Tax break for landlords under threat

I was reading with interest the piece in the Daily Mail about the fact that one of the few tax breaks that landlords have could be under threat as George Osborne looks to find the spending savings  he promised in the election.  Currently one of the biggest claimed expenses landlords can offset against their rental profits is the interest they pay on any loans they have taken out on their buy-to-let properties.  To scrap it would be unfair and a mistake and here's why:

1. Some people (normally disgruntled homeowners & tenants) argue it's an unfair advantage that landlords can offset their borrowing costs in a way that homeowners since the abolition can't with their own income tax liabilities.  This is true in isolation; but and it's a big but.  Landlords could equally argue that owner occupiers benefit from the current tax regime unfairly when they sell as they do not have any Capital Gain tax liability when they sell.  A landlord faces a capital gains tax bill of between 18 - 28%.  Therefore a landlord may have some income advantages in the short term but these are offset by the CGT disadvantages.

2. More pertinently to the above is that a household is not a business.  A landlord on the other hand clearly runs their own rental business and needs to make a financial return for the risk, effort and capital employed in their business.  In this respect the tax advantages compared to other businesses are far less generous.  This is because the rental business has historically a classification of an investment business which lies somewhere between a investment and business.

3. The mortgage interest tax break has historically meant that many buy-to-let investments have just 'washed their face' in the sense that a landlords income and net costs meant that a landlord would not be cashflow negative particularly in the early days whilst the outstanding debt was at it's largest.  This prompts landlord to be prepared to invest in the sector.  It is only recently because of historically low interest rates that landlords are making rental profits.  In the longer-term as interest rates increase this will revert to the previous situation and landlords with loans will be lucky to experience rental profits for the first part of their investment.

4. Simon Lamberts highlights that in the tax year 2012/13 the total tax breaks to landlords which includes the mortgage interest tax relief equated to £6.3 billion.  However, the fact that this is growing and is so large is testament to the growth and success of encouraging investment in the sector.  This money if invested in trying to house the 4.2 million households that lived in private rental accommodation (2011 census figures) would go 'no where' and the government know this.

5. The abolition of the interest relief would if abolished act if you as I do believe in the concept of 'nudge economics' be the tipping point for many landlords curtailing new investment and prompting many landlords to sell.  This would not be healthy for house prices, investment in the housing sector and the provision of rental property.  I also believe it to be demonstrably unfair.   

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