To say that landlords have been dealt a poor hand in the most recent tax changes is an understatement. Already penalised by additional rates of SDLT on additional property acquisitions, over the next 5 years the most recent changes, in section 24 of Finance (no. 2) Act 2015, will also see landlords pay an extra 20% of their mortgage interest payments.
As a result, the most heavily geared residential property owners will be paying tax at an effective rate of well over 100% of post interest net rental income. There are no symmetrical proposals when we look at companies who own and rent residential property, which creates a disparity that clearly is unfair.
‘Axe the Tenant Tax Group’, a crowd funded coalition of individuals and organisations who represent in excess of 150,000 landlords, were represented in their case for a judicial review by Cherie Blair QC, of Omnia Strategy LLP on Thursday 6th October on the basis that the change in law is not only unfair but also unlawful.
The case was heard that the changes mean that most landlords with mortgages will now have to pay tax – ‘The Tenant Tax’ – on their turnover rather than their profit and no other business in the UK is treated in the same manner.
Omnia Strategy LLP argued that the tenant tax is unlawful due to the restriction on the landlords’ ability to deduct finance costs as a business expense which can result in an unlawful grant of state aid to corporate landlords.
This first attempt to challenge the law was unsuccessful, and in a statement the group said the Court “has completely missed the opportunity to protect tenants, landlords and the housing market from the disastrous consequences of Section 24”.
They said: “For many, it will also mean the loss of their homes because vast numbers of landlords will be forced to exit the market. Hard-working, responsible landlords will have their pension plans in ruins, but the large corporations and the wealthiest in society, who can buy property without the need for mortgage finance, are systematically excluded from this unfair tax policy.”
Now that the legal route has run its course, they will be focusing 100% of their attention and resources on taking the case more forcefully, more powerfully and more directly, right to the heart of government. Their goal is simple: to abolish this tax or to remove the retrospective nature of it.
My previous blogs have already looked into the difficulties of getting properties from an unincorporated to incorporated entity, and it has become clear that the transition is fraught with difficulties and only tax efficient in limited circumstances.
In response, Axe the Tenant Tax has launched its third crowd-funding campaign to raise money for media, PR and lobbying campaign in an attempt to push pressure on MPs and government. I will be watching closely for future developments in this area so watch this space.