|UK Landlords Claim Restriction on Loan Relief is ‘State Aid’ for Corporates|
Landlords challenging the new restrictions on loan relief for buy-to-let properties have published the grounds for their judicial review application.
The restrictions were announced without prior warning in last July's special post-election summer Budget, and rapidly embodied in clause 24 of the Finance Act 2015. Starting in April 2017, higher-rate tax relief on individual landlords' finance costs (typically mortgage interest) will be gradually withdrawn – by 5 April 2020 relief will only be available at the 20 per cent basic rate of income tax.
However, corporate owners of residential property will still be able to claim full interest relief. So will owners of furnished holiday lets.
The announcement created strong opposition from property investors, who had already been hit by a series of tax measures (and have since been targeted by more, especially the extra 3 per cent stamp duty land tax surcharge on additional properties). Tax advisors pointed out that it could impose a marginal tax rate of more than 100 per cent on some private landlords, especially those receiving child benefit. Some will even be taxed on loss-making businesses. There were predictions that many would not be able to continue their businesses and would sell up, in the meantime evicting their tenants.
Late last year it emerged that some leading landlords were planning to launch a legal challenge to the measure, in the form of a judicial review. They are funded by 737 other individuals, including other landlords and letting agents. Initially the main ground for the challenge was thought to be that it contravened a 'fundamental principle' that taxable profits should always be calculated as income minus costs.
This month, objectors Steve Bolton and Chris Cooper gave more detail of their grounds, in a published letter before action. They say the new rules effectively grant state aid to corporate landlords, to whom the relief restriction does not apply.
HM Revenue & Customs reject this ground on the basis that individual landlords are in competition with home buyers for the purchase of individual residential property, while corporations are not. Bolton and Cooper, via their legal representatives Omnia Strategy, say this argument is invalid and that the difference between private landlords and corporate property companies, or between private landlords and commercial operators of holiday lets, does not justify discrimination in their tax treatment. They also say the measure imposes an excessive and individual tax burden on private landlords, and thus violates their right to property under article 1 of the European Convention on Human Rights.
The letter before action notes that taxable rental income has historically been treated in the same manner as income from a trade or profession, with costs of finance being fully deductible as an expense. In future, though, individual landlords carrying out a property business will be treated more punitively than other individuals carrying out a trade or profession.
The judicial review hearing could take months to prepare.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Feb.19, 2016