In the 2015 budget, George Osborne brought in legislation that from next April means landlords who own rental properties will, over the next three years, only be able to deduct a decreasing amount of their mortgage interest costs against their rental income.
This applies to about 150,000 landlords, but for some obscure reason it exempts those who own such properties within a company set-up. This generally consists of large companies, corporations, overseas investors and companies set up in tax havens.
This discrimination favours companies at the expense of individuals. Hence, on October 6, representatives of landlords asked the Royal Courts of Justice in London to launch a judicial review of this injustice.
Unfortunately, the presiding judge, Mr Justice Dingemans, declared the law was not discriminatory and denied the opportunity of a judicial review.
If he was correct in his judgment, it would be difficult to explain why most landlords who still wish to purchase buy-to-let property are now doing so through a company.
It would appear the obvious answer is for landlords to incorporate their property into a company. However, generally the costs involved include stamp duty (plus the three per cent surcharge) Capital Gains Tax, and legal fees. Generally, most landlords could not afford these costs, although I understand a local landlord recently paid over £1.5million to achieve this status. So much for Mr Dingerman’s judgment.
Adding insult to injury, this new law (Section 24) is to be applied retroactively. Those who have bought such property with a mortgage as part of a pension strategy need to look carefully at the financial implications of this legislation. It will certainly have a massive effect on individual buy-to-let landlords who buy-to-let as a business, particularly if it is their main source of income. Many will find themselves with a negative cash flow and may be forced to sell.
The conclusion is twofold: The number of properties available to rent is likely to fall; and landlords who remain in the market will be forced to increase rents. A similar scheme launched in Ireland a few years ago led to rents increasing by 50 per cent in a three-year period, before it was scrapped.
Many landlords have complained about the effect of this new legislation, however millions of tenants will also be adversely affected by the ‘Tenant Tax’, so may I suggest readers write about their concerns to their local MP?
Now is the time to act, not after the rents start to substantially increase.