George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Buy-to-let landlords trapped by tax system

  • June 2018
  • 3 minutes

The Conservative think-tank Onward has published proposals to reform the UK's housing supply. 

As one would expect, tax is seen by the authors as having an important role to play in reforming the UK housing system, but perhaps not as important as one might have expected.

Under current tax rules, interest relief on buy-to-let mortgages is being cut, with relief at higher rates of tax disappearing by 2020 when it will be replaced by a tax credit system allowing relief at a maximum rate of 20 per cent. The report's authors conclude that declines in the rate of housebuilding coupled with the rise of private landlords have deprived 2.2 million households of the opportunity to buy their own homes. They advocate the complete abolition of mortgage interest relief to drive individual landlords out of the market, although tax relief would continue to be available for corporate landlords. In our view, this is unlikely to achieve the intended effect. Since 2015, as the report notes, buy-to-let loans as a proportion of all mortgages have dropped from around 21 per cent to around 13 per cent in 2017. The downward trend seems set to continue and will accelerate when interest rates rise. The private landlord of the future is therefore likely to be cash-rich, or only to have a small mortgage exposure.

We had expected the report’s authors to recommend the redistribution of development gains through either a development land tax, or a land value tax, or both. Neither of these find favour, although the report does acknowledge that the ineffectiveness of the 1976 development land tax can be attributed to the fact that it was scheduled for repeal not long after implementation, with the result that landowners simply waited until abolition to bring forward land for development.

When it comes to capital gains tax, the report discusses proposed changes which might be made to the availability of the main residence exemption. That's relevant for private landlords who let out properties they have lived in, but of course that does not apply to the majority of buy-to-let properties. 

We think there is a better way.

Currently, buy-to-let landlords pay an additional 3 per cent SDLT surcharge when they buy the property. Even under current rules, tax relief for interest payments and some other expenses is restricted. And when the time comes to sell, capital gains tax is levied at the full rates of 18 per cent or 28 per cent, depending on how much other income and capital gains you have, and not the lower rates of 10 per cent and 20 per cent. This leaves landlords feeling trapped; having paid extra SDLT to buy their property, they then face higher rates of capital gains tax on the sale of the property. Surely, if the aim is to encourage private landlords to sell properties on the open market, then it would be sensible to encourage them to do this by extending the lower CGT rates of 10 per cent and 20 per cent to residential property. 

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