In a previous article, we looked at how Section 24 will change the existing tax system for landlords as it’s rolled out, but many landlords have expressed confusion about what the reforms are intended to achieve.
In the second article in our series on Section 24, we will look at the reasons why the legislation was introduced and how landlords have responded to it.
An overheating market?
In 2015, before the then Chancellor, George Osborne, announced Section 24 in his summer budget, the Governor of the Bank of England, Mark Carney, expressed concerns that the buy to let market could be overheating and could pose a risk to the wider economy.
In its quarterly update on potential risks to the economy, published in September 2015, the Bank said they were concerned that if house prices were to fall, landlords selling properties to exit the sector or consolidate their position could exacerbate the decline.
In its statement, the Bank’s Financial Policy Committee, said; “Buy-to-let mortgage lending has the potential to amplify the housing and credit cycles, though the extent of the amplification is hard to judge because the market has only recently grown to significant levels. Any increase in buy-to-let activity in an upswing could add further pressure to house prices.
“Buy-to-let investors may further exacerbate a downturn if they expect rental incomes to fall below their interest payments, and consequently add to selling pressure.”
The FPC claimed there was evidence suggesting that, if house prices were to slump, 40% of buy to let investors would respond by selling their properties.
‘Unfair’ tax relief?
When he announced the Section 24 changes, George Osborne, claimed that the existing tax relief available for buy to let investors was unfair because the same financial assistance was not available to owner occupiers for their mortgages.
Reforming mortgage tax relief on buy to let mortgages, it was claimed, would dampen speculation in the housing sector and make more homes available for residential buyers, especially first time buyers.
During his budget announcement, George Osborne said; “We will create a more level playing-field between those buying a home to let, and those who are buying a home to live in.
“Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot.
“And the better-off the landlord, the more tax relief they get.”
What do landlords say?
Between Section 24 and the increases in Stamp Duty on second homes, landlords have been hit hard by recent Government policy. The frustration landlords feel in light of these policies is heightened by the fact that many do not accept the Government’s stated reasons for introducing these policies.
In a statement, the Axe the Tennant Tax campaign said; “It is a tax grab pure and simple. The Bank of England’s concern was a false one as has been proved to be the case. If the government really wanted to restrict buy to let they would have changed the mortgage criteria, which they did at the end of the tax grab measures, rather than at the start.
“We believe that when Section 24 starts to be felt in the tax people pay, from January 19 onwards, only then will the rent rises truly be felt. The consequences we are seeing are on a small scale and will increase as Section 24 affected landlords are putting up rents or selling up.”
If you’re a landlord affected by Section 24 or Stamp Duty changes and worried about your finances, contact Landlord Debt Advisory on 0161 222 4311 or online at landlorddebtadvisory.com.