Lit­tle loophole that could turn into a noose

The Daily Telegraph - Property - - Property - Ed­mund Con­way

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)

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