There was bad news for Buy-To-Let (BTL) Brits yesterday (October 6th), with defeat in the legal battle against the onset of harsher tax legislation for private landlords beginning next year.
The British High Court yesterday refused to grant permission for a Judicial Review of controversial Section 24 of the Finance Act (No.2 2015) which ends tax relief on BTL finance costs.
Announced in the Summer Budget 2015, Section 24 remains firmly on course to kick in progressively from 2017/18-2020/21.
The Government said in 2015 that the legislation will impact one in five landlords, bring in £1305m to the Exchequer and “ensure that landlords with higher incomes no longer receive the most generous tax treatment.”
Landlords to Carry Fight From Courts to Government
With the High Court giving the go-ahead for Section 24 to hit landlords from next April, fellow claimants Steve Bolton of Platinum Property Partners and Chris Cooper of the crowd-funded Axe the Tenant Tax coalition group said in a joint statement that,“Now that the legal route has run its course, we will be focussing 100 percent of our attention and resources on taking our case more forcefully, more powerfully and more directly, right to the heart of Government.”
Cherie Blair CBE, QC, who represented the claimants in court, affirmed that, “from the outset, the legal process was just one aspect of our clients’ fight against this unfair measure.”
The Axe the Tenant Tax campaign has argued that landlords will have no choice but to pass on increased costs to tenants in the form of higher rents.
What is Section 24?
There are 54 sections in all of the GB Finance Act (No. 2 2015). Ten sections relate to Income Tax.
Section 24 is entitled Relief for finance costs related to residential property businesses. Had a look? Wish you hadn’t? Finance legislation is often difficult to understand because it is written not for clarity of understanding but for clarity of legal structure. The tax boffins understand it, because they are trained to. Nobody else is expected to really grasp how it works in detail.
Amongst other technical provisions, Section 24 lays out the progressive reduction between 2016/17 and 2012/22 of the percentageof property finance costs that can be used by private landlords as tax relief. This is the bad news. Over the period the figure drops from 75% to 0%.
Calculation Before Section 24
Currently BTL finance costs (like interest on mortgage payments, fees etc) are totted up and subtracted from revenues, along with other costs, to arrive at the total income liable to taxation. That’s according to the standard model of revenue minus costs = tax-liable profit, right?
Calculation After Section 24
The new legislation doesn’t allow landlords to count finance costs as costs (as they have been doing.)
Instead, the only relief available will be a Basic Rate (20%) percentage of the total BTL finance bill for the year deducted from the total income tax liability.
Who Will Section 24 Hit Hardest?
The Government says the objective of the legislation is to make the tax system fairer by making sure wealthy landlords receive the same tax relief as everybody else. But critics of Section 24 say modest-income landlords have ended up as the real target, with some making a loss on their properties even if they put up rents.
Super-wealthy landlords who can afford to go without a mortgage won’t be hit at all because Section 24 targets property debt finance. And, “corporate landlords and institutional investors typically hold property in companies and therefore can claim debt interest as a normal business expense.”
Private landlords have already been hit this year with the slashing of the wear and tear tax allowance and the Stamp Duty hike.