Landlords issue legal challenge over buy-to-let tax changes
Two prominent landlords are issuing a legal challenge to the new tax structure for buy to let that they say unfairly penalises buy-to-let landlords with mortgages.
Legal opinion from Cherie Blair states that the campaign has ‘a reasonable change of success.’
The legal challenge is made possible by the European Convention on Human Rights, in that it constitutes unlawful grant of State aid to corporate landlords and to the owners of commercially let holiday homes contrary to articles of the Treaty on the Functioning of the European Union.
In an attempt to bring the UK’s housing situation under some sort of control and “level the playing field” between owner-occupiers and landlords, the Chancellor has announced two changes to the tax structure for buy-to-let (BTL) landlords.
By 2020 buy-to-let (BTL) landlords will only be able to offset mortgage interest at the basic 20% rate of tax.
From April 2016 buy-to-let landlords will face a 3% extra Stamp Duty charge.
Read more about the impact of these changes in our feature Is it goodbye to buy to let?
The two challengers, Steve Bolton and Chris Cooper, have dubbed the changes the ‘Alice in Wonderland’ tax – so-called because of its absurd nature and separation from real life.
Their point boils down to the fact that preventing landlords with mortgages from offsetting mortgage interest costs against rental profit before calculating tax owed “overturns a fundamental business principle where income less costs equals profit.” Ultimately, they go on to say, it could lead to landlords having effective tax rates of over 100%.
The landlords have begun proceedings to call for a Judicial Review of the policy change by issuing a Pre-Action Protocol letter to the government, which must be responded to by 10 February.
This is a significant progression from the opposition’s initial form, whereby it sought funds necessary to mount a legal challenge from campaign supports and backers, of which 737 emerged.
The campaigners have set up a website with details arguing their case at www.crowdjustice.co.uk/case/clause24.
Stamp duty issues
The government is due to confirm its final BTL policy on 16 March. With this in mind, a ‘Higher rates of Stamp Duty Land Tax (SDLT) consultation’ took place in December last year.
On the back of this, Paula Higgins, chief executive of the Homeowners Alliance says that she supports the changes in principle, but highlights potential difficulties: “The way they’ve done it is very complex. It relies on conveyancers to investigate second homes [to see if the 3% surcharge is due].
“And for people downsizing, if someone buys a new property before disposing of the old one, they’ll need to stump up the stamp duty. It could be claimed back, but that could take 18 months.
“If you’re downsizing, often with new homes, you don’t control when you buy, and it’s more important to find the new one before you sell the family home. “They’re asset rich, cash poor, and they’ll need to find an extra 3%.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.