Clause 24 makes changes to ensure that all individual residential landlords get the same rate of tax relief on their property finance costs. This change will make the tax system fairer. Landlords with the largest incomes will no longer receive a more generous tax treatment. The distortion between property investment and investment in other assets will be reduced, and the advantage landlords may have over those who work hard to save for a deposit in order to own their own home will be minimised.
Let me begin by setting out the problem that the clause remedies. Landlords are able to offset their finance costs, such as mortgage interest, from property income when calculating their taxable income, reducing their tax liability. At present, the relief they receive from this is at the marginal rate of tax. That means that landlords with the largest incomes benefit the most from the relief, receiving relief at the higher or additional rates of income tax—40% or 45%—whereas landlords with lower incomes are able to benefit from relief only at the basic rate of income tax, which is 20%. In contrast, owner-occupiers of properties do not get any tax relief on their mortgage costs, and finance cost relief is also not available to individuals investing in other assets, such as shares in public companies. That creates a distortion between property investment and investment in other assets.
Clause 24 will reduce the inequity by restricting finance cost relief to the basic rate of income tax—20%—for all individual landlords of residential property. It will unify the tax treatment of finance costs for such landlords, including individual partners of partnerships and trusts. The change will ensure that landlords with the largest incomes no longer benefit from more generous rates of relief.
The Government recognise that many hard-working people who have saved and invested in property depend on the rental income they get, so the clause is being introduced in a proportionate and gradual way. The restriction will be phased in over four years from April 2017, ensuring landlords have time to plan for the change.
The Government have tabled five amendments to the clause. Amendment 22 ensures that all companies are excluded from the restriction, even when carrying on a property business in partnership. Amendments 23 to 26 ensure that where a trustee’s finance cost deduction is restricted, basic rate relief is available to trustees with accumulated or discretionary income.
Only one in five individual landlords are expected to pay more tax as a result of this measure. The Government do not expect the change to have a large impact on either house prices or rent levels due to the small overall proportion of the housing market affected. The Office of Budget Responsibility has endorsed this assessment. It believes that the impact on the housing market will be small and, taking account of the other measures in the Budget, has not adjusted its forecast for house prices. By April 2020, only 10% of individual landlords will see a tax bill increase greater than £500.
The clause will make the tax system fairer. It will restrict the amount of tax relief landlords can claim on property finance costs to the basic rate of tax, thus ensuring that landlords with the largest incomes no longer receive the most generous tax treatment. It will also reduce the distorting effect that tax treatment of property has on investment and the advantage landlords may have in the property market over owner-occupiers.
The amendments, as far as I can tell, are technical measures to smooth things out. As ever, these things come out in the wash, whether it is Mrs Gauke or someone else who spots them.
It is likely that I will ask my hon. Friends to support the clause but I want to probe the Government on it. As the Minister knows, this is one of the higher profile clauses in the Bill and has attracted a rather large postbag. Some landlords—not all—are concerned.
I appreciate that any landlord among the one in five paying more tax under the provision has almost two years from 8 July to April 2017 to sell the property if they wish to do so, so that they are not boxed in with de facto retrospective action, which can happen if there is only three months in which to sell. I salute the Government for giving that transition time.
I am surprised to hear that only one in five landlords will be affected, but the Government and the OBR have done their research. I am concerned that the measure will do nothing for house prices, which is perhaps a debate for another day. Would that it would bring down house prices, which are far too high around the country. Those prices might well get higher when pensioners, under the Government’s freedoms, buy not Lamborghinis but houses with the money freed from their pension funds.
I have a small amount of sympathy with the view that house prices are too high, but is the hon. Gentleman genuinely advocating that the principal method of saving for most people in this country should be reduced in value? The effect on households would be astronomically catastrophic if one were to start reducing house prices. Is that part of his policy?
Yes, I would like house prices to come down; they are far too high. For most people, property is not an asset that is any good to them until they die—in which case, of course, it is no good to them. The house I live in is worth roughly eight times what we paid for it 30 years ago. That is almost entirely a windfall, though some of it is due to improvements we have made. I will not take long on this, Sir Roger, because I know you do not want us to be too diverted, but were my wife and I to move, we would have to pay an equivalent sum for something else. Yes, house prices are far too high but they will come down when the Government do their bit by increasing the supply of houses.
Meanwhile, returning to clause 24, this is the issue on which I wish to probe the Minister. I may have misunderstood these technical matters because I am not an accountant, but I believe the buy-to-let income accruing to the landlord is counted as income for income tax purposes. There will therefore be some landlords—perhaps the Government have figures—who, before this change, when their non-buy-to-let income, perhaps from a job, was added to their buy-to-let income were standard rate taxpayers, but who will become higher rate taxpayers after the change is made. Therefore, that group may end up paying considerably more tax.
It is not simply a question of landlords who are already 40% taxpayers because of other income being levelled, as it were, to 20%, which is what I understand the clause is designed to do. That is understandable. However, it would actually be promoting people—pushing them into a higher rate tax bracket—and therefore they would be losers. Does the Minister have any figures on that “in between” group—a rather maladroit phrase, but the Minister will understand what I mean—who will be pushed up. I hope that, now he has the piece of paper, he will be able to elucidate that point for the Committee. As I say, my inclination is to support the measure, but I am concerned about that cohort who may be suddenly treated in a slightly different way, which may mean that the figure of one in five the Minister quoted is somewhat low.
I hope I will be able to welcome the support of the Opposition for the clauses in full, although the hon. Gentleman is quite right to ask scrutinising questions.
We are not making any claims about the effect on house prices. The OBR’s assessment is that the impact on the housing market will be small and it has not adjusted its forecast for house prices. The answer to the issue of house prices is improvement in supply—I suspect the hon. Gentleman would agree—so it is worth pointing out that housing starts are at a seven-year high. However, the Government remain focused on putting the right conditions in place so that we build more houses and more people have the opportunity to own their own home.
It is up to individuals to decide how they wish to save. We are determined to ensure that the opportunity to own one’s own home is available to as many people as possible. That requires us to increase the supply of homes in this country, and that is a Government priority. We are moving in the right direction, but, as we set out during the Conservative party conference last week, we want to do more to put in place the conditions wherein more people will have that opportunity.
On the impact of the changes, there was a question about whether the measures might move a basic rate taxpayer into the higher tax band. We expect that around 94% of landlords who will have to pay more tax will have a total taxable income of over £35,000. On average, landlords own 2.7 properties. Those currently with taxable income under £35,000 who will have to pay more tax have, on average, larger rental incomes and larger property portfolios; they have an average pre-tax rental income of more than £64,000, and own six properties. It is true that basic rate taxpayers could be affected by the measures, but often—not in every case, but overwhelmingly—those people will have quite large portfolios and may have leveraged up to a greater extent than the typical buy-to-let landlord.
I hope that clarification has been helpful to the Committee, and that the measures will have the Committee’s support.
George Kerevan rose—
Forgive me, Sir Roger. I am concerned about a sub-class of property owners in rural areas who might have unincorporated businesses on farms. They often rely on rented accommodation as part of the diversification of their business. I am concerned that one of these changes will make that more difficult for them, as they will be penalised, albeit unintentionally, with regard to investing in their property as part of a farm business. They might also be penalised with regard to their ability to make relevant commercial deductions for investment loans. In rural areas, property is quite often mortgaged less as part of a buy-to-let and more as part of the general farm business. Will the Minister comment on that?
The same principles apply to rural landlords as apply across the board. We want to ensure fairness in how interest deductibility applies: the same rate should apply across the board. In terms of whether businesses will be able to secure loans against property for business development, the measure will apply to restrict relief for borrowings used for the purpose of residential property businesses, not to borrowings secured against residential properties that are used for the development of other business. I hope that that reassures the hon. Gentleman and, again, I commend the clause to the Committee.
Amendments made: 23, in clause 24, page 37, line 18, leave out “finance costs” and insert
“costs of a dwelling-related loan”
Amendment 24, in clause 24, page 37, line 19, leave out
“non-deductible costs of a dwelling-related loan”
and insert “individuals”
Amendment 25, in clause 24, page 38, line 26, at end insert—
“274B Tax reduction for accumulated or discretionary trust income
(1) Subsections (2) to (4) apply if—
(a) an amount (“A”) would be deductible in calculating the profits for income tax purposes of a property business for a tax year but for section 272A,
(b) the trustees of a particular settlement are liable for income tax on N% of those profits, where N is a number—
(i) greater than 0, and
(ii) less than or equal to 100, and
(c) in relation to those trustees, that N% of those profits is accumulated or discretionary income.
(2) The trustees of the settlement are entitled to relief under this section for the tax year in respect of an amount (“the relievable amount”) equal to N% of A.
(3) The amount of the relief is given by—
BR × L
where BR is the basic rate of income tax for the year, and L is the lower of—
(a) the total of—
(i) the relievable amount, and
(ii) any difference available in relation to the trustees of the settlement and the property business for carry-forward to the year under subsection (4), and
(b) the profits for income tax purposes of the property business for the year after any deduction under section 118 of ITA 2007 (“the adjusted profits”) or, if less, the share of the adjusted profits—
(i) on which the trustees of the settlement are liable to income tax, and
(ii) which, in relation to the trustees of the settlement, is accumulated or discretionary income.
(4) Where the amount (“AY”) of the relief under this section for the year in respect of the relievable amount is less than—
BR × T
where BR is the basic rate of income tax for the year and T is the total found at subsection (3)(a), the difference between—
(a) T, and
(b) AY divided by BR (with BR expressed as a fraction for this purpose),
is available in relation to the trustees of the settlement and the property business for carry-forward to the following tax year.
(5) In this section “accumulated or discretionary income” has the meaning given by section 480 of ITA 2007.”
Amendment 26, in clause 24, page 40, line 3, at end insert—
‘( ) In section 26(2) of ITA 2007 (tax reductions deductible at Step 6 of the calculation in section 23 of ITA 2007 in the case of taxpayer who is not an individual), before the “and” at the end of paragraph (a) insert—
“(aa) section 274B of ITTOIA 2005 (trusts with accumulated or discretionary income derived from property business: relief for non-deductible costs of dwelling-related loans),”.—(Mr Gauke.)