Just a thought about Green Party housing policy

So, they’re going to finance their housing policy by stopping private landlords from getting mortgage interest relief on the tax from their rental payments.

Hmm. So, won’t everyone just incorporate their buy to let properties? And they’re really not going to disallow interest relief for corporate property investments now, are they? So what savings will there be in tax reliefs?

33 thoughts on “Just a thought about Green Party housing policy”

  1. They could probably ban relief on corporate property investments that have personal guarantees, and without such a personal guarantee, limited liability will make the loans riskier for the lenders, which will push up the interest.

  2. I suspect that the European court might have something to say if they tried something like that – excluding the primary cost from a profit calculation rather goes against the principle of a tax on profits, no?

    And I suspect they’d be quite tight on it – they just slapped down the French for putting a “social charge” on income from renting, or profit from selling, property in France owned by non-residents.

  3. “It’s the Greens. They don’t “do” economics.”

    Worse than that – they seem to be *against* economics, without really understanding what it is they’re against………

  4. It doesn’t say, “Richard Murphy, Economics Adviser” in their manifesto credits, does it by any chance?

  5. Fortunately for us all–to paraphrase Shaft from the original movie–they aren’t going to do shit.

  6. the scary thing is they think they’ll hold the balance of power in a hung parliament – just look at what damage a single green senator in Australia did, holding the Labour government hostage and forcing them to do a lot of his tiny party’s bidding.

  7. “Hmm. So, won’t everyone just incorporate their buy to let properties? And they’re really not going to disallow interest relief for corporate property investments now, are they? So what savings will there be in tax reliefs?”

    You could simply restrict interest relief on residential housing, rather than commercial/industrial.

    There is a reasonable argument to reduce the tax benefits for the BTL market, however the outcomes of this could be interesting. NZ, for example, removed the ability to deprecated houses, but that doesn’t seem to have impacted the housing market one bit.

    Ireland tried it about 2000, and very quickly reversed it the year following. From memory the rental market completely disappeared overnight, sending rents skyrocketing from an already inflated level.

  8. David,

    Please provide the reasonable argument why I should not be able to add the interest I pay to purchase a property to the expense side of the ledger. It is ridiculous to describe this as a tax benefit, the interest is a cost of doing business no different than other costs such as maintenance.

  9. Your competing with owner-occupiers for the same properties they do not derive the same tax benefit for the purchase of a property.

  10. They could disallow interest relief for corporate property investments in residential property only, while leaving commercial / industrial property reliefs untouched.
    Of course it still means less housing supply and higher rents: but that seems to be what the Greens want.

  11. I am not getting a tax benefit, David, I am deducting the cost of borrowing from my rental income and paying tax on the profit. It is Richienomics or UK Uncutonomics to believe that tax should be paid on turnover rather than profit and certainly not reasonable.

  12. Silly, silly DocBud. “David Moore” is just another Richard Murphy pseudonym so argument is useless.

  13. Docbud,

    “I am not getting a tax benefit, David, I am deducting the cost of borrowing from my rental income and paying tax on the profit”

    Not familiar with negative gearing then? Residential property in Australia results in a $6.8 billion collective loss, the estimate in the cost the Australian government is billions.

    “It is Richienomics or UK Uncutonomics to believe that tax should be paid on turnover rather than profit and certainly not reasonable.”

    The governor of the Reserve Bank of NZ is looking at this along with other measures to cool an overheated housing market. He believes the current housing market, and investors in particular, represent a major risk to the banking system in NZ.

    Given his track record to date, do you really think it’s Richienomics?

  14. Fred Z
    “Silly, silly DocBud. “David Moore” is just another Richard Murphy pseudonym so argument is useless.”

    Apart from the fact you don’t actually know which side of the argument I’m on. I was asked for an argument, I was just being polite in providing it.

  15. It is certainly Richienomics to describe a perfectly legal (and intended) policy as costing the Australian government money. That is like estimating the cost to government of not having a
    100% tax rate. The logic behind negative gearing is perfectly reasonable, the government taxes income, if income is reduced because investments make a loss, the government should only tax the net income after losses.

  16. “It is certainly Richienomics to describe a perfectly legal (and intended) policy as costing the Australian government money. That is like estimating the cost to government of not having a
    100% tax rate.”

    Err, no. 15 years ago residential landlords were net tax payers, now they accumulate a very, very large loss. Do you not think it reasonable for a government to take an interest in that?

    “The logic behind negative gearing is perfectly reasonable, the government taxes income, if income is reduced because investments make a loss, the government should only tax the net income after losses.”

    Correct. It’s also perfectly reasonable that when an entire industry is booking tens of billions in losses every year simply driven largely by tax structuring, that a government might want to review the tax laws that have created it in the first place? That applies especially when it involves very large amounts of debt and creates one of the most expensive housing markets in the world.

  17. “Your competing with owner-occupiers for the same properties they do not derive the same tax benefit for the purchase of a property.”

    But owner-occupiers pay a lower rate of interest, have lower equity requirements, do not carry the risk of a tenant trashing the place / not paying the rent / buggering off and having to find new tenants.

    So it’s not really a fair comparison.

  18. “So it’s not really a fair comparison.,”

    Does it need to be? It’s politics, it only needs to be perceived.

  19. “Does it need to be? It’s politics, it only needs to be perceived.”

    Perhaps not – politics is often rather lowest-common-denominator like that.

  20. David,

    A government might briefly consider trying to put the genie back into the bottle but will quickly realise that it would be political madness, there are simply too many “mum and dad” investors who have been encouraged to buy rental property by this government policy. Only the Greens who will never be in power really campaign against it, just as they want capital gains tax on owner-occupier properties (you could certainly argue that is a tax benefit) but neither mainstream party would entertain such an idea.

  21. “A government might briefly consider trying to put the genie back into the bottle but will quickly realise that it would be political madness, ”

    Can I reference you back to Ireland, as I mentioned previously, they tried it about 2000, and reversed it the following year. Makes an interesting question as to how Ireland would have fared a few years latter if they had kept it don’t you think?

    “there are simply too many “mum and dad” investors who have been encouraged to buy rental property by this government policy”

    Yeap, the vested interests are rather formidable.

    “just as they want capital gains tax on owner-occupier properties (you could certainly argue that is a tax benefit) but neither mainstream party would entertain such an idea.”

    The NZ Labour party lost a recent election, in part, by wanting to introduce a capital gains tax on housing and were somewhat confused as to if the owner-occupier was included or not. The result was their worst election since the party began.

  22. bloke (not) in spain

    No doubt this is blasphemy but what are the advantages of a strong BTL sector in the UK housing market?
    I’m personally very much in favour of renting rather than buying. But I’m not operating in an environment where people are using domestic housing as a savings vehicle.
    If you have what’s effectively a fixed supply of property then having inducements for BTL simply gives BTL buyers a competitive edge in the market & pushes house prices up & occupier owners out.. People wanting homes are forced to rent & all the wealth concentrates with those wealthy enough to be on the bandwagon.
    The Greens may be barking but that doesn’t mean the policy is.

  23. “No doubt this is blasphemy but what are the advantages of a strong BTL sector in the UK housing market?”

    We are often told by the Left that we should be more like Germany, with its tradition of renting rather than buying property, giving flexibility to the labour market etc. People who rent can more easily move to areas where the jobs are, especially if the supply of rental properties is high and its easy to get a new place when you move.

    Thus one could argue that the BTL sector is helping lubricate the UK economy by allowing flexibility of the labour force that would not exist if all people owned their own house and stayed in one place waiting for the jobs to come to them rather than vice versa.

  24. B(n)IS>

    It’s important to differentiate between theory and practice here, because the UK housing market is so distorted at the moment.

    In general, it makes complete sense for older/richer investors to provide the capital which allows younger/poorer people to rent homes they don’t want to buy. That’s a good thing, we want it to work as efficiently as possible, etc etc.

    As things actually are, unfortunately, we have many distortions in the market, not least access to credit. That’s skewing things greatly.

  25. BNIS,

    BTL is a business same as any other. You’re providing a service to someone who is willing to pay for the service. You have costs and you have income, and the difference between the two is your profit or loss. One cost is the cost of borrowing. To suggest that being able to deduct this cost is an inducement to BTL property owners is bollocks, it is entirely consistent with accounting and taxation practices.

    The idea that the government should stop someone buying a property and renting it to a willing renter, or try and inhibit such a transaction, is equally bollocks.

  26. We do the same for other investments; if you borrow to buy shares or debentures you can’t deduct the loan interest from your dividend or interest received, but if you incorporate you can.

    OK only relevant to loan interest, as dividends are tax exempt for a company, but that also supports the same point – there are differences between how individuals and companies are taxed that we seem to put up with.

  27. And I’m not sure BTL is just “a business the same as any other”, given the way government artificially restricts the supply of housing.

    The more BTL investors there are, the higher house prices go, the fewer people buy and so the more demand for rental there is. Most businesses don’t work on that economic model.

    If there was more freedom to build then I’d agree that BTL was just providing a service like any other, but in the current situation it seems to price its potential customers out of the alternatives.

  28. And I’m not sure BTL is just “a business the same as any other”, given the way government artificially restricts the supply of housing.

    Bingo. The problem with BTL is not the tax treatment, and landlords serve a real need in the housing market. The problem is that the government artificially restricts housing construction, keeps interest rates artificially low, and bails out borrowers whenever there’s a hint of a correction.

    Government policy is sucking billions and billions of pounds out of the pockets of the young who can never afford to buy a house, to hand to Boomer landlords who are convinced that government will never allow house prices to fall. That’s the problem.

  29. DocBud,

    “The idea that the government should stop someone buying a property and renting it to a willing renter, or try and inhibit such a transaction, is equally bollocks.”

    Is it any more bollocks than the idea someone can buy a property and be prevented from building unless the government approves?

  30. David Moore,

    Australian negative gearing is really more sensible than any other. If I have a factory that produces two products, one is going really well but the other is making a loss (but I have hopes for it in the future), the accounts will show total revenue minus total expenses = net income to be taxed. No one describes the loss of tax from the profitable line as a subsidy.

    What’s the difference with negative gearing? You have a high revenue, low (monetary, not labour) cost revenue stream in wages. and a low revenue, high cost, revenue in the form of rent. Doesn’t it make sense to combine both revenues and both costs to come up with with a net income?

    Bear in mind if you don’t allow that you are effectively endorsing double taxation – the money invested in the property has already been taxed. If it is invested, the cost of doing so should be deducted to arrive at the true (positive *or* negative) value that has been created from it.

    You argues upthread too that owner occupiers aren’t allowed to deduct mortgage interest while investors can. This is true, but you neglected to point out that the trade off is that your residence is exempt from capital gains tax. This is such a good deal that not even the very rich try the obvious possibility of incorporating ownership of their home and renting it from the company/trust.

    If anything, owner/occupiers are getting a break while investors are operating under a transparent, simple, and fair structure.

  31. There are planning restrictions on other businesses too. You can’t open a knocking shop next to a school, you can’t build a mega mall in the middle of a park, you can’t build a Tesco’s where the local traffic grid won’t support it. BTL is no different.

    And yes, if the government releases a heap of planning permissions then the anticipated capital gains may not arise. Too bad, so sad. That has nothing to do with how the accounting should be done.

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