Buy-to-let is taxed more in Britain than Germany, France or US – before the new tax

Even before George Osborne’s shock new tax on buy-to-let, landlords here pay more than in most other major economies

When George Osborne announced that he was cutting the amount of mortgage interest relief landlords could claim, he stated that the aim was to level the playing field between landlords and first-time buyers. Whether his controversial measures will achieve this or not, what is clear is that property investors in Britain are taxed more harshly than those elsewhere.
Most countries allow landlords not only to deduct mortgage interest costs in full, but also to set any rental losses against their other income, secure capital gains tax discounts and claim depreciation against their properties.

A study published by the London School of Economics in 2011 compared the tax relief available to British landlords with those in other countries and concluded even then – well before Mr Osborne’s announcement that mortgage interest relief would be abolished – that Britain’s tax incentives for landlords fell behind those offered in other countries. Research published by the Department for Communities and Local Government in November 2010 came to a similar conclusion.

The report, titled Promoting investment in private rented housing supply: International policy comparisons, concluded that “the large private rented sector countries all offer taxation advantages, especially to individual investors, which are more favourable than those available in England”.

Kath Scanlon, research fellow at LSE London and co-author of the 2011 report, Towards a sustainable private rented sector: The lessons from other countries, said the new buy-to-let tax “puts the UK out of step with how other countries are approaching the sector”. “The one thing you can say about people with mortgages on buy-to-let properties is that they have made a conscious decision that they want to be in the business of being a landlord,” she said, “whereas people with no mortgages perhaps never made any such decision – some just happened to be saddled with a property they are renting out.

“The people who will leave the sector are likely to be at the more professional end of the small landlord spectrum and are probably not the ones who you would want to encourage to leave.”

So just how much better off are overseas landlords compared with those in Britain?

Europe 

With its rent controls and long-term tenancy agreements, Germany is often held to be a model example of a tenant-friendly system. It isn’t at the expense of landlords’ tax bills, however, as they can deduct all mortgage interest from their property income, deduct rental losses against other income and claim depreciation costs. In France landlords get a similar deal, although the rental losses they can offset against their other income are capped at €10,700 (£7,550). Most other European countries operate similar tax systems and some also have lower rates of capital gains tax to encourage long-term investment: in Germany no capital gains tax is payable if you own a property for more than 10 years; in France it’s 15 years.

Australia 

Mortgage interest relief is allowed in full and investors can offset rental losses from their other income – a practice referred to as “negative gearing”. Depreciation of the building is only allowable for properties built after 1979. Investors get a 50pc deduction on capital gains tax when they sell a property if they have owned it for more than one year. In New Zealand the rules are similar, with the bonus of no capital gains tax at all.

United States

Landlords can deduct mortgage interest from their rental income, as well as offset an amount for depreciation each year. The amount of capital gains tax due falls depending on the length of ownership, and in some cases can be avoided entirely if proceeds are reinvested into property. Investors can offset losses of up to $25,000 (£16,460) from rental properties against other income.

Can you benefit from other countries’ lighter tax regime? 

When the new buy-to-let taxation regime is fully implemented in 2020, many higher-rate taxpayers will end up making little profit or even a loss from their rental properties.

Simon Misiewicz, a property tax specialist at Optimise Accountants, said some saw little incentive to continue. “I see a number of property investors who are higher-rate taxpayers looking elsewhere to invest their money. For years HMRC has targeted landlords and the interest relief cap is another obstacle they face.

“Unfortunately, outside an incorporated structure, entrepreneurial individuals cheered by those countries that do encourage investment in the private rental sector cannot easily benefit. If an individual resident in Britain buys property in a country with more favourable tax treatment – for example, Germany – they won’t benefit from that country’s rules, as British residents pay tax based on the regime applying here.

“There are ways to minimise tax by investing in property via a limited company, but because of the complexity a number of higher-rate taxpayers would rather sell their properties or at least reduce their appetite to invest further.”

Even when considering a limited company structure, some were looking to invest outside Britain, particularly in the US, said Misiewicz. Because the buy-to-let tax was introduced without consultation and applies retrospectively, many investors fear the Government could make further changes that would make even limited company property investment unviable here.

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