Landlords could be set to lose out on tens of thousands of pounds of income from their buy to let investments, starting next year when proposed tax changes come into force.
Under Section 24 of the Finance Act – introduced by George Osborne in his Finance Bill last summer – landlords will be taxed on the turnover of their property, rather than just the profit. It applies to existing as well as future buy to lets but not to foreign landlords (since they are not taxed under the British system).
Tax to be fully operational by 2020
The government plans to phase in the new ruling on a sliding scale from April 6 next year so that landlords pay 25 per cent in the first year, 50 per cent for 2018 and 75 per cent the following year. By 2020 the full 100 per cent tax bill will apply.
This means that most landlords’ tax bills will more than double. For instance, a landlord with a current rental income of £20,000 and a mortgage of £13,000 pays tax on the £7,000 profit. This works out at £2,800. By 2020 they will have to pay tax on the entire income of £20,000 less a tax allowance of 20 per cent, meaning their tax bill will jump to £5,400.
The 20 per cent tax allowance is only for landlords whose income is less than £40,000. As a result it will hit full time landlords with a number of buy to let properties hardest.
It’s a move which – not surprisingly – has brought protest from landlord groups around the UK. This is not simply because of the increased tax but also the fact that landlords will be taxed even if they’re making a loss. An attempt last month to have the tax overturned in court was thwarted after Cherie Blair QC, representing landlords (and an extensive property owner herself), was denied a judicial hearing on the grounds that the case wasn’t ‘in the public interest.’ She had argued that owners of other business ventures weren’t penalised in the same way and that the tax breached the European Convention of Human Rights.
Tenants forced to shoulder costs
Rather than penalising landlords, it’s claimed by many property experts that tenants will be the real losers of the move since rents will be increased to offset the higher tax bills. And this certainly seems to be the case since a recent survey by the Residential Landlords Association revealed at least half of their members insisted they would put up rents in response. A similar move in Ireland in recent years saw rents increase by as much as 50 per cent, according to members of Axe the Tenant Tax – a coalition fighting to have the tax overturned. As such, it’s been nicknamed ‘The Tenants Tax.’
Although the ruling was introduced by the then Chancellor as a means of getting wealthy landlords to pay more tax, those who have a number of property portfolios under the banner of a limited company won’t be affected since it only applies to landlords whose properties are in their own name. Neither will landlords who were wealthy enough to afford property without a mortgage in the first place.
Meanwhile, the ‘fight’ doesn’t end here with public protests from landlord groups planned prior to the first landlord tax changes in April 2017. Crowdfunding appeals had already raised £180,000 to pay for the recent legal battle. Watch this space…