1         

Introduction

1.1   

The Chartered Institute of Taxation welcomes the opportunity to submit limited evidence in respect of two questions that form part of the Committee’s inquiry.

Our evidence focuses primarily  on question 1b:

Question 1b Taxation: Are there tax measures that would improve housing supply and affordability?

We also comment briefly on Question 2a with the proviso that the CIOT’s remit is the administration and practice of taxation. It does not extend to economic forecasting or modelling.

Question 2a Will the reduction of tax relief available to private landlords announced by the Chancellor of the Exchequer in the 2015 Budget increase the cost of privately rented accommodation?

2         

Taxation: Are there tax measures that would improve housing supply and affordability?

2.1   

A number of features (explored below at 2.2 et seq.) of the UK tax system favour returns to property ownership, returns that could be expected to act to increase demand to buy property, retain it for longer, and so affect affordability.

Most of these reflect long-standing, important and widely supported objectives such as encouraging home ownership and seeking to tax returns where possible when there is cash to pay the tax. If affordability of housing is to be given greater priority in tax policy, it is unlikely to be achieved by a quick fix, but by a significant research and consultative effort to identify whether there are possible approaches that achieve, on a stable and sustainable basis, a better and more efficient balance between all these objectives.

A medium or long term assessment of the effect of recent tax changes would ideally be taken in a period of stability. There have been many changes affecting residential property taxation over a relatively short period of time. The Autumn Statement announced :

• an increase in SDLT rates on acquisitions of second homes and buy-to-let properties,
• an acceleration of the payment date for capital gains tax on disposals of residential property,
• an acceleration of the payment date for SDLT and
• a housing benefit cap.

Further recent changes include higher rates of SDLT for residential property and the change from the slab to a marginal rate basis, a 15% SDLT rate for enveloped property, the introduction of ATED (annual tax on enveloped dwellings) and ATED - related capital gains tax charge, CGT on non-residents disposing of UK residential property, the restriction on interest relief for buy-to-let property and replacing the wear and tear allowance with a less generous relief.

2.2   

Enjoyment of the benefit of owner occupation is not subject to income tax (as it was prior to 1963) nor of course to VAT.

Historically (prior to 1963), the benefit of owner occupation was subject to income tax via the mechanism of taxing imputed rental income under Schedule A. In principle each property was taxed on its potential rental value and mortgagors were entitled to tax relief on mortgage interest. Schedule A taxation was abolished in 1963 on owner occupied housing although mortgage interest relief remained (as a relief against income tax) being gradually phased out until abolition in 2000.

2.3   

The accrual of capital gains on the investment in property and the realisation of such gains on a principal residence are tax free, regardless of scale. In addition, elements of the principal private residence relief rules[1] may allow investors some (usually partial) shelter against tax on gains on second properties (though less than was once the case).

To promote labour mobility, the PPR rules provide that if the property has been the only or main residence at some point during ownership, gains attributable to the last 18 months[2] of ownership are free of CGT even if the individual is not living in the property during that time. If a taxpayer has two homes he/she can nominate, which property is the only or main residence (regardless of whether it is actually the main residence or not), provided that, as a matter of fact, the property has been occupied as a residence. It is the combination of these two elements that allows for limited ‘flipping’ or switching PPR between properties to take advantage of the 18 month period of tax free gain. This benefit has been curtailed by the reduction in the final period of ownership.

There is a further tax benefit of PPR if the property has been let. Normally the gain attributable to the period of letting would be subject to CGT but there is a lettings ‘relief’ of up to £40,000 to offset that part of the gain (or up to £80,000 in the case of joint ownership). This particular relief may, however, viewed in isolation have a beneficial impact on the supply and therefore affordability of accommodation, in encouraging the letting out of homes that have been (but currently are not) occupied as a main residence.'

2.4   

The value of (or derived from) a family home can now be left on death free of Inheritance Tax (IHT) to a much greater extent than the value of other assets.

Prior to 2015 the IHT regime made no distinction between gifts (whether during life or as part of a deceased person’s estate) of a dwelling that was owner-occupied or one that was rented out. That neutrality was reinforced by the denial of Business Property Relief in respect of rental properties where the business is ‘making or holding investments’[3]. However, in respect of deaths after 5 April 2017, a Residence Nil-Rate Amount (‘RNRA’) allowance[4] will remove from charge up to that value in a person’s death estate that comprises an interest in a dwelling-house which has at some time been the person’s residence, but only in cases where the home is left to direct descendants.

The Government has promised to include in Finance Bill 2016 legislation to allow the full RNRA where the owner-occupier had downsized prior to their death. In principle this should address the risk of elderly persons retaining the family home, purely for the ultimate IHT break. It will remain the case that the benefit of the higher IHT allowance is only available if the value has been included in the home in the first place.

2.5   

Council Tax on the benefit of occupation is assessed on long outdated values. For properties in England and Scotland the amount payable is based on the value in April 1991.

2.6   

Stamp Duty Land Tax (Land and Buildings Transaction Tax in Scotland) paid on the purchase of a house  (partially) offset the benefits outlined above but themselves add a cost to buying and selling and so effect adversely the flexibility of the market, which again can be expected to similarly impact affordability.

2.7   

Flexibility is also adversely impacted because, for example, a taxpayer cannot typically deduct rent they pay for living in one place while they let out a property they own (and on which they will pay tax on the rent).

2.8   

Although a serious study of affordability would be a medium/long term exercise, there may be some steps that could be taken more immediately that could have some impact; the increase in rent a room relief[5] will help to ensure the relief meets the objective of easing the pressures on housing by making best use of the housing stock. Keeping the rate under regular review so that it responds to increases in rent is therefore one such step. The ability exists to amend the threshold via statutory instrument.

3         

Question 2a Will the reduction of tax relief available to private landlords announced by the Chancellor of the Exchequer in the 2015 Budget increase the cost of privately rented accommodation?

3.1   

As announced in the July 2015 Budget, individuals who carry on a property business that involves the letting of residential property will gradually lose[6] their entitlement to higher rate tax relief on finance costs in respect of loans taken out for the purpose of that business. Currently there is a full tax deduction for mortgage interest against property income meaning that currently economic and taxable profit is more closely aligned. From 2020/21 those costs will be disallowed in full and an individual taxpayer will receive a basic rate reduction against total tax liability.

3.2   

The target of the legislative change is understood to be higher rate taxpayers running leveraged (unincorporated) ‘buy to let’ businesses. For a 40% marginal rate taxpayer the tax cost will increase by an additional 20%[7] (40% - 20%) on the interest and other funding costs. The economic profit on which that increased rate is payable remains the same as before; the change leading to an increase in the effective rate of tax on that economic profit. Higher finance costs will equate to higher effective rates.

3.3   

Such landlords can either seek to increase rents to offset the increase, or to absorb the additional tax cost, or take the decision to incorporate their property business (with the associated tax costs of incorporation and ongoing costs) or withdraw from the market. New landlords entering the market can do so with the expectation of higher rents or lower profits than would otherwise have been the case.

3.4   

The CIOT is not an economic modelling or forecasting organisation and cannot comment authoritatively upon which of those possibilities will materialise and to what extent.

4         

The Chartered Institute of Taxation

4.1   

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.