At present the majority of private landlords - approximately 9 in every 10 - hold their lettings portfolios as individuals rather than businesses. This is to say that they own their properties personally (individually or in partnership with others) and as such fall into the system of personal income taxation - distinct from limited companies, which are subject to corporation tax.
This combined with some other factors means that unlike similar enterprises, such as holiday lettings or car rentals, landlords’ activity is considered investment and their income ‘unearned’.
It is on this basis that the Government has decided to change the tax treatment of landlords finance costs - the cost of obtaining and servicing mortgages or other loans used to finance their properties – to bring them into line with other investment activity.
The result of this change will be to remove landlords’ ability to treat finance costs as a revenue expense and deduct them from their incomes prior to calculating their tax liability. Instead, from tax year 2020/21 landlords will be able to apply a ‘tax reduction’ to their income tax bill equivalent to the basic (20 per cent) tax rate.
This will have a disproportionate impact on landlords with moderate to high gearing across their portfolios and risks pushing a large proportion of landlords into a higher tax bracket – not necessarily representative of their actual income.
The NLA estimates that more than 200,000 landlords who are currently higher or additional rate taxpayers stand to lose out directly, while further hundreds of thousands could be pushed into the higher rates without any change in their income.
The NLA has met with policy makers at HM Treasury and HMRC, as well as politicians of all opinions to try to find a way of preventing these changes – or failing that mitigating their impact on landlords.
In addtion to meeting with the departments responsible, NLA Chief Executive Richard Lambert has written to the Chancellor on a number of occasions to raise landlords concerns about these policies. Some of the responses received are below: