A legal campaign to fight punitive tax relief changes for buy-to-let landlords has progressed to the next stage. Two landlords, Steve Bolton and Chris Cooper, are set to challenge the Government in court on behalf of 737 campaign supporters and 250 Platinum Property Partners.
Legal opinion from law firm Omnia Strategy LLP, led by Cherie Blair MBE QC, has confirmed that the campaign has a ‘reasonable chance of success’.
Following a successful fundraising stage, where the target of £50,000 was raised in a matter of days via the Crowd Justice website, the legal team has now issued a pre-action protocol letter to HMRC.
The letter, which has been issued on behalf of co-claimants Steve Bolton and Chris Cooper, calls for a judicial review of the Government’s policy change announced in the Summer Budget 2015 which restricts buy-to-let mortgage interest tax relief from April 2017. The Government must respond to the letter by Wednesday 10 February.
The new policy (Section 24 of the Finance Act 2015) will prevent landlords with mortgages from offsetting mortgage interest costs against rental profit before calculating tax, which overturns a fundamental business principle where income less costs equals profit. This will result in some landlords who finance their business with mortgages paying tax despite making no profit on their letting business.
The legal challenge seeks to overturn this ‘Alice in Wonderland’ tax – so-called because of its absurd nature and separation from real life. The challenge has the backing of both private landlords and key industry stakeholders.
The legal challenge is being made against the new policy on the basis that it breaches the European Convention on Human Rights, and it constitutes unlawful grant of state aid to corporate landlords and to the owners of commercially let holiday homes contrary to articles of the Treaty on the Functioning of the European Union.
Despite being introduced with the aim of creating a level playing field in the property market between homeowners and landlords, the policy does not do this. In the most part, homeowners do not generate taxable income from their homes, nor do they pay capital gains tax on the sale of their home. In addition, the Government has decided to exclude the most wealthy property landlords, who are able to make cash-only purchases, as well as institutions, corporations and overseas landlords, and those who own commercially let holiday homes, all of whom are unaffected by the change.
Furthermore, the tax discriminates against landlords with mortgages by making them the only type of business where the cost of funding the capital of their business is not tax allowable, a point made by the Institute of Chartered Accountants of England and Wales. As a result, some landlords will be liable to pay tax on an economic loss and could have effective tax rates of over 100%. There are also likely to be consequences for tenants, such as rent increases, evictions and reduced supply of rental homes.
Steve Bolton said: “This tax grab is unfair, undemocratic and underhanded, and we believe it is unlawful on a number of points. In no other business are costs wholly incurred to fund the business liable for taxation. In addition there is no substantiation in the Government’s proposal that the changes will create a level playing field between homeowners and buy-to-let landlords.
“The change discriminates against the typically smaller landlord who may incur effective tax rates of over 100% while making an economic loss, and gives an unfair commercial advantage to many other categories of landlord unaffected by the change. We are therefore delighted that our legal challenge has progressed to the next stage and look forward to receiving the Government’s response.”