Taxing landlords in the forthcoming spending review would make the housing crisis worse according to a prominent property firm.
There’s been speculation that Capital Gains Tax and possibly other taxes, targeting landlords, could be at the centre of new revenue-raising proposals in the upcoming spending review in June, and in the autumn Budget.
As Chancellor Rachel Reeves seeks to increase revenues from a broad range of sources she is thought to be considering levying higher taxes on the amount landlords pay on rental income. The government believes that this would be in line with its manifesto pledge of not raising taxes on “working people.”
It is thought that she is potentially considering forcing landlords to pay National Insurance (NI) on their rental income, introducing a separate tax band for rental income, and may levy VAT on residential property lettings.
These threats have already prompted the National Residential Landlords Association to issue a warning against the suggestion.
Now DJ Alexander Ltd, which is the largest lettings and estate agency in Scotland, says such speculation would result in reduced investment in the sector, the prospect of a fall in the number of landlords, and higher rents for tenants.
Rental income does not presently incur NI because the earnings are treated as passive income rather than from employment or self-employment. It is suggested that creating a new class of NI would enable the Government to apply the charge to earnings from rental income. It is thought that this would be similar to that paid by self-employed workers where NI is payable on the profits of the business.
The problem with this is that self-employed workers stop paying NI when they retire. Given that the median age of individual landlords is 58 years old there would be a risk of creating a two-tier system where younger landlords – who may have only recently invested in the sector and will be still building their business – would be charged, while older ones who have accumulated capital would not. It would penalise those seeking to expand and effectively reward those who have already gained the most.
Currently the first £1,000 of rental income – known as the property allowance – earned from property is tax-free with tax then charged depending on what band of income you fall into. Accountants and advisers have found creative ways to reduce the tax liability by allocating rental income to the person who would benefit most from a tax perspective. Effectively some landlords therefore don’t pay any income tax because if one partner does not work, the income can fall within their personal allowance. It is suggested that by creating a separate tax band for rental income this could close this loophole and would raise substantial funds for the Treasury.
A further option is introducing VAT on residential property lettings. There is precedent for the Chancellor to do this with VAT already being applied to furnished holiday lettings and serviced accommodation. A 20% levy would raise funds but would inevitably simply be passed on to tenants.
David Alexander, the chief executive officer of DJ Alexander Scotland, comments: “Once again landlords and property investors are being seen as easy targets for raising finance for the government. The last decade has already seen them subject to a series of ever more punishing tax and regulatory changes and now they have come back for more.”
“The problem the government has is that landlords and property investors can simply exit the market. They may project that by adding VAT or introducing a landlord income tax that this will produce a quantifiable annual levy based on current incomes. However, if many leave the sector, restructure their businesses, or put up prices for tenants to cover the extra taxation then the projected gains will not occur. The outcome of this kind of taxation would be that it would not help those needing a home and will, instead, exacerbate the current housing crisis.”
Alexander concludes: “At a time when demand is unprecedented, when tenants are facing delays in finding appropriate homes, and when property investment is being put on hold due to uncertainty over future returns this is not the time to make the market more difficult for landlords. Instead, the government should be working with the sector to make it more attractive to invest, to grow the market, and to improve investment conditions for landlords and property investors. By doing this the private rented sector would grow, landlords would invest, and tenants would benefit. This would be a win-win situation for all and would immediately start to address the current housing emergency.”
This article is taken from Landlord Today