A damning report on taxation in the private rental sector (PRS) has accused the treasury of appearing not to understand ‘the basic principles of taxation’.

Earlier this month, ‘Taxation without justification’ was published by the Institute of Economic Affairs as part of its ‘Current Controversies’ series.

The paper takes the government to task over its recent changes to buy-to-let property taxation, including Section 24 and the 3% buy-to-let stamp duty surcharge.

It was co-written by Dr Rosalind Beck, a private landlord for over 20 years who has written extensively on the PRS, and Philip Booth, Professor of Finance, Public Policy and Ethics and Dean of the Faculty of Education, Humanities and Social Sciences at St. Mary’s University, Twickenham.

The authors make proposals to roll back recent tax changes and suggest a range of other tax reforms with the aim of making the overall tax system for residential property one that promotes better economic welfare.

There are several case studies which are used to demonstrate why the phrase ‘tax relief’ is a ‘misnomer’ when used in relation to landlords.

The paper argues that before Section 24, ‘the tax position of private-sector landlords involved allowing legitimate finance costs to be deducted from income when they calculated their rental profits’.

It goes on to claim that compared to owner-occupied property, private rented property is significantly discriminated against when it comes to tax. 

“The effect of the measures will almost certainly be an increase in rents above the levels that would otherwise have prevailed and a reduction in the supply of rented housing,” it reads.

The authors suggest ‘investment in property should be treated like investment in any other business so that all business costs, including business finance costs, are deducted before taxable income is determined’. 

Their suggestions for improving taxation in the PRS are as follows:

– There should be no discrimination between different vehicles for holding property. Thus, the tax position of property held within a corporate vehicle should be no different from the tax position of property held by an individual.

– Stamp duty is a very inefficient tax and should be abolished, even if it were replaced by other forms of property tax.

– If stamp duty remains, it should be charged at low levels and not charged at different rates for owner-occupied and let property.

– A tax on imputed rent for owner occupiers could serve as a replacement for Council Tax and stamp duty. This would have the benefit of levelling the playing field between different forms of property ownership as well as between different forms of income.

You can read the report in full here.