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%.”