Little loophole that could turn into a noose
One of the first rules of economics and taxation is the fact that when one part of the economy starts doing very well, the Government will usually raise taxes on it. And in a progressive tax nation like our own, why not? After all, people making excess profits should pay a little bit more into the national pot.
I was rather shocked, then, to discover that buy-to-let landlords in Britain enjoy one of the most generous tax treatments anywhere in the western world. According to calculations by Global Property Guide, the tax charged on what landlords make in rents is lower here than almost anywhere else in the world. How can this be, given that buy-to-let landlords have enjoyed a huge rise in prosperity recently? The answer is that there is a little loophole which is saving them as much as £1.9billion a year, by allowing them to deduct interest costs from rental income.
For those inexperienced in the world of rents, yields and so on, the scheme works very simply as follows: if a landlord pays £1,000 in interest on his mortgage each month and receives £1,200 in rent, he pays no tax on that first £1,000, and pays income tax only on the £200.
The rationale is that governments should always be keen to encourage investment, so they make exceptions for those who borrow money to invest. The tax break buy-to-let landlords enjoy is precisely the same as that used by commercial property companies when they invest in buildings.
The problem is that landlords are making rather a lot of hay in this particular ray of sunshine. They often ensure that their interest payments are almost identical to the rental income, so they end up paying no tax at all on income during the course of their ownership. And though they do pay stamp duty when they buy and capital gains tax when they sell, developers often contribute to the former, while the latter has just become even more attractive for many after the Chancellor changed it to a flat rate in this week’s PreBudget Report.
Given how long this loophole has been around, I assumed until recently that it was here to stay, but now a think-tank is calling for it to go. Not a Left-wing landlordbaiting one either – the Institute of Directors, which is the lobby group for Britain’s business leaders.
One can only assume that Alistair Darling chose not to close the loophole this week because he is concerned about the consequences for the property market.
Nigel Terrington, chief executive of lender Paragon, reckons scrapping the rule on rental income would destabilise the housing market, and I have to agree with him.
As I said in last week’s column, the buy-to-let sector is already looking mightily over-stretched, and is facing potential price falls even without an intervention like this. Buy-to-let could easily be Britain’s subprime – in other words, its problems may be the trigger for a painful housing slump. It’s hardly surprising the Chancellor doesn’t want to pull the trigger on the property investment sector itself.
Edmund Conway is Economics Editor of the Daily Telegraph (edmund. con[email protected]graph.co.uk)