The wife of the former Labour PM is using European human rights legislation in an attempt overturn Tories’ planned property tax.
Cherie Blair QC has launched a legal battle against the Government’s flagship policy to increase taxes on buy-to-let investments, claiming it breaches landlords’ human rights.
In a letter sent to HMRC and seen by The Daily Telegraph, Mrs Blair’s law firm Omnia Strategy sets out the legal grounds on which it hopes to quash the controversial tax in court.
A successful challenge to the tax, which is central to the Government’s aim to grow homeownership and help the young buy property, would be hugely embarrassing to George Osborne – even if it were not being spearheaded by Mrs Blair.
Mr Osborne has repeatedly stated that he wants to “level the playing field” between homeowners and the rapidly growing army of buy-to-let investors, now thought to number two million.
He first announced the tax change in the July 8 Summer Budget. The move, part of the Finance Act 2015, will prevent small-scale landlords from deducting mortgage interest costs from their rental income before calculating a taxable profit.
The change will net the Exchequer almost £1bn per year by 2021, according to Treasury forecasts.
It was welcomed by housing charities and groups representing tenants.
But Omnia argues that the policy discriminates against individual buy-to-let investors by denying them the same rights as other business owners.
This includes corporate landlords such as pension funds and insurance companies, who can continue to “set their finance costs off against their income and be taxed only on their profit”.
This disparity breaches article 1 of the European Convention on Human Rights, Omnia claims.
In another reference to European law, Omnia argues that by favouring corporate landlords the tax “distorts competition” and constitutes a form of aid which should not be granted “unless it has been approved in advance by the European Commission.”
The case, fronted by Mrs Blair and human rights lawyer Adam Smith-Anthony, is being brought by two private landlords, Steve Bolton and Chris Cooper.
It is being funded by a group of 737 individuals, including other landlords and letting agents.
Mr Bolton, in his 40s, owns many properties in his own right and is the founder of Platinum Property Partners, an investment franchise with 250 landlords owning between them more than 700 properties.
Mr Cooper, who lives in Berkshire, said: “On the face of it the measures seem reasonable and the Government has presented it as if it will only affect the wealthiest landlords.
“The opposite is true, because it will affect landlords who have big mortgages. Very wealthy landlords who don’t have to borrow won’t be touched.
“The Government has also omitted to say is that it will move thousands of landlords from lower rate to higher rate, and some into additional rate.”
The latter anomaly arises, Mr Cooper explains, because mortgage interest, required to be paid by landlords to their bank, will effectively be viewed by HMRC as income – on which tax is then due.
Thus some landlords will be taxed where they make losses. In its letter to HMRC, Omnia states that “the measure will result in some landlords being liable to tax on an economic loss due to a theoretical, if not actual, increase in income”.
Mr Cooper believes mortgaged landlords will be forced to increase rents to cover the higher tax, or evict tenants in order to sell.
The Government has 14 days in which to respond, after which the matter moves to a judicial review – the formal process in which a court rules on whether or not legislation is valid.
A worked example: how landlord tax is changing
When George Osborne announced the change, he said the extra tax would hit only higher-earning landlords.
Every mortgaged landlord who pays 40pc or 45pc tax will pay much more under his proposals.
But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.
The only buy-to-let investors who will not be hit are those who buy property in cash and who don’t need a mortgage.
Companies which buy properties will also be exempt.
At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.
Here is a worked example assuming you, the landlord, pay 40pc tax.
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.
So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.
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