November 25, 2013 12:06 am

UK taxpayers provide £5bn annual subsidy for buy-to-let landlords

Buy-to-let sign boards©Getty

Taxpayers are subsidising buy-to-let landlords with £5bn a year because of loopholes that allow rental income and capital gains on property sales to be exempt from taxation, according to new research.

The Intergenerational Foundation, in a report published on Monday, details the ways that tax on rental income and capital gains can be avoided legally and the approximate cost of each.

These breaks, it said, encourage wealthy private individuals to plough yet more money into house purchases, making it even harder for first-time buyers to enter the market.

“It is clear that most of these tax write-offs go to older landlords keen to take advantage of both the lack of housing supply and the demand for properties to rent by the under-35s,” said Ashley Seager, co-founder of the Intergenerational Foundation.

“Furthermore, with so many MPs benefiting from a rental income themselves – [17 per cent of current MPs are landlords compared with 4 per cent of all adults] – there would appear to be little appetite within Westminster to level the playing field between landlords and young people.”

In addition to rules that allow buy-to-let landlords to deduct interest on the mortgage of their rental property from taxable rent income, property owners can automatically deduct a further 10 per cent from rent received to account for repair and depreciation expenses, even if the landlord has not spent any money improving internal premises.

The foundation filed a freedom of information request with HM Revenue & Customs for the 2010-11 tax year, and found that 1.2m landlords claimed £13bn as deductions against taxable income, of which just under half – £6bn – was simply by deducting interest on the mortgage.

Landlords exempted a further £2.52bn from tax by claiming it represented repair and depreciation expense. The remainder was accounted for by a variety of deductions from income including legal and estate agency fees, insurance and ground rents.

The calculation of the value of the annual tax break assumes that all landlords pay higher rate taxes.

And although landlords are subject to capital gains tax when they sell a second property, the report details ways that tax can be avoided. If the landlord “officially” occupies the property for as little as six months in the 36 months before it is sold, any gains accrued on the property in that period will not be taxable.

Landlords are also able to claim a separate allowance called “letting relief”, which is worth the lowest of the following three sums: the amount of private residence relief that has already been claimed; the value of the increase in capital gains that occurred during the period when the property was being let; or £40,000. If a husband and wife own a buy-to-let property jointly, they can take an £80,000 deduction from taxable income.

The foundation argues that current tax law on buy-to-let landlords is incoherent; these are treated as businesses for tax purposes although they are far more likely to resemble investments. While ordinary savers would not receive deductions for investments they make in, say, share purchases, buy-to-let landlords are effectively awarded them.

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Letter in response to this report:

Lettings profits reflect the law not moral turpitude / From Mr Andrew Watters

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