Chancellor George Osborne is shocked that some student landlords are cutting their tax bills by exploiting common legal loopholes.
HM Revenue & Customs showed Osborne 20 anonymous tax returns filed by some of Britain’s wealthiest individuals - and he was surprised they saved £145 million tax by simply claiming reliefs they were entitled to by law.
While deliberate tax evasion is fraud and a crime, avoidance is legal, and a right protected in law by the famous case of Ayrshire Pullman Motor Services, in which a judge remarked: “No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or his property so as to enable the Inland revenue to put the largest possible shovel in to his stores.”
Many tax saving measures adopted by the wealthy are not exclusive and are routinely used by student landlords or the owners of houses in multiple occupation.
The Chancellor has ordered a closer look at business tax reliefs because he considers property people should pay a larger slice of their income as tax - even if the law says they don’t have to.
Two landlord tax strategies highlighted by HMRC to the Chancellor were:
Setting off trading losses against future profits - This lets landlords improve properties by refurbishment and reclaim the cost pound for pound against rental profits in later years.
Claiming loan interest as a letting business expense - A measure that allows a landlord to charge interest on business expenditure against rental profits. The business pay borrowed cash to a landlord while setting off interest against profits.
“I was shocked to see that some of the wealthiest people in the country have organised their tax affairs, and to be fair it's within the tax laws, so that they were regularly paying virtually no income tax. And I don't think that's right," said the Chancellor.
"The general principle is that people should pay income tax and that includes people with the highest incomes."