Cherie Booth (her professional name, better known as Cherie Blair) announced in 2016 the launch of a legal battle to protect UK landlords’ human rights. The Chancellor George Osborne is infringing the human rights of Britain’s landlords with a planned tax change, she said. More recently her case was dismissed as one that was ‘bound to fail.’ Let’s take a look at some of the background and what the results mean for landlords with leveraged portfolios.
In his 2015 Summer Budget Osborne announced his intention to stop small landlords deducting mortgage interest costs from their rental income before calculating taxable profits. His motivation? To create a level playing field for residential homeowners and buy-to-let investors.
Landlords will no longer be able to claim interest as a business expense. Instead, they can claim a flat-rate 20 per cent rebate. This has the effect of halving the tax relief for higher rate taxpayers. The plan has dismayed buy-to-let investors because of the probability they will be paying much more tax on their investments.
Her key argument was that the proposed tax plan “discriminates against individual buy-to-let investors by denying them the same rights as other business owners,” says Richard Dyson of the Telegraph.
The legal argument claims that not allowing people to deduct mortgage interest before they calculate their profits “overturns a fundamental business principle where income less costs equals profit.”
At present landlords can claim monthly interest payments on their mortgages across a property portfolio as a business expense. But under the new scheme they will only be allowed a 20 per cent tax credit for mortgage interest, with serious implications for profit.
As an example if a buy-to-let property in your portfolio earns an income of £10,000 a year but you paid £8,000 interest then income tax would be due on £2,000 profit. If your income tax band is 40 per cent then you would owe £800.
Under the new rules you would owe tax on the £10,000, and could only claim a 20 per cent tax relief on the mortgage interest. Whilst lower rate taxpayers will pay the same in tax, higher and additional rate taxpayers will pay more.
The tax rate will now be calculated before the relief is deducted, so more landlords will find themselves in the higher rate tax-band.
Timothy Brennan QC, representing HM Revenue & Customs and the Treasury, said Booth’s claim was unarguable, adding: “There are cases which justify the courts looking at them in the public interest. This is not one of them.”
Speaking outside the court after the verdict, Booth said: “We will continue to engage with the government to make sure that the message comes over about the inherent unfairness of this tax. It’s not over yet.”
There continues to be considerable opposition from landlords across the country to a tax that appears to them to be fundamentally unfair. Watch this space.
One way of avoiding a potential investment income tax hike is to sell your property portfolio. We are actively acquiring property portfolios of all sizes and would like to talk if you are thinking of selling your property portfolio. Even if you believed you were stuck and could not achieve the price or result you need, we can help. Please drop us a line using the contact form here.