UK Government restricts negative gearing

By Leith van Onselen

In an interesting contrast to the Abbott Government’s do-nothing approach, the Conservative Government in the United Kingdom (UK) has announced that it will wind-back its own form of ‘negative gearing’ in a bid to give first home buyers greater access to housing. From The AFR:

David Cameron’s Conservative Party has handed down a budget littered with tax changes…

Galloping property prices, particularly in London, will be tackled by a restriction on tax relief for landlords who buy properties to rent them out. Landlords can now deduct their costs – including mortgage interest – from their earnings before they pay tax.

As in Australia, wealthier landlords receive tax relief at as much as 45 per cent, which is the top marginal tax rate. But from 2017 this tax relief will be reduced slowly to 20 per cent.

Chancellor George Osborne said the present system gave buy-to-let landlords a “huge advantage in the market” over people buying homes to occupy themselves.

It’s important to note that the UK is already far more restrictive than Australia in how it treats tax concessions for landlords.

In Australia, taxpayers can deduct their net loss on negatively geared assets (e.g. residential property and shares) against other types of income, including salaries or wages and business income. There are no restrictions on the number or types of assets held, and there are no caps to the amount of deductions (losses) that can be recognised in any one income year.

In the UK, by contrast, if a taxpayer makes a loss on an asset, that loss is quarantined to that asset class. If after applying the income losses in that asset class against the gains in that same asset class the taxpayer is still in an overall net loss position for the income year, then that loss can only be carried forward and utilised in future income years. Any unapplied losses can then be offset against the capital gain of the eventual disposal of the asset.

It follows, then, that Australia’s negative gearing system is already far more generous than the UK’s, since:

  • There are no limits on losses recognised;
  • The investor can apply losses against unrelated income (e.g. wages and salary);
  • Losses are subsidised by tax refunds; and
  • Losses are recognised at the individual’s marginal tax rate.

In turn, the loss of revenue to the Australian Government is greater than would occur under a ‘quarantined’ approach, like in the UK, and the amount of investment that takes place – primarily into existing housing (see next chart) – is higher than would otherwise occur.

ScreenHunter_8253 Jul. 10 08.18

There are obviously other major problems afflicting England’s housing market that prevent first home buyers from accessing affordable housing (most notably on the supply-side). Nevertheless, it is good to see a Conservative government take some action to reduce tax concessions for investor housing.

Tony Abbott should take a leaf out of David Cameron’s book.

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Comments

  1. No no no.

    This is another one of those latest fads, just like gay marriage.

    In Straya, we don’t want poofs or bludgers who can’t save enough to get on the proprti ladda.

    • Cameron also fired a climate denier environment minister (Owen Paterson). Abbortt does the opposite — he appoints deniers left and right. 😡

    • Poofs and bludgers without houses should be immediately stripped of citizenship.

      Grocery code.

      Death Cult

  2. Mr Hockey and Mr Abbott will not like that policy as it makes life difficult for the real backbone of the economy.

    Those individuals who take on massive amounts of taxpayer subsidised debt to speculate on rising asset prices.

    If they are just allowed to go about their business there should be plenty of opportunities to arrange their finance, do their accounts, transact their speculations, pour them coffee, import cars and water their gardens.

  3. This is a mere fig leaf. Check out George Osborne’s help to buy scheme. Rich back in the 80’s tried to implement the UK system where mortgage repayments on your primary place of residence could be used as a tax deduction. Thankfully Keating told him to go away. UK still has this massive subsidy as well

  4. The AFR article also says that 1.2 million Aussies own an investment property, which effectively rules out negative gearing being abolished in Australia. It’s just too much political suicide, unfortunately.

  5. ResearchtimeMEMBER

    Great thing about the UK is that it doesn’t have urban sprawl like we do here in Australia. Think about it – there are 55m people living in an area about the size of Tasmania. Yes houses are expensive in London, Cotswalds, St Marys’ etc, but the vast majority are probably cheaper everywhere else than Australia (in fact I think until the AUD fell recently, Sydney was more expensive than London). The green belt areas are enormous, and there is plenty of agriculture in England, and you can walk anywhere, anytime. Really well thought out.

    Australia needs to build higher density, higher quality of housing – and build up. I am not joking when I say that the average English home is a half to a third of the size of a new Mac double brick mansion.

  6. Tassie TomMEMBER

    Partial tax deductions – Brilliant!

    I think Australia should phase in partial tax deductions on interest paid to foreign entities – including bank bonds. Start at a 95% tax deduction, and go down by 5% per year. That would sort out the foreign debt without a massive shock, and it might help Australians get some sort of reasonable return for their deposit accounts too.

    It wouldn’t stop the “Singapore Sling” though – actually enforcing the existing tax avoidance rules might though – that “if the primary purpose of using a particular structure is to avoid tax then it is illegal”. It wouldn’t stop offshore profit shifting either – ie, to buy an advertisement on Google you need to buy it from the company “Google Cayman Islands”, or the like.

    It would be a great start though.

  7. I differ from the MB experts in that I think NG is a sideshow compared to supply of land for housing. As long as the latter is rigged, house prices will be based on “the maximum that can be gouged out of the marginal buyer/renter”.

    Maybe NG rules will have a psychological effect on the marginal specufestor and maybe they will affect cyclical volatility at the margin, but they won’t make housing median multiples 3 point something instead of 6 to 10.

    There are, after all, markets around the world with tight credit, no NG, extremely dense development, and median multiples over 10. Pretty much every city in the developing world is like this.