How do we make houses more affordable for first-time buyers? How about we start by making them less affordable for buy-to-let buyers?
A new report suggests that landlords are currently subsidised by the rest of us to the tune of some £5bn a year, thanks to the way in which they (entirely legally) avoid paying both income tax and capital gains tax (CGT) on their returns.
If you buy a house to live in, you pay the interest on the loan you take out to do so, out of your post-tax income. You also pay for any repairs to or upkeep of the house out of your post-tax income.
However, if you are a landlord, the house is considered to be a business. That means you can deduct the interest from the rental income pre-tax. You can also deduct a further 10% from the rent received to cover repairs and depreciation (even if you haven’t actually spent anything on upkeep).
So let’s look at the effect of this in a general way. Let’s say our residential buyer and our landlord both buy a house costing £250,000 which could be rented out for £15,000 a year. Our residential buyer (let’s call him Tim) has an income of £50,000. Our buy-to-let landlord (who’s going to be a bit older and richer – let’s call him John) has an income of £60,000, including the rent from the house.
They have both put down a £50,000 deposit and borrowed £200,000 to buy the house. What does a year of ownership cost each of them?
Tim has to get a repayment mortgage and the two-year fix comes in at about 2.5%. That makes his monthly payments £904.59. The annual cost is £10,855. He spends about £1,500 on upkeep in the first year. The total annual cost is around £12,350. And that, remember, is after he has paid all his other taxes.
On to John. He gets a two-year fixed interest-only mortgage (buy-to-let investors can still get these!) at 3%. That makes the annual payment £6,000. John also has £1,500 of repairs to set off (whether he has spent it or not of course).
But these payments are pre-tax, not post. So when John gets around to doing his self assessment form, he won’t be taxed on £60,000 but on £52,500. This brings his tax bill down from £18,236 to £15,086 (an effective rate of 25% all in). That’s a saving of around £3,150.
The upshot? It costs John not £7,500 to own the house, but £4,350. Without the deductions, the house still costs Tim £12,350.
You can fiddle around with these numbers depending on what mortgage rates you can find and so on, but the fact remains that the effects of the compounding of payments alongside the tax benefits give John an unbeatable advantage.
And that’s before we start on all the other things that can be offset – all sorts of professional fees and insurance premiums, to say nothing of the ways it is possible to avoid CGT. It’s also one reason why there are so many buy-to-let landlords around.
Will this change any time soon? Hard to say, but here’s a statistic that might give you a hint: around 4% of all adults are landlords. Around 17% of current MPs are landlords.