Landlord Tax Reflief

[no accountant]

I don't think the LL has a tax advantage, I think the OO has the tax advantage, even without invoking CGT.

LL has to pay tax on income from the property.

but the LL's income is my rent, and he get's to offset that (now his income) against his mortgage interest payments.

If his interest is the same as his income he doesn't pay any tax at all, and he has no net cashflow each month. If my gross income is the same as my IO mortage I have to pay 41% of my income in tax, with a cashflow of negative 41% of the interest every month. :angry:

LL can only offset mortgage interest against income from their LL business, not their general income.

Ok, renting to yourself only makes it worse.

[Smell the Fear]

but the LL's income is my rent, and he get's to offset that (now his income) against his mortgage interest payments.

If his interest is the same as his income he doesn't pay any tax at all, and he has no net cashflow each month. If my gross income is the same as my IO mortage I have to pay 41% of my income in tax, with a cashflow of negative 41% of the interest every month. :angry:

Ok, renting to yourself only makes it worse.

Please stop, you are making yourself look very stupid. Read over the original reply from myself and Jeff Ross.

[Time to raise the rents.]

Maybe we should turn this thread into a complaint thread about why landlords have to pay CGT!

I think it's disgusting that I first have to pay tax on any profit I make from the rent, then I am double taxed by also having to pay CGT if I sell!!!!

CGT is double taxation, because when I sell I am receiving a payment for giving up the right to future income according to discounted cash flow models. However that same future income is going to be taxed again when the new owner rents the place out!!!!

What a sham!!!

[mercsl]

Landlords can get some nice taper relief on BTL's starting at three years , at ten years its only 60% of the capital gain that is taxable

Edited May 16, 2006 by mercsl

[no accountant]

In danger of making myself look stupid, I think you’re missing a subtle point. Taking your replies in turn:

This gives the landhoard an inherent tax advantage compared to the private buyer.

1. There's no such thing as "landlord tax relief". Interest on loans is a normal business expense. It can only be offset against actual rent received.

2. Your comparison omits to mention that an owner occupier pays no tax on their imputed rent (the rent they effectively pay themselves). This used to be taxed under Schedule A (abolished in 1963).

The tax advantage is therefore with the owner occupier.

Yes I just made up the phrase "landlord tax relief". Sorry, got your attention though.

Also, as an OO you effectively rent from yourself (this is known as an imputed rent). You are not charged any income tax on the imputed rent you receive for living in your property, so you are better off than the landlord who has to pay tax on his profits.

Imputed rent? I pay income tax on my gross income and I pay an IO mortgage on an overpriced property and you want to add my ‘imputed rent’ to my gross taxable income? How many times do you want me to pay for the damn thing? You’re mad.

The money the landlord receives in rent is post-tax income for the tenant - the same pool of post-tax income is available for housing (whether buying or renting), so the landlord does not have an advantage. As TTRTR points out, giving relief to OOs would simply drive house prices up further as OOs would have more money available for purchase.

I agree with this completely. House prices would go up. (This doesn’t correlate with the change in 2000, when Gordon removed the 10% mortgage interest tax relief for OO, but hey, it was a mad bull market)

Would it be more illustrative to examine this removal? Surely you’d say, all things being equal that this removal should make owning less attractive, and hence LLing more attractive?

The change did occur shortly before the explosion in BTL. I wasn’t enough to cause the whole thing, but I think it must have helped.

If the LL had suffered a similar reduction in their cashflow at the same time, then the playing would have maintained it’s tilt. As it was, Gordon tilted it towards the LL.

If landlords could not offset the mortgage interest, surely they would raise the rent. If it was a blanket piece of legislation all landlords would increase at the same time.

Indeed they would raise the rent, and then buying would seem more attractive again, and more people would become OOs. And rent is very closely connected to wages. People have a set idea about how much they can afford to pay in rent. It’s a rational decision. If it’s too much they up and leave and go to another city. Owning is much more emotional, and people will sacrifice their whole lifestyle to fulfil the dream.

My point is they would try to raise the rents to cover their increased tax liability, but some would go out of business, because people could buy for less, or just go away.

More OOs and fewer LLs = happier, more productive, population.

[frugalista]

If his interest is the same as his income he doesn't pay any tax at all, and he has no net cashflow each month.

Correct. Ignoring other factors, in this case the LL has a business generating no profit.

If my gross income is the same as my IO mortage I have to pay 41% of my income in tax, with a cashflow of negative 41% of the interest every month. :angry:

I would say these are not comparable scenarios. Assume IO mortgages as you say. Then compare OO to LL this way this way:

OO

Assets: 1 house.

Work you have to do: some job, the net income of which covers your mortgage payments.

Benefit you get from asset: you get to live in it (a benefit equal to the rental value).

LL

Assets: 1 house.

Work you have to do: none (assume typical BTLer ).

Benefit you get from asset: none.

frugalista

[Tester]

You are missing the point entirely – whether the tax system favours OO or BTL more is irrelevant. The point is that the tax rules make BTL attractive.

Given the artificially restrictive supply of housing in this country why should BTL be treated as any other business when it comes to tax benefits?

The thought of removing mortgage interest tax relief strikes fear into the average highly geared landlord.

I suggest a campaign to:

1. Have a tenant registration scheme which identifies landlords to the Inland Revenue.

2. Reduce mortgage interest tax relief on BTL properties – allowing a percentage only.

3. Reduce Capital Gains Tax relief benefits eg. Reduce the period of relief from three years to one year for properties that were formerly Principal Private Residences. This would discourage people who can’t sell their house defaulting to be landlords.

4. Reduce stamp duty to make buying costs less so not restricting worker mobility.

Landlords won’t like it.

Edited May 16, 2006 by Tester

[Smell the Fear]

Imputed rent? I pay income tax on my gross income and I pay an IO mortgage on an overpriced property and you want to add my ‘imputed rent’ to my gross taxable income? How many times do you want me to pay for the damn thing? You’re mad.

That's a matter of opinion, but it is abundantly clear that you are a bit thick.

[no accountant]

Thank you Tester. At least someone understands. If you add tax on to something it alters the balance of demand and people alter their behaviour. Tax Cornetto ice creams and people buy Magnums instead. Tax BTL and people become OOs. It’s that simple. Tax shifting

But yes, the stamp duty does screw this up somewhat. Gordon made it difficult to own for short periods. I would cost you a fortune in stamp duty.

That's a matter of opinion, but it is abundantly clear that you are a bit thick.

STF, maybe I wasn’t comparing like with like, thanks for explaining it so clearly. You have a way with words, have you thought about becoming a teacher?