No Change to Landlord Tax Despite Petition Protest

The government has refused to back down over a petition protest despite 30,000 landlords objecting to tax changes they claim are ruining their buy-to-let businesses.

The protest, led by Midland property investor Simon Foster, demands the government change tax rules to allow landlords to offset finance relief, including mortgage interest, against rental income.

Former Tory Chancellor changed how landlords handled mortgage interest relief in 2015 when he abolished higher-rate interest relief with a blanket 20 per cent tax credit for all investors.

Like many other landlords, Foster explains that the change means he struggles to make money from his property investments.

“Like many self-employed business people, I am a small, well-established private landlord that is now struggling to make any money from letting properties,” he said.

“Unless the ability to offset mortgage interest against rental income is reinstated I will, like many, be forced to sell my properties. This could reduce the amount of properties available on the private rental market.”

When a petition on the Parliament website reaches 10,000 signatures, the government must offer a written response.

Landlord tax is fair

The response rebuffs Foster’s argument and confirms the current tax arrangements for offsetting finance interest relief will not change.

“The government will continue to set mortgage interest relief against rental income at the basic tax rate. The government has a responsibility to ensure the income tax system is fair,” said a Treasury spokesman.

“The government recognises that the private rented sector plays an important role in the UK housing market and economy. However, the government also has a responsibility to make sure that the income tax system is fair. Under the old system, residential landlords got relief on their finance costs (including mortgage interest payments) at their marginal rate of income tax, which meant that higher rate taxpayers got a more generous tax relief than those on lower incomes.

“To address this, and make sure that all residential landlords are treated the same by the income tax system, the government phased in a set of reforms to restrict finance cost relief to the equivalent of the basic rate of income tax. The reforms mean that all residential landlords will now receive the same amount of relief. It also reduces the disparity in income tax treatment between homeowners and landlords.

Cost of living challenge

“To minimise the impact on landlords who are affected, the government chose to act in a proportionate and gradual way. It announced this change almost two years before its implementation. The restriction, introduced in April 2017, was phased in over four years to give landlords time to adjust to the changes.

“To be clear, these reforms do not mean that tax relief on mortgage interest has been abolished. Landlords are still able to claim an income tax reduction equivalent to basic rate tax relief on the finance costs of their rental property. Residential landlords also continue to be able to claim relief at their marginal rate of income tax on the day-to-day costs incurred in letting out a property, such as letting agent fees and replacing furniture.

“The government understands that people, including those who rent property, are worried about the cost of living challenges ahead. That’s why decisive action has been taken to support households across the UK, whilst remaining fiscally responsible.”

At 100,000 signatures, the petition is debated by MPs in Parliament.

Sign the petition

How Section 24 tax works

Section 24 of the Finance Act 2015 changed how landlords offset finance interest relief - including mortgage interest and finance fees - by removing the costs from rental expenses before calculating any tax liability. In effect, landlords work out the tax on their gross income and then deduct a 20 per cent tax credit to determine their liability.

Here’s how Section 24 tax works:

  • A landlord has a rental income of £15,000 a year
  • The landlord pays mortgage interest of £5,000 a year
  • Section 24 demands landlords pay income tax on their gross rental income - £3,000 at 20 per cent and £6,000 at 40 per cent.
  • Mortgage interest relief is applied at 20 per cent, which is a fifth of £5,000 (£1,000)
  • So, the 20 per cent taxpayer’s tax decreases to £2,000 (£3,000 -  £1,000), while the 40 per cent taxpayer pays £5,000 (£6,000 - £1,000)

Section 24 means no change to a 20 per cent taxpayer’s payments to HM Revenue & Customs. However, 40 per cent taxpayers pick up less relief and pay more tax.

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