frugalista Posted May 14, 2007 Share Posted May 14, 2007 AJ, an accountant at the meet yesterday reminded me of something I knew but wasn't really factoring in to my mental model of the housing market: owner-occupiers make their mortgage payments from taxed-income; landlords can reclaim ALL the mortgage interest payments against their tax (at the highest rate they are paying tax!) because it's a business expense for them. AJ even suggested that if two people wanted to buy adjacent houses they would be better off buying each other's house and renting it to the other one. That way they'd be claiming back oodles of cash. This inequity used to be corrected by MIRAS, which was allowed to wither on the vine, and then was cancelled by New Labour. In the USA and Ireland and probably other countries mortgage interest payments are 100% claimable against tax. No, there's no subsidy to landlords compared to owner occupiers in this regard in the UK. Landlords can only offset interest against the income they are getting from their rental business, not against their general taxable income. Compare the following two situations: 1. Person A earns 50k a year gross, say 30k net. Person B earns 50k a year gross, 30k net. They both become owner occupiers, and spend say 10k a year from their taxed income on mortgage payments, of which say 6k is interest and 4k is principal repayments. 2. Same people A and B. They both become landlords and rent the other one's house. The rent they charge is the same as the mortgage payments, 10k. When they pay rent they have to do this out of taxed income. So far it seems like they are doing just the same as in situation 1, i.e. spending 10k of their salary on accommodation and getting their house gradually paid off. But, they now have an extra income of 10k, which they have to pay tax on. This taxable income is reduced by the mortgage interest, so they only pay tax on 54k not 60k. The interest payments cannot reduce their taxable income by more than 10k because that is the rental income. But they are still paying more tax than before, so they are both worse off. So, owner occupiers already have an advantage in the current UK system. It works in countries like Australia where you have negative gearing (i.e. the ability to offset your mortgage interest on your rental property against your general income) but not the UK. MIRAS + the American system are something different, they allow you to offset your primary residence mortgage interest against your general income. This gives owner occupiers a further advantage, on top of the advantage I list above. frug. Quote Link to comment Share on other sites More sharing options...
frugalista Posted May 14, 2007 Share Posted May 14, 2007 The BTLer gets paid rent out of the tenant's post tax income. He pays his mortgage and then pays income tax on any surplus (so the money is double taxed effectively). Even worse for the BTLer, he pays his mortgage interest and then pays income tax on anything above that. frug. Quote Link to comment Share on other sites More sharing options...
Smell the Fear Posted May 14, 2007 Share Posted May 14, 2007 Even worse for the BTLer, he pays his mortgage interest and then pays income tax on anything above that.frug. Indeed that's what I meant. You don't think I was implying that BTLers actually reapy some capital as well? Quote Link to comment Share on other sites More sharing options...
bdon Posted May 14, 2007 Share Posted May 14, 2007 Very good article - well worth a read - hereI won't quote it in full as it is very long. But I can assure you, it is worth 15 minutes of your time. OK, it might not go as far as we would like, but the tenor of it is far closer than similar pieces only 12months ago. I reckon the journo has been spending time here... the HPC influence continues apace! case studies here message to Carole: you are now forgiven for this silly bit of braying bourgeois frippery - running away from lickle youts? Rahhlly. This was a good bit of writing. Long article - as OP stated - but worth reading until the end. A good bit of journalism. The thing that got me was the fact that, in 2007 (way past "space 1999") we still have the highest homeless in EU?! WFT; Britain has one of the highest rates of homelessness in Europe with approximately four people per 1,000 without a roof over their head. How further apart can UK become. Forget "things can only get better", I'm singing "there may be trouble ahead" Quote Link to comment Share on other sites More sharing options...
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