Buying-to-let fuelling boom in house prices

Tax breaks help private landlords, but will the Chancellor try to tweak the rules?

Reasons for the boom in house prices, particularly in the South-east, are many - but one possible contributor is the buy-to-let market. That is encouraged by the tax system, but could that be about to change?

Reasons for the boom in house prices, particularly in the South-east, are many - but one possible contributor is the buy-to-let market. That is encouraged by the tax system, but could that be about to change?

Private landlords get full tax deductibility, at marginal rate, of the interest paid on loans taken out to buy the property for letting. That contrasts starkly with the ever-smaller amount of tax relief available through Miras on loans to put a roof over your head, relief that disappears in April.

I am of a generation that remembers saving assiduously with one building society and grovelling to the manager for a loan based on a modest multiple of salary. Now the multiplicity of lenders is awash with cash to lend and they are well geared to the letting market.

The security of the property is there and they are happy to fund a venture which increasing numbers of people see as extra income, some see as a significant activity and a number are starting to see as a better way of providing for their pension than traditional pension funds. Letting can make financial sense.

A key is the mortgage interest relief. There is also relief for all the running expenses, although capital costs, such as property improvements, will not normally get relief. Let the property furnished and there will be a deduction for the wear and tear of the furnishings at a standard 10 per cent of the rentals.

There are downsides - such as having to manage the property, find tenants and cope with matters arising, which includes the pleasures of a self-assessment tax return as the Revenue will automatically send one to all landlords. But there are agents to do most of that, and their fees are usually tax-deductible. A snag looms when you sell the property - capital gains tax. The CGT exemption for selling the house you live in does not extend to a rented property. Bear in mind that up to 40 per cent of any sale profit will end up with Hector.

A sting in the CGT tail is that it is not possible to "roll over" the gain from selling a let property into a replacement let property. That has always struck me as unfair. There is an exception for holiday letting, such as a seaside cottage. Generally, holiday lets get a better tax treatment, but before you start asking your prospective tenants to bring their buckets and spades, the definition of holiday accommodation basically requires a series of short lets to different people rather than one long one. But fit in this and the result is a more generous tax regime with improved loss reliefs and rollover and retirement relief (while it lasts) possibilities. The lack of a general rollover relief has always seemed proof that the tax system for letting has never been designed - it happened. That crucial tax relief for interest might seem to a predatory Chancellor as an accident - and one that needs repairing.

That could lead to a restriction of tax relief for the interest, perhaps by reference to the size of the loan, as with Miras, or even by being phased out. That would ruin a lot of plans, though it has never stopped the taxman in the past. But would the Chancellor really do that? He must surely appreciate that he would damage the letting market severely, and a good letting market is something that the UK needs and has lacked for many years.

Not everyone can afford to buy a house - or wants to - and mobility of labour needs flexible housing, which the rental sector helps. The taxman makes money on rented housing - tax is paid on the rental profits and those capital gains. Why risk that in an effort to raise more? Then there is stamp duty. Raising stamp duty at the top end of the housing bracket may not bother landlords, in that they will tend to buy ordinary properties and keep them for a good while.

But increased stamp duty on the sort of leases that govern lettings would be unwelcome. Again, it really shouldn't happen as in essence what has grown up is a good piece of free market enterprise, by a raft of ordinary small business people who are trying both to provide a service and make a return for their investment. The tax reliefs that they get for their costs are simply in parallel to those any business gets.

VAT could compensate if changes are afoot. We could see VAT being charged on new houses - at the low 5 per cent rate reserved for domestic fuel and power. That might be seen as a dampener for greenfield developments, but would have to be balanced by reducing VAT to 5 per cent on repairs and refurbishments. That would encourage maintenance of the housing stock.

Let's hope the Chancellor is geared to the need to maintain and develop the housing market in this area. And that he realises dampening here won't stop house price inflation.

John Whiting is a chartered tax adviser with PricewaterhouseCoopers