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Dodging regulatory bullets

Dodging regulatory bullets

Buy-to-let is a tax dodge. That's what Chancellor George Osborne has been encouraging the nation to think. Last week, he told The Daily Telegraph how "shocked" he was that rich people were using loopholes to reduce their income tax. Tax relief for charitable donations was the loophole seized on by most commentators, but interest relief for buy-to-let mortgages was also on the blacklist. The story then did the usual rounds, including in a primetime BBC report by Newsnight economics editor Paul Mason that listed buy-to-let as a way of avoiding tax.

Landlords must be wondering why they are being lumped together with the "tycoons" that politicians love to hate. One reason may be that the public still simplistically conflates property ownership with wealth, making landlords an easy target for a government desperate to prove it is not letting the rich off lightly. Another reason is that mortgage interest deductions for primary homes were gradually abolished in the 1990s, and it is easy to assume buy-to-let mortgages are similar.

In fact, they are very different. The mortgage on your primary (or indeed secondary) residence is a personal cost, but a buy-to-let loan is a business cost. Just as firms make sales by buying raw materials, landlords earn rental income by taking out debt and servicing it. Taxing gross rental income, rather than net income, is like taxing a company's revenues rather than its profits – which no sane politician would suggest.

Luckily, it seems more a war of words than of substance. HM Revenue & Customs assures me the chancellor's infamous cap on unlimited income-tax relief won't affect buy-to-let. Still, the politicking is highly misleading, and unhelpful for a sector that plays an increasingly important social role. Brokerage Savills estimates that the private-rented sector requires £200bn of investment over the next half decade to keep up with demand. That will be even harder to achieve if politicians actively spread the fallacy that landlords are white-collar bandits.

Sound bite-led initiatives from Whitehall are not the only regulatory threat. Indeed, landlords have to dodge bullets at every level of government – local, national, even European. Manchester landlord Carolyn Uphill says her biggest worry is not a house-price crash or abusive tenants but "inappropriate legislation". She owns student lets, so her particular bugbear is a rule introduced in 2010 that allows councils to restrict the creation of "houses in multiple occupation" – effectively house shares – through the planning system. This measure is popular with owner occupiers, who don't like grotty students on their streets. But it will restrict new supply of student digs, which are already in short supply, pushing up rents. One faction's benefit becomes another's cost, which is a poor approach to policy by any standard (except Nimbyism).

A regulation with a far wider potential impact is the European Union's draft directive on Credit Agreements Relating to Residential Property, published last year. David Cox at the National Landlords' Association brands the bill "catastrophic" in its current form: "It would kill buy-to-let if it were accepted."

The problem is a prescription that banks take account of a borrower's income when advancing a mortgage. This is normal for a home loan, but not for a buy-to-let loan, where the rental income of the property is what counts. Presumably because buy-to-let loans do not exist outside Britain, the draft directive did not take them into account, threatening the basic business model of the UK private rented sector.

It seems likely landlords will dodge this bullet, too. Mr Cox says he is "quietly confident" buy-to-let loans will be excluded from the next draft of the directive. "The bill is about protecting consumers," he argues. "But buy-to-let loans aren't consumer loans, they're business loans." It's not just the UK government that forgets buy-to-let mortgages are commercial contracts, not personal ones.

To conclude more optimistically, the other major legislation that will affect the buy-to-let sector – the Green Deal – looks better considered. The objective is to reduce the nation's carbon emissions by improving the energy efficiency of housing. There are special rules for rental properties, which tend to be particularly draughty because landlords have no incentive to pay for upgrades that only benefit tenants (there is no evidence energy efficiency increases either house prices or rents).

There is a 'stick': after 2018 landlords won't be allowed to let out houses with energy ratings worse than the current grade E. But there is also a large 'carrot': from October, landlords and owner-occupiers alike can apply for loans to fund home improvements, which then pay for themselves through lower fuel bills. There is a risk older houses need so much work that it can never pay for itself. In these cases, the carrot won't work and the stick will look heavy-handed and potentially socially destructive, reducing the private-rented sector's already tight capacity. That needs to be watched. But otherwise – fingers crossed – this structure seems likely to meet an ambitious policy target without placing a major financial burden either on landlords, tenants or the taxpayer. If only all legislation could follow that principle.

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By Stephen Wilmot,
18 April 2012

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Stephen Wilmot

Stephen Wilmot covers property at the Investors Chronicle, including both the listed commercial real estate companies and buy-to-let investments.

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