NO, RESTRICTING INTEREST RELIEF IS NOT UNFAIR AT ALL!

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NO,RESTRICTING INTEREST RELIEF IS NOT UNFAIR AT ALL!

I have just read an article, “Taxes on Britain’s landlords are complex, unfair and counterproductive”.  It was written by Rory Meaking, a Research Fellow at the Taxpayers Alliance.  I do not know what a research fellow does, but it does not appear to involve research or, indeed, thinking.  The article bemoans the fact that five years ago George Osborne took what seems to me to be the very modest step of restricting income relief for interest paid by landlords to the 20% basic rate, with a phased introduction to give landlords the opportunity to rearrange their affairs.

Or what the article calls “gradually replacing the old, neutral system with one that is far more punitive towards landlords”.  I would argue it actually replaced an old unfair system with one that is a little bit fairer to those who choose to invest in things other than rental properties.  Mr Meaking’s proposition on neutrality is that if A pays interest to B and the government taxes B on its receipts, A ought to be entitled to a corresponding tax relief.

That argument seems to me to fall down very quickly.  When I eat a sandwich, the baker is taxed on the money I paid for the bread, the dairy on my cost of the butter, and the butcher on the meat I bought to put inside it.  I doubt that even Mr Meaking believes that I should get tax relief for eating my sandwich, yet that is the logic of his argument.  A more direct comparison is of course that the government gives me no tax relief when I borrow to invest on the stock exchange, it gives me no tax relief when I borrow to invest in a tech start-up (which seems to be the government’s current flavour of the month) and it gives me no tax relief if I invest in somewhere to live.  All of these things are as important, if not more important, to the country than a healthy residential letting market.  If Mr Meaking values neutrality, it would be helpful why he seems to believe that this concept should apply only to one type of investment.

The article does not address that question.  It does however suggest that allowing interest relief to the landlord is quid pro quo for not taxing a householder on his occupation of his house.  The answer surely lies in the word “income”.  Income tax is a tax on income, not a tax on pretences.  If Mr Meaking thinks that having invested my money in my house as a place to live ought to attract income tax on pretend income, why not also investing my money in my car, or my TV, or, indeed, my sandwich?  I do not expect Mr Meaking to remember 1962.  I do, because that is when I was serving my articles (the old expression for a training contract).  In 1962, we did tax people on pretend income from their houses.  I doubt that it raised much money though.  Virtually the only tax I did during my articles was maintenance claims.  If a person is to be taxed on notional income, fairness surely requires that he should be able to reduce that notional income by the expenditure on maintaining the house.  For most of my then firm’s clients, the maintenance claim largely eliminated the tax charge.

Of course, the real political problem with rental properties is that the investor in a rental property is in competition to buy it with a potential owner-occupier.  A government needs to strike a balance between the undoubted need for a healthy residential rental sector and the aspiration of a large part of the populace to own their own home.  Many people, including me, think that landlords are unfairly advantaged.  Owner-occupiers have to buy their houses from a combination of taxed income and borrowings the interest on which has to be met out of taxed income.  Landlords (after the first property) can buy properties out of a combination of untaxed income (because relief for interest on borrowings for earlier properties frequently eliminates the tax on current rents) and unrealised gains on other properties (by re-mortgaging them, which not only releases tax-free money to buy more property, but creates extra interest charges to reduce taxable rents still further).  Very few people have become multi-millionaires out of living in their own house.  Quite a lot of people have become multi-millionaires by building up a residential property portfolio, which suggests to me that the balance is weighed far too heavily in favour of the landlord.

Mr Meaking of course sees it differently.  He thinks “the government opted to tax a politically unsympathetic group to scapegoat”, instead of addressing the actual cause of the housing crisis, “a housing shortage caused by planning restrictions”.  Whilst the planning system can undoubtedly be much improved, I doubt that many other than Mr Meaking believe that abolishing the planning system would somehow mean that millions of new houses would be erected.  Mr Meaking thinks that blaming landlords for the housing crisis, “relies on the specious logic which claims that because owner-occupiers cannot set their mortgages against their tax, it gives landlords an unfair advantage for them to be able to do so.  This is nonsense (he says) because owner-occupiers are already exempt from tax for the value of their home (to themselves) as the owner …  But it was clearly a much easier option for politicians rather than dealing with the resistance to building more homes than we currently do so that housing supply increases and prices and rents fall”.

Of course, if prices and rents fall, some of the people hardest hit will be residential landlords with long-term borrowings.  Curious, because the special case that Mr Meaking seemed to be pleading in the rest of his articles seemed to be aimed at defending those he now seems to want to bankrupt!

ROBERT MAAS