A tax on both your (privately rented) houses

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.

Not anymore.

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…

  1. “In perhaps the most surprising move, the government will reduce the amount wealthier landlords can claim in mortgage tax relief.”

    It is not a “tax relief” or a “tax subsidy” or anything of the sort. It is basic accounting. If you buy a shirt for £10 and sell it for £12. Any with a bit of common sense, will tell you the profit is £2. However, our Chancellor seems is saying the profit is £12.

    It is the sort of thing you expect in a Banana Republic, but certainly not in the UK. It beggar’s belief if George Osborne is fit to run the economy.

    In the above example, the shirt seller has no option but to increase the selling price of the shirt to cover increased taxation. So instead of the shirt been sold for £12 it has to be sold for £20.

    I am not sure how Shelter think this is good for tenants?

    1. Absolutely, A Landlord. Shelter seems to be of the same view as George Osborne, that the (relatively wealthier) potential home purchaser is far more important than the tenant. I thought Shelter would be more the champion of the poor. What is this obsession with home ownership? Many many people do not want to buy – they don’t care about owning stuff and they don’t have the money anyway. Of course it was easier when there were council houses. My father never could have bought and didn’t give a damn about it. He made his council house his own and lived in it for 40 years. What’s wrong with that? Shelter should stop its pathetic landlord-bashing and get on with lobbying the Government to build more social housing. Or even better get on with building social housing itself. Why be called ‘Shelter’ if you don’t actually provide any shelter?

  2. Whose side is Shelter on? Supporting these tax increase on landlords, how is this going to help tenants?.

    It is clear Shelter is hopping landlord will sell up, so it is on the side of the tenants who have aspiration to buy their own home, rather then the single mother on benefits.

    In the 2015 Budget, housing benefit tenants and their landlords got shafted. George Osborne announced a freeze on housing benefit yet again, that is another 4 years. George Osborne also announced a cut in the benefit caps for tenants from £26,000 down to £23,000 in London and down to £20,000 elsewhere. Plus there are changes to tax credit. So it unclear how a housing benefit will be able to pay their rent.

    Housing Benefit has been largely frozen since 2008 and this new freeze will cover 2015-2019. That is nearly 11 years of no rent increase.

    So is it fair the George Osborne burdens landlords with overheads such as increased taxation? (On a typical property valued around £160,000, it will increases costs by £800 per year).

    Landlord have been frustrated with the LHA system. It is bad enough the rent will be frozen, but with the LHA system the rent is been paid directly into the tenant banks account and it is causing problems because tenants are not managing their finances and there are rent arrears.

    George Osborne want to have it both ways – He wants a rent freeze and more tax from landlords. This is not fair.

    Yet Shelter continue to attack landlords by saying rents are going up etc…

    Many landlords have been ‘standing’ by existing housing benefit tenants, accepting lower rents, in the hope the Government will increase them in the future. Market rents have gone up,

    Housing Associations by have been increasing their rents by 7% per year. Yet private landord are been blamed for increasing the housing benefit bill.

    Landlord with housing benefit cannot increase the rent to cover the taxation. It means landlords are forced to evict poor tenants. Shelter welcomes the tax increase, so it does not mind if it causes homelessness. So long as their political agenda is attacking landlords is met, they don’t care who faces the pain.

    Shelter seem to be “celebrating” at the tax increases, but it is an attack on the decent landlord who are ‘paying’ their taxes.

    I have not increase my rents in many years. So for my working tenants, it means the cost will have to be passed on to private tenants, many of who are saving for a deposit and will have less to put away – hardly a levelling of the playing field.

  3. Time to earn your taxpayers subsidy Shelter.
    When are you carrying out a survey on the effects of mortgage tax removal on the poorest tenants?
    Or aren’t you interested, just as long as your mates at Gen Rent get to buy the house they ‘deserve’ ?

  4. There is going to be serious trouble for the poorest members of our society when these landlords tax changes are fully implemented.Homelessness will sky rocket. .Landlords will avoid housing benefit and rent to working people who generally can afford higher rents.Shelter have just ruined the lives of the poorest members of our community.

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