Finance Bill

Written evidence submitted by Michael Fickling (FB 46)

Submission to the Public Bill Committee on the Finance Bill 2015-16, Clause 24: Relief for finance costs related to residential property businesses.


1. This submission opposes Clause 24 of the Finance Bill 2015-16 (the Bill) on the following grounds:

a. the clause is fundamentally unfair and discriminatory in its application – it leaves people paying tax far beyond their real world income from property; in some cases, even paying tax on a real world loss;

b. the clause is premised on fallacious advice such that it is flawed both in its conception and approach (to achieve a somewhat murky policy objective); and

c. implementation of the clause will lead to a perverse and indeed contrary outcome to that (apparently) intended by the Chancellor / Government. Rents will rise and fewer properties will be built as investors leave the market place.

Chancellor’s bombshell 2015 Summer Budget announcement on 8 July 2015

2. On 8 July 2015, in announcing the measure to restrict finance cost relief for individual landlords, the Chancellor stated: Today, I will set out three important changes that will address unfairnesses in our taxation of property and put the security of home ownership first.

3. First, we will create a more level playing field between those buying a home to let and those buying a home to live in. Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income whereas homebuyers cannot, and the better off the landlord, the more tax relief they get. For the wealthiest, for every pound of mortgage interest costs they incur, they get 45p back from the taxpayer. All this has contributed to the rapid growth in buy-to-let properties, which now account for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability.

4.       So we will act, but we will act in a proportionate and gradual way, because I know that many hard-working people who have saved and invested in property depend on the rental income they get. We will retain mortgage interest relief on residential property, but we will now restrict it to the basic rate of income tax. To help people to adjust, we will phase in the withdrawal of the higher rate reliefs over a four-year period, and only start withdrawal in April 2017 .

Flawed approach that is factually incorrect

5. What the Chancellor said is factually incorrect. It is not the case that for every pound of mortgage interest costs they [the wealthiest of landlords] incur, they get 45p back from the taxpayer. This will depend on the actual profit after losses have been deducted from the rental income.

6. In short, the proposed change does not actually do what the Chancellor has said it will do – in fact, the opposite. It takes a 100% allowable real world expense and treats it as non-existent, or at best 20% of the real world amount.

7. While all higher-rate taxpayers who own buy -to-let properties on which there is a large mortgage will pay substantially more tax , a number of current basic-rate taxpayers will also be hard hit, because the change will push them into the higher-rate tax bracket.

8. The fact is that Clause 24 applies to every buy-to-let investor – not just top rate taxpayers.

9. Many small buy-to-let investors currently make a small loss or break even. They will now, under this policy, pay tax on a real world loss. This is fundamentally unfair and something never done before in any taxation sphere. To ignore a huge expense is something never before conceived in any westernised tax regime.

Current situation (refer worked example below)

10. Under the current taxation arrangements, finance costs i.e. mortgage interest and associated broker / arrangement fees, bank charges etc., for a buy-to-let property are legitimate expenses that are fully tax-deductible from the income derived from the property. In other words, 100% of these costs are able to be offset against the rent received for the property, prior to the balance i.e. the profits earned on the buy-to-let, being taxed.

Proposed situation under Clause 24 (refer worked example below)

11. The proposed taxation arrangements under Clause 24 of the Bill will, over the four year phase-in period from 2017 to 2020, reduce the percentage of buy-to-let finance costs able to be offset in 25% increments from 100% in 2016 to 0% from 2020 thereafter.

12. There is a somewhat tokenistic tax credit offered of 20% at best of the finance costs not deducted from the income in the tax year.

13. Note however, it is subject to the caveat that it is 20% of the lowest of three options (resulting in quite an elaborate calculation to undertake to ascertain the least amount to which the 20% tax credit can be applied).

14. Most significantly though, commencing from 2017 (25% offset reduction) and with full impact from 2020 (100% offset reduction i.e. nil offset), without the ability to deduct the finance costs from the rent earned prior to applying taxation, the effective outcome is not taxation on a profit but taxation on turnover and in many, if not the majority of instances, this will in fact result in taxation on a loss.

15. It has never been any government’s policy to tax any business on its turnover value rather than true profit. To do so is profoundly unjust. This policy does exactly that, and is therefore fundamentally unfair.

Worked example assuming the landlord is taxed at 40%

16. CURRENTLY – the buy-to-let earns £20,000 a year in rent and the interest-only mortgage costs £13,000 a year. Because tax is payable on the difference or profit, the landlord pays tax (at 40%) on £7,000 i.e. £2,800 is payable to HMRC.

17. 2020 – tax is now payable on the landlord’s full rental income of £20,000 less a tax credit equivalent to basic-rate tax (20%) on the interest. As such, the landlord pays tax (at 40%) on £20,000 (£8,000) less 20% of £13,000 (£2,600), i.e. £5,400 is payable to HMRC – an increase of 93% in the landlord’s tax bill!

18. In this example, the landlord has made an overall profit of £1,600 (£20,000 rent, less £13,000 finance costs, less £5,400 tax to HMRC).

19. However, what happens if the Bank Rate – and in turn, the landlord’s mortgage rate – rises by even a small fraction, lifting the mortgage costs to £15,000 but the rental income remains unchanged at £20,000?

20. Under this scenario, the landlord will be required to pay £8,000 – £3,000 (20% of £15,000) i.e. £5,000 is payable in tax to HMRC. Thus the landlord will make an overall profit of ZERO (£20,000 rent, less £15,000 finance costs, less £5,000 tax to HMRC).

Fundamentally unfair

21. It is submitted that Clause 24 is fundamentally unfair as it will tax turnover rather than profit.

22. As finance costs will not be treated as genuinely incurred expenses able to be offset against rental income, this will artificially inflate the true value of the return on investment i.e. profit, and correspondingly, the tax liability.


23. It is further submitted that Clause 24 is also discriminatory on two fronts.

24. First, it discriminates against those investing in buy-to-let properties as opposed to any other business venture, where finance costs will remain fully deductible from business income before the balance is taxed cf. buy-to-let.

25. Second, it discriminates against buy-to-let investors who have greater exposure i.e. larger mortgages and thus higher finance costs, than those who are wealthy enough to either not have a mortgage or have a significantly reduced mortgage (with commensurately lower finance costs and a greater true profit from the rental income generated).

Fallacious basis for proposed policy change

26. The Chancellor appears to have based the decision for Clause 24 on a recent statement from the Bank of England and that buy-to-let properties, now account for over 15% of new mortgages, which could pose a risk to the country’s financial stability.

27. How exactly? It’s one thing to make such a pronouncement but where is the reasoning and the figures behind the Bank of England’s statement , particularly when the Bank of International Settlements considers the bigger risk to be ultra low interest rates?!

28. Moreover, i sn’t it a greater risk that if buy-to-let landlords leave the market en masse it will significantly weaken the market? This is the very situation that will occur should Clause 24 be passed.

Leading to a perverse policy outcome

29. When giving oral evidence on 21 July 2015, the Chancellor stated in response to Q234 (at p.28 of the transcript), "there are many people who save hard through their lives, buy a little property, rent it out, and those are people who we absolutely want to support and help."

30. However, it is the ‘mom & pop’ investors who will be hardest hit, with increased tax bills despite these average buy-to-let landlords running their properties at a loss!

31. What is becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy-to-let , often alongside pensions and Isas, as a means to supplement their income.

32. It has been calculated that for a buy-to-let property owned by a landlord paying 40% tax, if the mortgage interest payable on the property is equal to or greater than 75% of the rental income for that property, it will become a loss-making investment from 2020 solely on the Clause 24 change in taxation alone i.e. without factoring in other expenses !

33. This is a very common situation, especially for small buy-to-let investors. With that mind, Clause 24 is likely to see the end of buy-to-let for middle class income earners.

34. Conversely, it will have little effect on the very wealthy ‘evil’ landlords – the intended target group – because wealthy landlords who do not need mortgages are untouched.

35. One foreseeable outcome is that there will be fewer but wealthier landlords in the buy-to-let market who will end up holding larger property portfolios, enabling them to manipulate rental prices.

36. Those who are worst affected will see: the actual tax they pay on their investment rising twofold or more; the tax rate payable (on their rental income) rising above 100% meaning that more than all of their profit is paid in tax; a degree of tax that pushes them into loss, making their investment financially unviable and forcing them to increase rents sharply – or sell .

37. Many landlords are already serving notices on tenants to quit their properties, in preparation for selling.

38. In short, Clause 24 turns what was considered to be ‘good debt’ into ‘bad debt’. Potentially, this could lead to an exodus from the market by the very people the Chancellor says he supports to remain in the market – thus creating the exact effect that the Governor of the Bank of England claims to fear, i.e. that thousands of buy-to-let investors would quickly sell up.

39. It is submitted that this is not the outcome the Chancellor / Government, is seeking to achieve .

40. It is worthwhile noting that the official policy paper ‘Restricting finance cost relief for individual landlords’ issued 8 July 2015 by HMRC states the following under Economic impact in its Summary of impacts:

41. ‘This measure could marginally reduce demand for housing but it is not expected to have a significant impact on either house prices or rent levels due to the small overall proportion of the housing market affected and the offsetting impact of wider budget measures.’…

42. ‘It is expected that 1 in 5 individual landlords will receive less relief as a result of this measure.’

43. And further under Equalities impacts: ‘It is likely that this measure will impact on those with above average incomes.’

44. With all due respect to the Treasury/HMRC Analysts and Office for Budget Responsibility which has certified the figures, it is submitted that they have miscalculated what the true impact of the proposed measure will be on individuals of average incomes, and the wider adverse impact it is likely to have on the economy generally.

Lack of consultation

45. The proposed tax change has come completely out of left field – particularly from a political party proudly founded (allegedly) on principles of capitalism – with no consultation undertaken with affected stakeholders prior to being announced.

46. This has resulted in what is patently obvious to be a colossal under-estimation of the widespread deleterious impact this tax will have on ‘ordinary, hard-working people’ – the very people the Chancellor has stated he wants to help.

Lessons learned from other jurisdictions

47. The history of governments seeking to interfere with market economics by effectively placing sanctions on landlords is not good. For instance, in New Zealand, similar concerns about rental landlords led to restrictions being placed on rent levels. The results were a dire shortage of rental properties and eventually the government had to backflip.

Alternatives proposed

48. As it is unclear what the Chancellor’s / Government’s actual policy objective is, no alternative is proposed other than outright removal of Clause 24 from the Bill.

49. Retention of the current taxation arrangements for buy-to-let properties is sought, whereby finance costs are legitimate expenses 100% deductible from the profits earned from the property, prior to tax being applied – as they are for all other businesses.

50. To do otherwise is to create a whole new tax paradigm based on a business’s turnover – for one discrete sector.

51. Furthermore, should any further changes to the taxation arrangements for buy-to-let properties (or indeed, generally) be proposed, it would be appreciated if this democratically elected Government undertook proper consultation with the affected sector, rather than announcing the changes as an expected fait accompli.

September 2015

Prepared 18th September 2015