Landlords’ tax burden surges by £1bn

Campaigners and politicians are now calling for Government to reverse its controversial move to slash mortgage tax relief that has driven property investors to sell up and rents to rise, writes Alexa Phillips

Landlords will pay £1bn more tax this year compared to just four years ago as frozen tax allowances and the removal of reliefs take hold. The tax burden on property investors will reach £8.3bn this tax year, accountants RSM UK estimated, up from the £7bn HM Revenue & Customs collected in 2019-20, according to RSM’s analysis.

It comes as rents across Britain soar prompting calls for the Government to reverse years of anti-landlord policies.

Clive Betts, a Labour MP and chairman of the influential housing select committee, said reinstating tax relief on mortgage interest should be considered to make investing in the rental sector more attractive to small landlords. “The

Government should review it and look at the possibility of making changes to undo what they’ve done,” he said.

He said the Government appears to be trying to push landlords out of the rental sector to make more properties available and affordable for firsttime buyers. “There is little real hard evidence that somehow the growth of the private rented sector in recent years has been the biggest effect on prices for first-time buyers,” he said.

“The issue basically is an overall lack of supply. It was a knee-jerk reaction to reduce the way that landlords could offset their interest payments against their income, and the consequences were simply not thought through.”

Landlords are paying more tax largely as a result of frozen income tax allowances and thresholds, and the scrapping of tax relief on mortgage interest payments. They used to be able to deduct 100pc of mortgage interest from their rental income when calculating profits. Now, they only get a 20pc tax credit.

The removal of mortgage relief, gradually cut between 2017-18 and 2020-21, cost landlords an estimated £796m this financial year, up from £747m last year, according to forecasts from the Office for Budget Responsibility.

Now that mortgage rates have risen sharply, landlords are feeling the scrapping of relief even more keenly. The average two-year buy-to-let mortgage rate was 5.95pc this month, compared with 2.9pc a year ago. Likewise, the average buy-to-let tracker mortgage rate has risen from 2.12pc to 5.11pc during the same period.

Landlords are also being hit hard by a deep freeze on the personal tax allowance and tax thresholds imposed in March 2021 and extended until 2028 despite rising inflation.

Rents have risen by 4.4pc in the past year, according to the Office for National Statistics, pushing landlords into higher tax bands.

Chris Norris, of the National Residential Landlords Association, said: “The Government seems to be hell-bent on creating a hostile environment for landlords.”

He said frozen income tax thresholds, combined with the loss of mortgage interest relief, mean that landlords are being forced to declare an “artificially high” income because they cannot deduct as many expenses.

“It’s driving up the costs, some of which will get passed on to tenants, and you go round and round in a cycle,” he said. “It seems like the Government is determined to make things worse rather than to create an environment where people feel confident to invest.”

Growing numbers of landlords are exiting the rental market, which is reducing the supply of properties.

Mr Norris said it is those who are poorest and most vulnerable who will pay the price, because they will have the most difficulty in being able to afford higher rents and beating increased competition from other tenants.

One way landlords are trying to reduce their tax burden is by transferring their homes to limited companies, which would allow them to get full tax relief on mortgage interest, but this can be prohibitively expensive. Landlords have to effectively sell their properties

‘The poorest and most vulnerable will pay price as they will have difficulty affording higher rents’

to the limited company, which would make them liable for stamp duty, including a 3pc surcharge for purchases of additional homes. They will then pay corporation tax, which is rising.

There can also be capital gains tax to pay if the property has increased in value by more than the £12,300 annual allowance, as well as other fees. The capital gains tax allowance will be reduced further this April.

Landlords used to get an “energy saving allowance” of £1,500 per property for things like insulation and draught proofing. This was scrapped in 2015.

This carrot was replaced with a stick, according to the NRLA, in the form of proposals for all newly let properties to have an EPC (energy performance certificate) rating of C or above by 2025. For existing rentals the deadline is 2028.

The Government has not confirmed if this target will go ahead, but the rules could saddle landlords with a bill of £10,000 per property.

Landlords would have very little time to get their properties ready without more notice, and this is another factor pushing some out of the rental market.

The idea that landlords could fund this in a way that won’t lead to a further reduction in supply and even higher rents is “laughable”, said Mr Norris.

A Treasury spokesman said: “Whilst managing public finances responsibly to ensure long-term sustainable growth, we are committed to supporting the housing market.

“Landlords will pay less tax thanks to cuts to stamp duty and can still claim tax relief on financing their purchase and day-to-day costs, such as replacing furniture and lettings agent fees.”