Lord Flight, a former Conservative Shadow Chief Secretary to the Treasury, has attacked the Government’s buy-to-let tax changes, warning they could destabilise Britain's housing market by triggering "a sharp fall in prices, if not a crash".
He said the Government's policies also threatened to "put thousands of tenants’ security at risk", predicting that landlords would rush to sell to sell properties having first evicted tenants.
Lord Flight is the first prominent politician to openly criticise the Government's surprise assault on private landlords, which will see many pay significantly more tax on their rental income and higher rates of stamp duty.
In an article published on the Conservative Home website, Lord Flight called on the Government to rethink this “sudden attack”.
He warned the tax changes “risk the very crisis in the buy-to-let housing and lending markets of which the Bank of England has recently warned”.
This was a reference to Mark Carney, governor of the Bank of England, who said in September that Britain's buy-to-let market poses an increasing threat to financial stability because rising property prices could magnify a housing market crash.
On the contrary, Lord Flight argued that buy-to-let has been an “entirely sensible” market development, with middle-class savers turning to property as an alternative to saving for old age via a pension.
“Given the poor performance of the stock market over the last 20 years, it is hardly surprising that many people have opted for buy-to-let investment as an alternative, and more successful, retirement provisioning investment,” Lord Flight said.
“Buy-to-let has, moreover, provided some three million homes for those not able yet to afford to buy their homes – especially in London."
Lord Flight also pointed out the relatively high levels of tax already paid by buy-to-let investors, especially when compared to other forms of saving.
“Buy-to-let does not enjoy any of the major tax advantages of pension saving, such as tax credits on the amount invested and accumulation of income and capital gains free of tax within a pension scheme," he said.
"The only buy-to-let ‘tax advantage’ has been the ability for the interest cost to be offset against an individual’s income to determine their tax bills – the very thing which the Finance Act measure has hit by limiting the tax deductibility of mortgage interest to a 20pc tax rate.
"This will hit more modest buy-to-let investors the most, while many of the more sophisticated have their buy-to-let properties held via a company.”
In the summer Budget, George Osborne announced plans to prevent landlords offsetting mortgage interest costs against rental profits before calculating tax.
The change, which has been written into the 2015 Finance Bill, will apply to existing investment properties and future purchases. It will result in some investors paying tax even where they generate no profit or are loss-making.
Many private landlords have pledged to fight the tax changes through a judicial review.
Lord Flight's views – as yet not shared openly by any other politicians – are in agreement with those of lawyers, accountants and other property professionals.
The accounting trade body, the Institute of Chartered Accountants in England & Wales (ICAEW), for example, has attacked the removal of mortgage interest relief as "unreasonable, unworkable and unthought-through".
Lord Flight also criticised the Government’s stamp duty rise, announced in November’s Autumn Statement, for those purchasing buy-to-let properties and second homes.
From April, anyone who buys additional residential property will have to pay an extra 3 percentage points in stamp duty.
The additional charge applies above the current “stamp duty land tax” rates. This means there will be 3pc tax (currently zero) to pay on homes worth up to £125,000, 5pc tax (instead of 2pc) on homes that cost between £125,001 and £250,000, and 8pc (currently 5pc) on homes worth between £250,001 and £925,000.
Homes worth up to £1.5m will be subject to 13pc stamp duty and those over this amount will incur a 15pc charge.
“The risk is self-evidently that as some buy-to-let investors are motivated to sell as a result of the reduction in the tax offset of mortgage interest, potential buyers will be put off by the additional 3 per cent stamp duty on top of what are already confiscatory rates of stamp duty applying in London (where properties are generally more valuable),” Lord Flight said.
“More sellers and less buyers clearly has the ability to create a sharp fall in prices, if not a crash. A significant increase in those selling buy-to-let properties may also put thousands of tenants’ security at risk as buyers will want to sell with vacant possession.”
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