A Taxing Question From The Office Of A Local MP
As an association PDPLA field questions from landlords, both members and prospective members. Less often, we receive questions from members of the public. Much rarer still, an unprompted question from a local MPs office (although they do usually reply when we write to them on your behalf) and sometimes engage in response to our newsletters.
The Question
However one such came in and caught our attention. The thrust of the enquiry, on behalf of a local constituent, asked whether HMO landlords pay tax, other fees and if the tax is business tax (and asking for pointers towards the legislation). Once we had stopped coughing and spluttering, Simon, Martin and your author (all three of us hold properties in our personal names) put our heads together.
While it would be possible to see the question as potentially coming from a position of resentment and hostility, we are not given to turning a possibly negative sentiment into a positive opportunity to respond. We have always prided ourselves in putting a positive case forward.
More importantly, the question seems to highlight the fact that very few tenants understand that landlord taxation for mortgage holding landlords is forcing a sell off, and both higher finance costs and reduced supply impact tenants themselves.
Our response is below. Members who reside or have rental properties in Portsmouth North are also encouraged to send emails putting their own experiences to Amanda Martin MP
Dear Amanda Martin MP (and colleague Lucy)
Thank you for your email.
As Vice Chairman of PDPLA and a long standing party member I have been tasked with replying to your enquiry.
It has always been our policy to engage with local and national politicians, we are not affiliated to any political party or group. Indeed we have members across the political spectrum.
Business Rates are a property tax usually paid by the occupier rather than the owner, raising money to fund local services much like Council Tax.
Either Business Rates or Council Tax will always apply to any premises, never both.
Most residential property is subject to Council Tax, not Business Rates, although there are some exceptions.
For example, property used for short-term holiday lettings will often be subject to Business Rates instead of Council Tax.
Business Rates are usually a bit lower than Council Tax in such cases. Either way, they are a tax on property, not income. HMOs are usually subject to Council tax, as we explain below.
Where an entire house is in the possession of a tenant as their main residence, for example a house let to a family, the responsibility for paying Council Tax falls on the occupier; this is appropriate as they are the party benefitting from the local services that Council Tax funds.
The same is true of a rented commercial premises, it is the occupying business liable for Business Rates, not the freeholder.
HMOs are an exception. Where rooms are let separately in HMOs, the legal duty to pay Council Tax falls on the landlord rather than the occupiers. This helps reduce the administrative burden on the local authority where occupants can be expected to change more frequently. There is more information here https://www.portsmouth.gov.uk/services/council-tax/council-tax-houses-in-multiple-occupation/
Other taxes HMO landlords are subject to will depend largely on whether the property is owned personally or owned by a company.
Where incorporated as a company, taxes due are the same as for other incorporated businesses, that is, principally through Corporation tax and Dividend tax. This may be the case where a property is purchased and developed into a super HMO.
Our evidence to the original licensing process is a few years out of date on prices, but you may find our earlier article on the economics of HMOs a good briefing document. https://pdpla.com/news/hmo-rents-set-to-rise-50
Where property is personally owned, tax is paid primarily as Income Tax. Most landlords (HMO and non-HMO) will pay more Income Tax than individuals with the same level of income from other sources due to the effects of Section 24 Finance Act 2015 that limits tax relief on mortgage interest payments for private individuals.
This is referred to as the Osborne Tax (Or the tenant tax) and has a very real impact, often forcing smaller landlords out of the industry. There is an explainer here;
The effect is that landlords who own properties in their own name (not in a company) cannot offset all of the interest on mortgage payments.
It is hard to comprehend the impact without looking at a worked example.
A portfolio landlord who does not wish to be named has given the following rather bleak example (albeit a bad year) figures rounded to nearest £1,000
Occupational pension income £10,000
Total portfolio income £245,000
Maintenance £44,000
Ground rent, legal, wages & other tax allowable costs £64,000
Mortgage costs (subject to Osborne tax, not fully allowable) £149,000
Operating loss (property) (£ 12,000)
Taxable income from property£ 92,000
Tax liability £29,000
In this case, the landlord ran at a loss, but still incurred a tax liability. Prior to the Osborne tax he would have carried this loss forward, thus maximising his opportunity to trade out of loss.
As the tax is on a loss, it is not possible to calculate a marginal tax rate, however had he reduced his costs in this year by £13,000 (and made a profit of £1,000) his marginal tax rate would be 2,900%
The mortgages are the largest expense but other liabilities include Maintenance, as well as employment and maintenance.
He has covered his position by a mixture of refinancing and selling a property, This case demonstrates how landlords are slowly being forced out of the market. To us, this looks like the clear intention of the Osborne tax.
This situation is not sustainable, but losses occur in all businesses from time to time. I would normally expect a renegotiation of mortgage interest rates to be a starting point, then reduction of other costs to return to profitable trading, but the Osborne tax will continue to create a headwind.
Landlords also pay a significantly higher rate of SDLT when purchasing property than is paid by owner-occupiers,
Finally, and unlike home owners, landlords pay Capital Gains Tax at a higher rate than is applied to other asset classes when they sell property.
Of other fees HMO landlords pay, the most notable is the HMO Licence Fee payable to local authorities.
Licensing is mandatory for houses with 5 or more occupiers. Local authorities have discretion to require licensing also for smaller HMOs, as is the case in Portsmouth
We are painfully aware that few outside of our industry have much sympathy with landlords. We are faced with prejudice and resentment on a daily basis in the media, although for the most part our tenants enjoy the services we provide.
Nevertheless, ultimately the losers are tenants because sales of private rental properties nearly always result in eviction and rental properties are lost to the PRS. If they are purchased by other landlords they will nearly always be renovated or developed and offered back to prospective tenants at a much higher rent.
We urge you to support the PRS by writing to Rachel Reeves MP in her role as chancellor of the exchequer requesting the abolition of the Osborne tax. We understand this is a big ask, but the taxation level was introduced over a 4 year period and could be stepped down in a similar manner to reduce the perceived loss of taxation while balancing with the need to make taxation fair.
You can assure constituents that HMO landlords are not under-taxed relative to other businesses or other taxpayers in general.
Alwin Oliver
Vice Chairman, PDPLA