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Landlords claim tax relief on £5bn mortgage interest a year

HMRC figures back up Exaro analysis on tax breaks that help block first-time buyers

The tax advantages distort the market

Matt Griffith, director, Priced Out

Buy-to-let and other private landlords in the UK benefit from tax relief on £5 billion of mortgage interest a year, figures released to Exaro show.

It supports analysis published by Exaro last September that landlords are saving £2 billion in tax annually from this relief.

Figures disclosed by HM Revenue & Customs (HMRC) in response to a request under the Freedom of Information Act show that landlords claim £5.31 billion for mortgage interest and other financial costs a year, plus about £7 billion of other tax-deductible costs. These include repairs, letting fees and insurance.

Mortgage tax-breaks were scrapped for homeowners a decade ago. But landlords can offset their mortgage interest against rental income to reduce their tax bills.

Many landlords pay income tax at 40 per cent or at the top rate of 45 per cent, previously 50 per cent. So, the mortgage interest of £5 billion translates to a tax saving of around £2 billion.

According to HMRC, about one million landlords claim this tax relief on mortgage interest.

By comparison, about 1.2 million landlords claim a total of £2.5 billion of expenses a year for repairs and maintenance, while over a million offset their letting and other professional fees against rents.

The substantial tax breaks on property lettings have helped fuel a boom in homes in the private-rental sector. Loan interest and other allowable costs account for about half of declared rental income.

Figures previously released show that one million landlords in the UK evade tax by failing to declare rental income.

The evasion costs the country at least £550 million a year.

Of £25 billion of rents in 2010-11, the latest figures available from self-assessment tax returns, about £2.6 billion of tax was payable.

Two million people declare rental income for tax. So, the average tax bill for landlords was around £1,300 a year.

Matt Griffith, director of Priced Out, which campaigns for ‘affordable’ housing, described the ability to claim tax relief on mortgage interest and other expenses against rents as “a major hidden subsidy for private landlords”.

“The tax advantages distort the market.” He said that they help to push up the prices that landlords are prepared to pay for properties, making it harder for first-time buyers.

But Ray Boulger, senior technical manager at John Charcol, a leading broker of buy-to-let mortgages, said that it is “fair” for landlords to be able to offset their mortgage and other rental costs.

He said: “Buy-to-let landlords are running mini-businesses, and a major part of their business expenses are mortgage interest.”

He would have expected a higher proportion of the UK’s two million landlords who declare rents to claim for interest or other costs. “While not all landlords are borrowing, most have some expenses,” he said.

HMRC’s figures also underline how the cost of mortgage relief to the public purse is likely to surge when interest rates rise again.

The amount of loan interest that was offset against rental income peaked at £8 billion in 2008-9 – equivalent to about £3 billion of tax relief.  Although total buy-to-let borrowing was lower then, interest rates were higher.

Interest rates have plunged following the financial crisis, bringing the value of the relief down.

However, borrowing by landlords has continued to rise, and the number of landlords claiming interest as a tax-deductible expense has increased.

So when interest rates eventually rise, the total amount of tax relief looks set to soar.

But Boulger warned of the effect on the private-rental sector of scrapping tax breaks. “If landlords were not able to claim mortgage interest relief, this would make letting property significantly less attractive and you would see people exit the sector,” he said.

Article Comments

What's your point. It's a business expense, like any other, and therefore subject to reliefs. I cannot see what the fuss is about. CGT is payable on any increase in value of the property when it is sold and tax is paid on income or dividends as normal. This simply is not a story.

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