Will landlord tax changes be reversed in Autumn Statement?

26 October 2016

George Bull

While some commentators have criticised the former Chancellor of the Exchequer George Osborne for having a privileged background (something over which he didn’t exactly have any control!), his track record in 11 Downing Street showed him to have finely tuned sensitivities regarding public opinion and what matters to people up and down the country. Call it populist if you will, or electorally savvy.

However it is described, the impact of that combination of skills and sensitivities has made itself very clear in the UK tax system. Changes to the tax regime for non-doms, for people wishing to withdraw money from their pension plans and for private residential landlords all bear the same hallmark: tax is used as an instrument to deter those who have fallen out of favour in the public estimation, while raising more funds for the Exchequer.

While some of those tax changes have already come into force – for example, aspects of the pensions changes – others are still in the pipeline. As my colleague Helen Relf discussed in her piece last week, the exact nature of many of the non-dom changes has yet to be determined, even though individuals affected by the changes will have to make potentially life-changing decisions before April 2017.

The new Chancellor of the Exchequer Philip Hammond has already decided to abolish some of Mr Osborne’s changes, specifically the plan to allow people receiving pension annuities to cash them in and invest elsewhere. Will that willingness extend to the landlord tax changes?

The landlord tax change which has got everybody talking is the phasing-out of tax relief for finance costs from April 2017, and its replacement by a 20 per cent tax reduction in certain circumstances. For 2017/18, 75 per cent of the finance costs will be deductible, with no deduction available for 2020/21 or later years. For this purpose, finance costs include not only interest but also fees and other incidental costs for obtaining or repaying loans, as well as discounts, premiums and disguised interest. The rules will apply to a UK-residents letting properties worldwide and to non-residents letting UK properties. Our calculations show that these changes could have a very significant impact on the net income of landlords. A recent report by the Residential Landlords Association suggests that this will almost inevitably mean that some landlords sell their properties while others have to increase the rents they charge. All of that was predictable from the day on which Mr Osborne made his announcement. But is this a uniquely British problem, or do other countries have relevant experience which should be considered here?

Interestingly, the Dublin government adopted a similar policy in 2009 as a result of which only three quarters of finance costs qualify for tax relief. The Irish Minister for Finance has now decided that a housing crisis in Ireland requires the 2009 policy to be changed. The amount of finance costs qualifying for tax relief will therefore gradually increase over a number of years until full tax relief is once more available.

With no sign of the UK’s housing crisis being far from the public headlines, it will be interesting to see whether Chancellor Philip Hammond goes the same way, reversing Mr Osborne’s tax restrictions before they come into force on 6 April 2017.

For more information please get in touch with George Bull, or your usual RSM contact.