Government housing changes: British tax overhaul 'nowhere near as severe as here'

A landlord chief says last decade's change in Britain to axe tax deductions on rental homes' mortgage interest payments was far more lenient than the changes the New Zealand Government planned.

But Revenue Minister David Parker says this Government will close tax loopholes that encouraged debt-driven rental buy-ups over more fully taxed and more productive investments.

Andrew King, NZ Property Investors Federation president, said Britain had been more benign, forecasting most landlords were unaffected by its changes four years ago.

Andrew King of the New Zealand Property Investors Federation. Photo / Jason Oxenham

"The UK made a change in 2017 but it is nowhere near as severe as our new rules because the Government there estimated 82 per cent of rental property owners were not affected there," King said.

From April 2017, British landlords were barred from the tax breaks in a move which became effective gradually, losing amounts by 25 per cent annually until April this year, King said.

King cited Information from insurance giant AXA which published "Landlord tax relief changes explained." AXA said British landlords there could previously fully deduct finance costs, like mortgage interest, from their earnings to reduce tax.

But on April 6, 2017, the British Government replaced that system with a basic tax reduction of 20 per cent on whichever is the smallest:

• Finance costs: total interest on mortgage, loans or overdraft;

• Property profits: net rental income;

• Adjusted total income: earnings after deducting losses, tax relief and personal allowance.

Tax relief for British landlords became a reduction in tax liability instead of a reduction to taxable income, meaning they had to declare all their rental income, pay tax on that and then claim back 20 per cent, AXA said.

"The Government hopes that these changes to landlord tax relief will help prevent the highest-earning landlords from receiving the biggest income tax relief, but they won't affect registered companies or landlords of furnished holiday homes," AXA noted.

The insurer also noted that "while the UK Government has claimed that 82 per cent of landlords won't be impacted, our research showed that over 40 per cent of landlords believe they will have to pay additional tax as a result of the changes".

On Tuesday, Parker announced the removal of interest deductibility, terming them "loopholes".

"The tax system favours debt-driven residential property investment over more fully taxed and more productive investments," his statement said. To reduce investor demand for these investments, the Government will remove the advantage investors have over first-home buyers.

"Cabinet has agreed to remove the ability for property investors to offset their interest expenses against their rental income when they are calculating their tax," Parker said.

Ministers were also considering closing a loophole on interest-only loans to speculators, Parker revealed.

Parker said the system encouraged rental property purchases due to tax loopholes. Photo / Chris Loufte

The Reserve Bank will report back to ministers in May on this and any proposals around debt to income ratios, particularly for investors, Parker said.

British changes to landlord tax deductions were not mentioned by our Government on Tuesday.

David Whitburn, an Auckland investor and housing developer, said he was au fait with the British changes four years ago because he had relatives there but he said the amount of revenue generated in Britain was far less than initially expected.

Covid and the lockdown there since late March last year meant statistics showed the full effect of the tax changes were masked with all sorts of transfer payments, Whitburn said.

Britain had stamp duty as well, which New Zealand did not have "so by selling in your own name to a company, you must pay an extra round of stamp duty when you transfer ownership of the property to the business. Some are incorporating and finding taxes and accounting bills become more complex."

However, when Australia abolished negative gearing in 1985 under the Hawke Government, there were rent hikes especially in Sydney and Perth and the policy was unpopular.

"So the Australian Labour Government unwound it soon after. Perhaps the same will happen here," Whitburn said.

Auckland accountant Anthony Appleton-Tattersall said the British changes had not made housing more affordable there.

"When I was living there in 2015, they were offering first-home buyers schemes to buy as little as 30 per cent of a house through shared ownership programmes with a 5 per cent mortgage and pay rent on the rest, then ladder-up by buying another 5 per cent to 10 per cent of the property when they can afford it. So it obviously didn't fix their housing market," he said.

PM Jacinda Ardern, Finance Minister Grant Robertson, Housing Minister Megan Woods and Revenue Minister David Parker on Tuesday. Photo / Mark Mitchell

Peter Lewis, Auckland Property Investors Federation vice-president, doubted the New Zealand tax changes would bring in the money the Government expects.

"Like tobacco tax or liquor tax, it is intended to be more of a deterrent for bad behaviour rather than a revenue-raising exercise," he said of the Government's attitude to landlords.

A potential $1.78b tax was possible, according to some figures Lewis had seen but the Government would not collect that amount, he predicted.

He will sell one of his 12 rental properties, pay all mortgage debt and then not pay any extra tax when he loses the right to claim tax.

"By making some changes I can reduce that figure to almost $0," Lewis said of losing $16,000 annual tax write-offs by 2025 when the new system is fully in place.