Brits could take heed from Aussie buy-to-let tax concerns

WHEN GEORGE OSBORNE delivered his emergency Budget in July, there were some nasty surprises for the country’s estimated two million landlords.

Osborne outlined plans to reduce the amount of tax relief buy-to-let landlords can claim for the mortgage interest they pay, as well as scrap the 10% wear-and-tear allowance available to those with furnished properties.

The move will mean some landlords are paying tax on losses and many tax advisers report being flooded by calls from worried property owners.

The plans, which have no grandfathering provisions, were described by the chancellor as a way to “level the playing field for homebuyers and investors” and followed lobbying by campaign groups, arguing that buy-to-let investors are forcing first-time buyers out of the market.

Interestingly, a similar political debate has been doing the rounds on the other side of the world, but the outcome is almost certain to be vastly different.

Down Under

In Australia, tax breaks for property investors are far more generous – not only can all mortgage interest costs be deducted from earnings, but investors are also able to ‘negatively gear’ their property losses, meaning they can offset any losses on rental property against their other income.

They also get a 50% reduction on the capital gains tax payable when the property is sold, so long as they have owned it for at least 12 months. In New Zealand, negative gearing is also allowed, and there’s no capital gains tax at all.

With property prices rocketing in recent years, there have been more voices arguing negative gearing should be be abolished, but Mark Chapman, of Australian tax preparation giant H&R Block, says there is little chance it will happen, though many of the firm’s clients express concerns about such a move: “There are too many people who have negatively geared properties for it to be a politically sustainable move to abolish it. The government has pretty much ruled it out.”

Indeed, despite having a population of about 23 million – just a touch over a third of the UK’s 65 million – Australia has a buy-to-let army of almost two million, with about two-thirds of those reporting a loss on their property income and making use of negative gearing.

Even before investing in property became as widespread as it is today, a decision by a previous government in the 1980s to scrap negative gearing was reversed within two years after property groups campaigned hard on the issue, arguing rents were rising as a result of the change.

Although the actual evidence of rent rises was confined to two capital cities – Perth and Sydney – it seems to have been enough to deter politicians from putting an end to negative gearing in the intervening 30 years. Earlier this year, Australia’s treasurer Joe Hockey said on the issue: “If you change negative gearing in a market like Sydney, which has very low vacancy rates, you are going to push up rents, which will have a horrendous impact on some of the lowest-income families.”

Even those arguing for the abolition of negative gearing – Australia’s Greens Party, for example – are not calling for this to apply retrospectively, perhaps because it could cause a fall in supply of rental properties.

“One of the obvious things for clients to do when negative gearing was abolished was sell their property,” says Chapman. “If negative gearing was abolished again, you would find a lot of people would be looking to sell quite quickly. Without the tax benefits, it just wouldn’t be economically sustainable.”

Many believe landlords selling up will also be the likely result of Osborne’s changes here in the UK, but experts say this may not be an option for some highly leveraged investors due to capital gains tax liabilities. With only a couple of years until the rules begin to change, tax advisers are expecting difficult conversations with clients as the impact of the rule changes starts to set in.

UK landlords’ options

For a start, says Michael Wright, of property accountancy firm RITA4Rent, many people wrongly assume they are unaffected by the changes: “One of the things confusing a lot of people is that many are in the basic taxpayer band, but they will be pushed into the higher tax band because of the way in which the rentals account now expresses the profit.”

He says many landlords have approached them with the idea of moving their properties into a limited company structure to take advantage of the cut in corporation tax to 18%, also announced in the emergency budget. However, for many the stamp duty and capital gains tax payable on transfer will be too high to make it worthwhile.

Heaven ’17’

Wright says there is still one tool in the landlord’s armoury that some have not yet explored: the ‘form 17’ route. Where a property is owned jointly, it’s possible to alter the percentage shares owned by each party – if, for example, one half of a couple was a higher-rate taxpayer while the other was a homemaker. Then, the lower earner owns more of the property and a corresponding amount of the profits can be declared as belonging to that person by submitting form 17 to HMRC.

Although efforts to overturn Osborne’s proposals are gaining pace, whether or not Britain’s landlords have as much political sway as Australia’s remains to be seen. For now, at least, the best course of action is to make sure that, as advisers, you’re up to speed with the changes – as more and more property owners seek help.

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