Autumn Budget: Could we see changes to Section 24?
On the 8th of July 2015 George Osborne stood at the despatch box in the House of Commons and delivered his second Budget Statement of that year, the first on behalf of a fully Conservative government since Kenneth Clarke in 1997.
I remember the day clearly.
There had been a lot of speculation about a proposal to remove landlords’ ability to deduct mortgage interest costs from their income for tax purposes. The rumours seemed so ridiculous that during a national radio appearance that morning I had gone so far as to say that it would not happen.
I was of course wrong.
Not about the proposal being ridiculous, I still contend that it was a dreadful policy, founded on an inappropriate comparison between owner-occupiers and property businesses.
I had misjudged the then Chancellor’s cynicism and disregard for the supply of rented homes. I had, incorrectly, assumed that no Chancellor of any party would turn on its head the way in which more than a million private landlords financed their portfolios. That no Treasury would risk driving investment from our sector. That no government would be willing to accept the inevitable hit to supply and passing on of costs to consumers.
Like I said. I was wrong.
I’ve learnt from that mistake. So, this time around, I am not going to declare with absolute certainty what Rachael Reeves might do when she delivers the first Labour Budget Statement since Alistair Darling in 2010.
Parallels
Incidentally, note the parallels. Both 2015 and 2024 are unusual in witnessing two budget statements, delivered by different governments following election victories.
These tend to be dangerous fiscal events, when Chancellors are more apt to make unpopular or risky announcements, taking advantage of a fresh mandate and the luxury of an entire parliament before they face the electorate again.
It is entirely possible that the Chancellor will choose to feature landlords’ finance costs in her statement. However, it is incredibly unlikely that she will do so in a way favourable to private investors.
Despite the sector’s best efforts, the Government does not see s24 as an aberration which singles out landlords for harsh treatment.
That would involve viewing us as businesses, which I’m sorry to say is not the collective view.
It is far more likely that voices in HM Treasury view the fact that landlords still retain a partial tax reduction (equivalent to the basic rate of Income Tax) as a peculiar distinction, relative to other forms of investment.
The delineation here is between the tax treatment of investment, versus trading businesses.
The logical conclusion therefore is that, were the Chancellor to re-open Pandora’s box, it is more likely that she would do so to remove the existing tax reduction, not restore relief for finance costs.
There are even rumours that the Treasury is considering reducing, or removing, the relief available to incorporated businesses, as these are also not considered trading companies by HMRC.
Both of these moves would be a figurative slap in the face to investors who have struggled to adapt since 2015 and are facing some of the most significant financial challenges ever faced by the modern PRS.
They would also represent a literal viability crisis for tens of thousands of landlords and a material risk to the supply of rental homes.
Arguably, the immediate impact of such a change would be more acute than George Osborne’s initial attack, given that interests rates are considerably higher today than they were throughout the implementation period of the last cut.
The cut in finance cost relief has exacerbated the impact of interest rate hikes, foreshortening the period before landlords drop below breakeven, as illustrated in this analysis by Capital Economics comparing profitability before and after the partial removal of finance costs relief.
Removing the final element of the relief would strip away the remaining margin achievable by leveraged landlords and drive either further rent increases, or property disposals.
What would this mean in practice?
To put this into context, take an example of a single property landlord, liable to pay the higher rate of Income Tax.
They let a property valued at £250,000 with a 70% loan to value mortgage at 5.5%.
To achieve their lender’s stipulated 140% interest cover ratio (ICR) they have recently increased the rent to £1,125pcm (£13,500pa).
So, for the sake of simplicity, let’s assume they incur no other costs throughout the year (which is of course nonsense, but bear with me) this means:
Total income: £13,500
Total mortgage interest: £9,625
With the current 20% reduction permitted this landlord would be liable for £5,400 Income Tax, minus £1,925 reduction (equivalent to one fifth of their finance costs) leaving their tax bill at £3,475.
In this case, once the landlord has paid their mortgage and HMRC they are left with £400 for their efforts at the end of the year.
If the 20% reduction is removed, this landlords’ final settlement reduces to: -£1,525 for the year.
To break even the landlord could increase rents by just over 11 per cent.
To stem the losses, they could sell the property.
Neither outcome looks good for the supply of homes, or the affordability of private renting. Nor does it make running a property business very appealing.
This is one rumour I very much hope is unfounded.
