Tax policy and the Chancellor's home ownership crisis

Houses in England
Donald-Drysdale By Donald Drysdale for ICAS

4 March 2016

While buy-to-let investors feel betrayed by an onslaught of tax changes, housing policy objectives remain inexplicably convoluted.

In his Autumn Statement last November, George Osborne referred to “a growing crisis of home ownership” and heralded his plan “to back families who aspire to buy their own home”.

The government’s current housing policy and related aspects of tax policy were addressed by the House of Commons Treasury Committee in its report on the Spending Review and Autumn Statement 2015, published in February.

Tax and housing policy

It is generally accepted that one of the responsibilities of government, of whatever political hue, is to ensure that each citizen should have a roof over his or her head. Because not all citizens can afford to buy a home or pay private sector rents, government housing policy is expected to support some of the costs of housing.

Historically such support has been provided through a mixture of subsidies and taxation. The 1950s, 60s and 70s were the heyday of council housing, when flats and houses were built by local authorities for public or social housing use and let at subsidised rents.

For those able to buy their own homes (which was seen as “a good thing”), the tax system from 1969 through to 2000 offered home owners mortgage interest relief at source (MIRAS) on their mortgages.

Although a significant proportion of UK citizens still occupy council housing, changes have taken place. The ‘right to buy’ – the right of tenants to own the house they live in – was conceived by Labour and launched a new era of home ownership once enacted by the Thatcher administration in 1980.

In recent years house price rises in most areas have exceeded inflation, and private sector rents have done likewise. Home ownership has moved further out of reach for many would-be first time buyers.

It resulted in a depleted stock of council housing, especially in London and the South East, leading to a growing private rental sector and increased homelessness.

In recent years house price rises in most areas have exceeded inflation, and private sector rents have done likewise. Home ownership has moved further out of reach for many would-be first time buyers. Meanwhile, rising rents and new pension freedoms have attracted increasing investment into buy-to-let properties, fuelled by the availability of an uncontrolled volume of mortgage finance at low interest rates.

About half the UK’s remaining stock of social housing is now owned by local authorities and the rest by housing associations. Alongside these, the quantity of privately owned buy-to-let residential accommodation has grown exponentially. The government estimates that approximately 10% of sales in England, Wales and Northern Ireland are second homes or buy-to-lets.

Non-tax help

Home ownership is still encouraged – at least in theory – by a plethora of government schemes to help first-time buyers and existing homeowners.

These include:

  • Help to Buy (offering equity loans and mortgage guarantees).
  • Right to Buy or Right to Acquire in England, Wales and Northern Ireland (this scheme is being phased out in Scotland).
  • Shared ownership (or Co-Ownership in Northern Ireland).
  • First Steps London.
  • Separate shared equity schemes in England, Scotland, Wales and Northern Ireland.

Recent and current tax changes

Complex tax rules are being used to try to incentivise or disincentivise certain behaviours. However, because measures have been introduced piece-meal and with a lack of transparency, it is hard to decipher what the government’s policies are.

Potential first time buyers are incentivised with ‘Help to Buy’ ISAs which were introduced on 1 December 2015, but there are disincentives for homeowners such as the cost of Stamp Duty Land Tax (SDLT) (or in Scotland the similar but slightly different Land and Buildings Transaction Tax (LBTT)). There are also increasing disincentives around buy-to-let properties, which in turn affect the rental market.

The new 3% supplement on SDLT/LBTT will apply to purchases of additional residential properties from 1 April 2016. The supplements have created short-term market distortions as prospective buy-to-let landlords rush to buy properties before 1 April.

Restrictions on tax relief available on buy-to-let landlords’ finance costs will be phased in from 1 April 2017, but will apply only to owners who are individuals or trusts, not to companies – and for this reason some existing landlords are seeking to place their residential properties under corporate umbrellas.

It seems that buy-to-lets have become the scapegoat for raising extra revenue to help pay for the ‘triple tax lock’ under which rates of income tax, VAT and NICs won’t rise during this Parliament – either that or there’s a desire to dampen private property letting.

Over time, the SDLT/LBTT supplement and the restrictions on relief for finance costs are together likely to reduce the supply of privately rented properties and thus raise rents. The profitability of buy-to-let investments will be sharply reduced – with many non-corporate landlords discovering that hitherto profitable tenancies produce losses after tax.

An acceleration in the payment date for capital gains tax on residential properties, which has applied to disposals by non-residents from 6 April 2015, will apply from 6 April 2019 to all non-exempt disposals such as buy-to-lets and most second homes.

Ownership through a company or other intermediary of a residential property worth more than £1m (£500,000 from 1 April 2016) may attract liability to the annual tax on enveloped dwellings (ATED) – although not generally on buy-to-let properties. Acquisition in this way of a residential property worth over £500,000 may also attract the 15% higher rate of SDLT on the full consideration, but in Scotland there is no equivalent rule for LBTT.

Conclusions

The Treasury Committee seems unconvinced that recent measures will achieve the desired outcomes. Government policy changes risk causing severe market distortions, whilst also catching many taxpayers unawares.

It is hard to believe the government’s recent claim that it “is seeking to balance support for the wider housing agenda whilst maintaining the efficiency, fairness and simplicity of the tax system, and minimising tax avoidance opportunities.”

It seems that buy-to-lets have become the scapegoat for raising extra revenue to help pay for the ‘triple tax lock’ under which rates of income tax, VAT and NICs won’t rise during this Parliament – either that or there’s a desire to dampen private property letting.

Uncertainty about how much further the government might be prepared to go in squeezing buy-to-let landlords may act as a further deterrent to investment in this sector, and this could work as an enduring constraint on the supply of privately rented properties. Perhaps this also suggests that housing policy and tax policy should be co-ordinated in a more enlightened way.

In the meantime it will come as no surprise to practitioners that one of the most popular current topics for courses is ‘tax update for landlords’.

Article supplied by Taxing Words Ltd

Topics

  • Tax

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