Increase Housing Supply – Tax Regime Comparisons

by Mark Alexander

2 years ago

Increase Housing Supply – Tax Regime Comparisons

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Increase Housing Supply – Tax Regime Comparisons

Increase Housing Supply – Tax Regime Comparisons For Landlords

Property118 is calling for Government to give UK landlords the same tax treatment as other major countries in order to increase the supply of homes.

Towards the end of this article you will find a link to a NEW Government Petition to “Increase Housing Supply”

In the UK there has been a housing shortage for many decades.  Private Housing Providers (Buy-to-Let investors) have done much to alleviate this, increasing the supply by financing new-builds, by rehabilitating derelict properties, by converting commercial properties into dwellings and by converting over-large properties into more space-efficient HMO’s.

In July 2015 the government’s English Housing Survey credited the private rented sector with 83% of the increase that steadily occurred in the number of dwellings between 1996 and 2013 in England alone (2.5m of the 3m increase) source document link

If tax incentives had been available, landlords would have increased the supply even more, further boosting the economy and employment.  For every £1 spent on housing construction an extra £2.09 is generated in the economy.

However, the Chancellor’s plan to levy a tax on finance costs will have the opposite effect, just when more housing is needed.

Despite David Cameron’s pledge in the week before the general election that there would be no increase in income tax in this Parliament, George Osborne announced in July 2015 that he was going to increase income tax for landlords who hold properties in their own names – by excluding finance costs (including loan interest) from the calculation of rental profit.  This means that they will pay tax on a fictitious amount of profit.

Over 130,000 landlords will be moved from the lower rate tax band to the higher rate because of this fictitious profit.

This will exacerbate the tax regime for landlords in the UK which is already worse than that in many high income countries, as a report in June 2015 made clear.  It was entitled “Proposals for regulation of the private rented sector”:

The report was written by Kath Scanlon, Research Fellow, and Christine Whitehead, Professor of Housing, both of the LSE (London School of Economics).  They made the following points:

The tax treatment of mortgage interest in the UK has been the same as in the rest of Europe: landlords can deduct these payments from taxable income.

Commenting on the Green Party’s manifesto proposal for the removal of the mortgage interest deduction for private landlords, the authors stated that compared to several European countries, the USA and Australia, the income tax system in the UK is already substantially less favourable to landlords, especially in its treatment of depreciation and negative gearing.

Many countries permit landlords to depreciate their rental properties (either the entire value or the cost of the building only). This means that part of the cost of the dwelling is deducted every year from rents received before the tax is calculated.  This is not permitted in the UK.

UK private landlords cannot offset rental losses against income from other sources (negative gearing); they can only carry them forward.

UK private landlords receive no special subsidies.

Finally, some countries have lower taxes on rental income than on other business income.

The report included a table showing:

Countries that allow depreciation: Australia (new properties only), Austria, Germany, Ireland, Sweden, Switzerland and the USA.

Countries that allow rental losses to be set off against a landlord’s other types of income: Australia, Denmark, Finland, France, Germany, Norway, Spain, Switzerland and the USA (with limits).

The report ended with the warning: “Finally, all changes in regulation which negatively impact on rents and yields and on risk and confidence can be expected to reduce supply and make it more difficult for new tenants to find the accommodation they want.”

In 2011, in a report entitled “Private renting: learning the lessons from other countries” Kath Scanlon pointed out one similarity – the small landlord predominates: “Most private landlords in England are individuals or couples owning five or fewer properties. This is very similar to the profile of landlords in most of the other countries we studied. Even in Switzerland, where institutions are required by law to invest in property, over 60% of private landlords are individuals—and in France the figure is more than 95%”.

Some people have called letting in the UK a “cottage industry” because there is a large number of landlords who have a small number of properties.  Her report shows that the situation is the same in all the countries mentioned above – in the competitive hands of a very large number of people.

However, these LSE reports were restricted to the income tax systems, and did not compare Capital Gains Tax in the UK with that in other countries.

A report from the Department for Communities and Local Government in 2010, entitled “Promoting investment in private rented housing supply”, compared both income tax and CGT in England with Australia, France, Germany and the USA:

The report pointed out that CGT is greater in the UK than in the other countries and there are no concessions for holding property for several years. In the USA the rate of capital gains tax falls after one year of ownership and in Australia there is a 50 per cent reduction after one year. Deductions begin after five years of ownership in France and liability is zero after 15 years. In Germany no capital gains tax is due after 10 years of ownership.

It also stated that in the large private rented sector countries, generous depreciation allowances have been very important in encouraging investment in the sector and promoting new building for private renting.

The authors suggested an increase in tax incentives for individual landlords in order to increase investment in the private rented sector in England.  However, this suggestion was never implemented.

Instead, George Osborne stole a Socialist measure from the Green Party manifesto, despite the warning from the LSE’s June 2015 report about the effect on supply.

In Germany, as well as deducting interest, a landlord can write off the cost of the property  over a number of years against rents received.  If the result is a loss he or she can deduct it from other income before tax is calculated.  If the property is held for 10 years the CGT is zero.  This is to encourage landlords to stay in the business long-term.

In the UK, if a landlord carries forward losses but fails to make enough rental profit to absorb them before he or she sells the last property, the losses are extinguished.  They cannot even be set off against any capital gain.  Landlords have to pay CGT at the full rate regardless of how long they have owned the property.  There is no longer any incentive to stay in the business long-term.

Individual landlords in the UK do not benefit from any tax incentives, and in future they will be penalised for borrowing.  Everybody with an understanding of economics, except the Treasury, admits that disallowing finance costs will not only stop the increase in supply, but will also affect tenants through an increase in rents and a rise in the number of evictions, with a resulting increase in the cost to the public purse of housing the homeless.

Property118 has the following message for George Osborne:

INCREASE HOUSING SUPPLY

“If you want to solve the housing shortage in the UK, Chancellor, don’t penalise the PRS.  Give us the same tax incentives that are given to our counterparts in Australia, the USA, France, Germany and other high-income European countries!”

The Property118 Campaign Plan

Property118 has launched a petition calling for Government to set up a Royal Commission to solve the UK Housing Crisis. This will provide a platform for full consideration to be given to providing tax incentives to private housing providers (Buy-to-Let investors) along the same lines as those in other countries.

If the petition gains traction we will then consider the launch of a fund-raising campaign to pay for professional PR highlighting the potential to solve the UK housing crisis with an alternative approach to taxation.

The only way end the housing crisis is to incentivise investment into the building of more homes. This will provide choice. The cost of home ownership and privately renting relative to wages is only likely to stabilise or even reduce when the supply of homes begins to balance with demand.

Link to petition >>> https://petition.parliament.uk/petitions/118920



Comments

Neil Patterson

2 years ago

The Treasury clearly don't want to back track on their decisions to date and will fight us all the way in that regard. However, if they were to fall into line with other advanced countries and allow us to depreciate properties over say 20 years, pay no CGT after 10 years of letting and offset rental losses against all income that would be a major step in the right direction. If we also win the c24 legal case that would be even better!

I've been giving a lot of thought about how the same tax conditions as Germany would affect the UK and I'm convinced it would help increase the supply of housing and the availability of real choice for all social classes. That seems to be what everybody apart from the rogue operators claim to want, even Shelter and the other anti-landlord lobbyists!

Nobody would choose to rent a bed in a shed or a mouldy property if there were affordable alternatives - it is time for change! It is time for UK Government to recognise the vital role of the PRS and to learn from other thriving economies where quality housing supply is much less of an issue.

Now just suppose you could depreciate your rental properties by 2.1% of the cost each year and offset that amount against your rental income, like in Germany. That would be equivalent to offsetting the interest on a 3% mortgage at 70% LTV.

Just suppose you could deduct any rental loss from your other income before your income tax is calculated, like in Germany.

Just suppose you could sell any rental property you had owned for 10 or more years CGT free. That would allow you to replace low yielding stock with better alternatives and would put an end to landlords feeling trapped by taxation into holding onto properties which they would ideally prefer to sell to owner occupiers. If we could also get c24 overturned that would feel like Utopia for UK landlords but the reality is, that's the tax regime of many other economies.

This isn't just a pipe dream, all of this is happening in other countries.

Adam Hosker

2 years ago

A Royal Commission on housing would be very interesting, Above the Landlord issue as Social Housing providers also feel under attack - as - the government pursues a "home owning democracy" in Thatchers shadow.

This petition certainly seems to cross housing boundaries.

Jason McClean

2 years ago

Similar to many other things, the UK could learn a lot from Germany here. There's a good reason they are the economic powerhouse of Europe - they have a great many policies that make sense.

Any pressure we can put on our Government the better...

John Walker

2 years ago

If GO doesn't wish to listen to reasoned argument, then we may have to resort to threats. If all PRS landlords were to threaten to make just one tenant homeless there would be such an outcry, not necessarily all in our (landlords') favour, but it would serve to bring to the fore our legitimate grievances as well as shewing him the power we possess to make his political life exceedingly uncomfortable. I appreciate this would potentially upset the lives of many innocent tenants, but how many LLs will be upset financially if he proceeds unchecked.

Incentives = Solutions

Post suggestions for the Royal Commission to consider.

stuart edwards

2 years ago

Reply to the comment left by "Jason McClean" at "18/01/2016 - 21:20":

I think you find its because they have a low budget deficit and make things. I say yes to no cgt tax though. ....not quite sure how depreciation on an appreciating asset will work though.

adam prospect

2 years ago

Reply to the comment left by "John Walker" at "19/01/2016 - 17:57":

If we all evict one tenant each that would cause an outcry and bring the spotlight in as you suggest.

However, I think one of the Pharaohs tried something similar by killing all the first born. It was effective and served his purpose but not sure overall history suggests it was for the greater good.

So I will evict a family, 2 children....because of a tax regime which seems to be targeting a group of LLs who are borrowing at extraordinary high levels. That seems proportionate.

Still think you are locking horns with the wrong team and that the wave of sentiment is now massively against LLs.

And Stewart I agree, not sure how we depreciate the appreciation. If that debate is opened I can see it creating a spark in HMRC for taxing us based on house price indexes.

I have brought to life many derelict properties but I don't expect thanks or feel the country owes me for this great service. I received my reward when I sold.

For me, head down, sell a couple more.....no one owes me anything.

Paul Temple

2 years ago

Did anyone see the BBC 2 programme last night with people setting up offshore companies like the big boys? I'm sure it's not quite as easy as they made it look but, equally, I'm sure it's not as difficult as most of us think.

All it needs is one half decent set of tax solicitors/accountants (who might that be, I wonder...) who know the routine and also have a good knowledge of the BTL sector who then market package deals to the LL fraternity and suddenly Alice could find his 'kill the LL' plan backfiring in a serious fashion.

Anyway,must be off; my flight to the Isle of man leaves in a few hours...


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70% of renters not planning to buy