
Reply to the comment left by "Landlord Lucan" at "16/03/2016 - 18:21":
Hi L L
The restriction of the tax reduction (what most people have been describing as the 20% tax relief) was originally described in the Policy Paper dated 8 July 2015:
“Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of the:
• finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
• profits of the property business in the tax year
• total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year
Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.”
https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords
Note that this does not say that excess finance costs may be carried forward to following years if the tax reduction has been limited to total income etc.
If someone with no other source of income makes a profit from property that is offset against losses brought forward, he or she would have no total income in the year.
On 25 February I sent the following email to Megan Shaw, entitled “Losses brought forward when Clause 24 is in force”. I have not yet had a reply.
Perhaps if landlords who have accrued losses, and their accountants, also emailed her it might provoke a response.
“megan.shaw@hmrc.gsi.gov.uk
Dear Ms Shaw
I would like to know what will happen when finance costs are disallowed and losses are brought forward.
Suppose a landlord’s only sources of income in 2020/21 will be from UK property and a salary:
Income from property before finance costs £110,000
Finance costs £66,000
Losses brought forward £300,000
Salary £40,000
Presumably £110,000 will be deducted from the losses brought forward, so there will be no property income in the tax calculation.
Will any basic rate relief be given?
Will it be possible to carry forward any excess finance costs on which basic rate relief is not given?
What tax will be payable for 2020/21 resulting from the figures above?
What would the answers be to the 3 questions above if the salary were £140,000?
Regards”
Simon Hall
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Sign Up7:23 AM, 17th March 2016, About 9 years ago
Reply to the comment left by "Appalled Landlord" at "16/03/2016 - 22:11":
Appalled Landlord, Mark Alexander had posted earlier that, effect of Clause 24 have been watered down but I can no longer see the link. As per my understanding and I also spoken to couple of shrewd investors and they seem to think that, Clause 24 will apply on those, who will be naturally higher rate tax payers i.e. not with addition of Gross Rent at the top of salary which pushed them into higher rate payer but those who are already a higher rate payers!
Dr Rosalind Beck
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Sign Up8:54 AM, 17th March 2016, About 9 years ago
Hi Lisa
Can you email a copy of the document to Mark A so that he can show it to a few active members of Property118, including me? We will only show it to trusted people. A few of us think it could be a goer - it is definitely worth a good look at it. This is a great example of lateral thinking, so well done.