A tax on both your (privately rented) houses
10 Jul 2015
Wednesday’s budget furrowed many a brow at Shelter. The Chancellor singled out housing support for substantial cuts. A lot of the people who come to Shelter for help are about to find themselves worse off – and our job just got tougher.
However, amidst this frustration there were some sensible tax reforms that deserve an honourable mention.
1. Raise the Roof
The Budget raised the tax-free threshold for the rent-a-room scheme.
This scheme was introduced in 1992 to offer an incentive for letting out spare rooms. It grants an exemption from income tax on rental income up to a certain threshold. This threshold hasn’t been raised since 1997. Until now.
Following a long campaign from SpareRoom.co.uk and Shelter the Chancellor increased the threshold to £7,500. While this might seem small, it is a very positive move:
- Encouraging people to rent out rooms provides a much-needed source of affordable rented accommodation.
- Renting out a room is an important step struggling homeowners can take to avoid repossession.
The previous threshold was no longer acting as an incentive; it is good to see common sense prevail.
2. Wear and Tear
The Chancellor also announced a major reform of the ‘wear and tear’ allowance.
When filing their tax return, landlords with furnished properties can subtract 10% of their rental income from the income they have to declare. This is supposed to account for the cost of maintenance – but at present ‘wear and tear’ takes no account of landlords’ actual expenditure. They can reduce their tax without making any improvements.
From April 2016 landlords will only be able to deduct the costs they actually incur. This is a very positive reform – and one that Shelter called for last year.
The Treasury estimates that this reform will raise over £500 million by the end of the Parliament. The government should earmark some of these savings for driving up standards in privately rented homes.
Local authorities are under enormous pressure to root out rogue landlords, but they do not have sufficient resource. To rectify this, the upcoming Housing Bill should place a statutory duty on local authorities to provide a Tenancy Relations Service. The government now have the income to resource this vital duty.
3. Mortgage Tax Relief
Unfortunately this one doesn’t have a pithy title reminiscent of a 90s rap anthem.
In perhaps the most surprising move, the government will reduce the amount wealthier landlords can claim in mortgage tax relief.
At present, all landlords can claim back money on their mortgage interest payments – and here’s the killer – at the highest rate of income tax they pay. As a result, the wealthiest landlords can claim tax relief of up to 45%. Thanks to the Chancellor’s intervention, from 2017 well-off landlords will only receive back the basic rate of tax relief.
The government is finally listening to the Bank of England and doing something to dampen demand for Buy-to-Let. We like this because making Buy-to-Let a less attractive investment will release more homes for first time buyers. Plus, mortgage tax relief costs the Treasury hundreds of millions of pounds – a large chunk of which they’ll now be getting back (around £600million by the end of the Parliament).
The government could have used this money to lessen the pain of cuts to housing support. Since this didn’t happen there is no excuse for them not to funnel it towards building more affordable housing.
Likewise, the Chancellor’s decision to reduce social rents by 1% for four years will save billions of pounds in housing benefit. Unfortunately, the Office for Budget Responsibility estimates that these changes will also result in 14,000 fewer affordable homes each year. With such significant savings on the table, the government can afford to reverse this trend. Just a small uplift in the Affordable Homes Programme would deliver the homes low-income families desperately need.
Although the Treasury are loathe to hypothecate taxes – they have set a precedent with this budget. They now have a real opportunity to seize political momentum and deliver on their election promises.
We await the Comprehensive Spending Review with anticipation…