Top accounting body: ‘buy-to-let tax is unfair, unreasonable, unworkable’
The Institute of Chartered Accountants has warned of a negatives outcomes of the tax, including harm to first-time buyers
Britain’s leading professional accounting body, the Institute of Chartered Accountants in England & Wales, has attacked the Chancellor’s controversial new tax on buy-to-let tax as “unfair and unreasonable”. It condemns the legislation as “unthought-through” and predicts it will cause “extreme confusion”, as well as forcing some landlords out of business, distorting the market – and even making life harder for first-time buyers.
The new tax, which was not consulted upon and which The Telegraph is campaigning against, is included within the Finance Bill currently progressing through Parliament.
It will be phased in between 2017 and 2020, and effectively removes the ability of private landlords to offset the cost of their mortgage interest before arriving at a taxable profit.
The ICAEW, in commenting on the proposals, criticised both the aims of the new tax and its implementation.
It cited George Osborne’s intention to “create a more level playing field” between property investors and owner-occupiers who, as Mr Osborne said, do not enjoy tax relief on interest payments.
But the ICAEW pointed out that the new tax would hit only small property investors, who include middle-class savers adding one or two buy-to-let properties to their pensions and other portfolios. Large companies investing in residential property will not be affected – and will be able to continue claiming tax relief.
Wealthy investors buying cash are also excluded.
“Far from being level, it leaves the playing field with a cliff edge in the middle,” ICAEW said.
It suggested the measure was unfair in applying not just to new investments but to buy-to-let investors’ existing properties.
“Taxpayers will have priced and borrowed according to the tax relief they expected, and these borrowing decisions would necessarily have a long timeline. Many will not be able to restructure their debt.”
Paying tax on losses – and the loss of tax credits
As Telegraph Money has pointed out in our examples of future tax returns under the new regime, some landlords will end up paying tax on zero income or actual losses.The ICAEW said: “Landlords’ real losses will become ‘profits’ when the interest restriction is introduced.”
It pointed out that some landlords would find themselves being pushed from the basic-rate tax bracket into the higher rate – even though their real incomes had not increased.
Tax credits could also be lost, “with no real economic change in income”.
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Other consequences could be the loss of tax relief on pension contributions or the loss of the new 0pc savings income band, which takes effect next year.
All of the above occur because, with the inability to offset mortgage interest costs, landlords’ “income” will suddenly appear higher – even though it will not be.
Aggravating property shortages
While the proposed tax has found popularity among tenants, the ICAEW says it could exacerbate the property crisis and make it more difficult for first-time buyers. “ The interest relief restriction will favour cash buyers who want to buy to let and may increase the competition even more at the lower end of the property market, thereby increasing prices and hindering first-time buyers.”
The changes will “make it exceptionally difficult for taxpayers to self-assess,” the body warned. The introduction over a four-year period “will be very difficult” to calculate and “will require extensive record-keeping.”
The Institute’s technical manager Anita Monteith said: “It’s very confusing legislation and not thought-through. There needs to be a holistic review of property taxation, looking at how property is taxed from a capital and income point of view. This approach is piecemeal.”
EXPLAINER: a worked example of how landlord tax is changing
When George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords. It’s true that every mortgaged landlord who pays 40pc or 45pc tax will indeed pay much more under his proposals.
But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.
In fact, contrary to Mr Osborne’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.
At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.
Here is a worked example assuming you, the landlord, pay 40pc tax.
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.