Is the UK exceptionally hostile to landlords?

Changes to the way landlords are taxed have been accused of being overly harsh. Is that fair? Emma Lunn investigates.

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Australia supports landlords with generous tax breaks
(Image credit: Credit: Jeff Morgan 10 / Alamy Stock Photo)

Recent changes to the way landlords are taxed prompted the Residential Landlords Association to describe the taxation of landlords in the UK as "one of the most hostile tax regimes in the western world". But how well does that claim stand up to scrutiny?

Australia's housing market suffers from many of the same problems as the UK market. Prices in major cities have risen to the extent that it's virtually impossible for a first-time buyer on the average salary to buy a house. Yet investors there are treated very generously by the tax system. Australian landlords can deduct mortgage interest and other costs from their rental income, but they also have the option to "negatively gear" their property investment. This means they can make a loss and offset this against their other income, including that from employment.

When they sell, Australian investors receive a 50% reduction on the capital gains tax (CGT) payable, as long as they have owned the property for at least 12 months. The policy is in contrast to the UK, where people selling second homes pay a higher rate of CGT than investors disposing of other assets. Similar concessions also apply in New Zealand, where negative gearing is allowed and there's no CGT at all for investment property unless it was purchased solely for resale.

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Unsurprisingly, these concessions are often controversial, just as in the UK. "Governments are spending billions of dollars in tax subsidies for people who are already comfortably housed or investing, pushing up housing prices and debt to unprecedented levels," says Cassandra Goldie, chief executive of the Australian Council of Social Services, an advocacy group.

Tax breaks for property investors in the United States aren't quite so generous, but landlords can offset rental losses under certain circumstances. Rental income is considered "passive income", and losses on rental properties can be offset against other forms of passive income, such as interest on cash, gains on stocks, or other capital gains. "With passive activity, you have to [declare] income and you are taxed on that income, but for losses you can only deduct losses to the extent you have passive income.

The non-deductible passive losses accumulate, however, and when you sell or otherwise dispose of the property, the accumulated losses can be taken at that time," says Jim Adkinson of Florida-based accountants Adkinson CPA. Meanwhile, in Canada landlords can deduct interest expenses, mortgage fees and the cost of maintaining and managing rental properties from their rental income, but a net loss on a rental property cannot be deducted from overall income. They also benefit from a 50% CGT reduction when an investment property is sold.

Finally, in Germany, where most people are renters, landlords are also treated favourably, according to David Hannah of Cornerstone, a specialist tax adviser. "Germany allows landlords to deduct 100% of their mortgage interest from their property income, claim rental losses against their other income and deduct depreciation costs," he says. "You are also not required to pay CGT at all on disposal of any property owned for more than ten years."

So overall, landlords in the UK may have some reason to feel hard done by. But given the political climate, that's unlikely to change soon. In MoneyWeek's view, there's probably more chance of further taxes and curbs directed at buy-to-let, rather than concessions. Landlords might be wise to plan accordingly, rather than looking enviously at their peers in the rest of the world.

Emma Lunn

Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise. 

She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and YourMoney.com. She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.