UK landlords pay more buy-to-let tax than other major economies

British landlords are forced to pay more tax on buy-to-let properties than any other leading global economy, including Germany, France and the United States.

And that’s before Chancellor, George Osborne announced he would be cutting the amount of mortgage interest relief landlords could claim.

Mr Osborne stated the move was designed to level the playing field between landlords and first-time buyers across the UK, but latest figures suggest property investors in Britain are already taxed more harshly than those elsewhere.

A 2011 study, published by the London School of Economics, compared the tax relief available to British landlords with those in other countries. It concluded that, even before the abolishment of mortgage interest rate relief was first mooted, UK tax incentives fell well short of those offered by other leading nations.

Kath Scanlon, research fellow, LSE London and co-author of the 2011 report, believes the new buy-to-let tax “puts the UK out of step with how other countries are approaching the sector”.

“The one thing you can say about people with mortgages on buy-to-let properties is that they have made a conscious decision that they want to be in the business of being a landlord.

“Whereas people with no mortgages perhaps never made any such decision – some just happened to be saddled with a property they are renting out.

“The people who will leave the sector are likely to be at the more professional end of the small landlord spectrum and are probably not the ones who you would want to encourage to leave.”

Britain’s European counterparts are often held as a model example of a tenant-friendly system. In Germany, landlords can deduct all mortgage interest from their property income, deduct rental losses against other income and claim depreciation costs.

It’s a similar story in France, although the rental losses that can be offset against other income is capped at €10,700.

Down under, Australian property investors can offset rental losses from their other income with mortgage interest relief allowed in full. In New Zealand, the rules are similar, with the bonus of no capital gains tax whatsoever.

In the United States, landlords can deduct mortgage interest from their rental income, whilst offsetting an amount for depreciation each year. Investors can also offset losses of up to $25,000 from rental properties against other income.

When the UK’s new buy-to-let taxation regime is in full swing in 2020, many higher-rate taxpayers could be left making little to no profit from their rental properties.

The Telegraph this week provided a great working example of the landlord tax changes for those that pay the higher-rate 40 per cent tax:

Currently

If your buy-to-let investment brought in £20,000-a-year and the interest-only mortgage costs £13,000-a-year, tax is due on the difference or profit. Subsequently landlords pay tax on the £7,000 difference, resulting in £2,800 to HM Revenue and Customs (HMRC) and £4,200 to you.

The 2020 landscape

Tax will be due on the full £20,000 rental income, minus a tax credit – equivalent to basic-rate tax – on the interest. For example, you’d pay 40 per cent tax on your £20,000 income (£8,000), less the 20 per cent tax credit (20 per cent of £13,000 = £2,600). This will result in £5,400 to HMRC and only £1,600 to you, with a tax bill increase of 93 per cent.

In the event mortgage rates were to rise between now and 2020, mortgage costs could rise to £15,000 per annum on a property with £20,000 rental income. In this scenario you would be required to pay £5,000 tax, resulting in no eventual profit whatsoever.

If you are a property investor and you’d like to discuss your current and future tax situation, please don’t hesitate to arrange a free initial consultation with your local TaxAssist Accountant. We can provide you with advice on all tax aspects of buying, selling and letting property. Simply drop us a line using our online enquiry form or call our friendly team today on 0800 0523 555.

Last updated: 20th November 2015