We talk about the unstoppable rise of buy-to-let and forget that it was only as recently as the early 1970’s that owner-occupation tipped the 50% mark and most people owned their own homes.
At the turn of the last century, 95% of the population rented their home from a private landlord.
Owner occupation began to gather pace in the 1930’s and the suburbs were built on the back of this demand.
After WW2 it was slum clearances and state sponsored rebuilding programmes which meant that council housing grew as we eliminated the worst private lettings.
But behind all of these pulses and surges the tax system plays its part. And that is where it gets interesting in light of current Government tinkering with tax and buy-to-let.
The hardest concept to grasp is ‘imputed rental income’. Think about a landlord receiving rent from a tenant. The tenant uses the property and pays rent to the landlord for the value he or she gets from this use. The landlord does not use the property themselves but has the expense of providing the asset – interest on loans, maintenance, management.
Now think about an owner-occupier. They use the property for themselves rather than renting it out so you could say they pay themselves the rent for the use they enjoy. This is the ‘imputed rental income’.
Sounds barmy, but would it surprise you to know that until the mid-20th century owner-occupiers had to account to the inland revenue for this ‘imputed rental income’ on their tax returns under Schedule A?
However, the tax man allowed them relief against the expense of providing the asset – interest on loans, maintenance etc.
Later the rules changed and ‘imputed rental income’ was no longer taxed but the relief for mortgage interest payments continued.
No wonder the owner-occupied sector began to grow rapidly – the tax man would help you pay your mortgage but would not help you pay rent to a landlord.
And remember this was happening at a time of high wage inflation, so in a short time your outstanding mortgage would look like a fairly small sum.
Chancellor Howe increased the allowance to £30,000 per year per mortgaged taxpayer, but the bubble finally started to burst in 1988 when Chancellor Lawson stopped double relief for taxpaying couples and in 2000 Chancellor Brown abolished the relief entirely.
Throughout this private landlords continued to pay tax on their rental income but could at least claim full tax relief on their mortgage interest payments.
This is what Chancellor Osborne has begun to undermine by tapering the interest tax relief on buy-to-let mortgages to the basic rate. Is what he is doing fair?
You could argue that the Government is bringing the tax treatment of owner occupiers and landlords into alignment by removing relief.
But the difference is that landlords still pay tax on their rental income while owner-occupiers don’t pay tax on their imputed rental income.
Also the Chancellor has widened the tax gap by leaving landlords on the 28% capital gains tax rate, but reducing the rate to 20% for the owners of other capital assets and leaving the rate at zero for owner-occupiers.
Stamp duty is now two tiered with a punitive rate of an extra 3% for landlords.
Equal treatment of owner-occupiers and landlords would mean equalised rates for stamp duty, capital gains tax, mortgage interest relief and tax on rental income or imputed rental income.
If that regime were to be put in place the buy-to-let sector would go ballistic and we would see 50% of the population renting their homes within our lifetime.
*Ian Wilson – Chief Executive Officer