Osborne targets the 'Tory taboos' of buy-to-let landlords and non-doms

The smashing of two Tory taboos in the Budget will have long-term consequences for Britain's housing market, says Merryn Somerset Webb.


Suddenly prime central London property doesn't look so attractive anymore

Last weekend, wandering around Gilleleje harbour in Denmark, I noticed something slightly odd.

Every 20 yards or so I would lose my husband to a car. He stopped to look at a Porsche 912, then at a vintage Chevrolet. Next came an Aston Martin complete with amusing bumper sticker ("all the parts falling off this car were made in England"), a Triumph Stag and something very old and very black (I had lost interest by then).

"I wonder why the Danish are so interested in classic cars", I said to our host. "They aren't", he said. "It's a tax thing".

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It turns out that taxes on new cars are eye-wateringly high in Denmark (around 180% all in), but taxes on very old cars are not. Which is why the average age of a car in Denmark is more than nine years, and the average age of one in most of the rest of the EU (including the UK) is more like seven.

Incentivisepeople to own old cars and they'll own old cars. In the UK we don't encouragecar ownership in quite the same way George Osborne's Budget has added to the cost of buying a new car with his first-year levy and his £320 a year charge on cars costing £40,000 plus, but there's no 180% here.

However, where we have long used our tax system to promotewhat at first glance looks like irrational behaviour is in the housing market.

We charge no capital gains tax on primary homes (regardless of how big those gains are), something that encourages people to leverage up as much as possible on their main home and resist downsizing from it for as long as possible. We charge very low council tax. And then we make it stunningly tax efficient for those with some cash to get into the buy-to-let market by allowing them to write off all the interestagainst their taxes, and to take a 10% 'wear-and-tear allowance' as well regardless of whether they have done any work on their rental properties or not.

Let's look at how this workson a cute-looking flat in Southampton (one of the UK's many buy-to-let meccas). Rightmove tells us we can buy a two-bedroom flat in Telephone House for around £325,000 and rent one for around £1,000 a month (giving us, by the way, a pathetically low gross yield of 3.7%). Let's also assume that the mortgage is £250,000 at 4% (buy-to-let interest rates are typically higher than residential).

That gives us mortgage payments of £10,000 a year to make. Add in our wear and tear (10% of our rent, so £1,200) and we now have £11,200 to offset against the £12,000 we are getting in income. The result is that we only have to pay tax on £800.

So even a 40% taxpayer makes a reasonable net profit (£2,000 minus the £320 of tax is £1,680) on the deal (assuming he hasn't actually made improvements to the house in the year, and, for the sake of simplicity, ignoring other costs).

As far as he's concerned, that works: all the costs are covered, there is a cushion and he's hoping to make his real money from capital gains anyway. When he gets enough cash together for another deposit, he'll buy another. Incentivise people to buy houses and they'll buy houses.

When George Osborne started talking on Wednesday it looked like his endless support for the UK housing market and anything to do with keeping the prices up within it was going to hold firm. We all knew for example that the special inheritance tax allowance for 'family homes' was going to turn up, something that can surely only encourage people to do exactly as they have always done leverage up on bricks and mortar.

But actually I am not sure it has held so firm. Look at the IHT business. The rhetoric is all about houses. But it is really just a rise in the IHT threshold in general. A couple now get £1m as long as one of their assets is (or was, since you get to carry the allowance around with you) a house worth £350,000 or more.

80%of over-65s own their own home and those that don't probably aren't going to get to the current £650,000 limit anyway so the fact that there is £350,000 of house in the £1m allowance is by-the-by.

Look at it like that and you will see that the house shtick is just that: shtick. This is just the rise in the IHT allowance David Cameron has been hankering after for years; George's gift to Dave.

Now look deeper, and you will see that Mr Osborne might be starting the process of taking away some of the things propping up our housing market.

The wear and tear allowance for buy-to-let investors goes. You are only to be able to claim against cash actually spent. That means our landlord above is suddenly paying tax not on £800 but £2,000. His profit comes down to £1,200.

There's more. By 2020 he won't be able to claim back 40% on the interest, only 20%. All relief is coming down to the basic rate of income tax. The result? His cash flow is negative (his tax bill goes up to £2,800 so he is down £800 at the end of the year) and that's before rates start to rise.

He might stick it out in the hope of still getting capital gains. But new investors might think twice before getting in. It will be harder for them to get mortgages and now that buy-to-let is identified as a tax-raising target, who's to say that the 20% relief won't go too? Note that with no tax relief, our hypothetical landlord would be losing a net £2,800 a year.

The buy-to-let optimists say that landlords will simply put their rents up. I think this unlikely. More landlords, being capitalists, will be charging what their market can bear already. I suspect that if they can't carry the cost they will end up selling, and as all prices are set at the margin pulling prices down as they go. That might help out the bottom end of the market a bit.

On to the top end of the market and the miserable fate of the UK's non-doms. Those who have lived in the UK for 15 of the 20 previous years are now to start paying tax on their worldwide incomes and capital gains just like everyone else. This, say the analysts at Gavekal, captures "many famous billionaires who have lived in Britain for many years and who undoubtedly helped inflate the London property bubble".

They are now likely to sell out of that bubble. After all, if the UK isn't a tax haven, why not live somewhere warmer? Note too that a good many of the overpriced new-build flats in London go to investors. Watch for the recent fall in prime London house prices to start gathering speed.

There were many other interesting things to look at in the Budget (if I didn't know better, I would think George Osborne was one of my more regular readers) and I'll come back to them.

But the smashing of these two Tory taboos (leave the super-rich and landlords alone) alongside the planning reforms announced on Friday might, I think, have unexpectedly strong long-term effects on the price of a house in the UK.

This article was first published in the Financial Times.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.