Why are rents soaring? Should we blame the tax system?

Tom is a 45% taxpayer who moved house and rents out his old property.
His rental income after general expenses is £12,000 a year. He pays £8,500 a year in interest on the mortgage on his old property.

In theory, that’s £12,000 income minus £8,500 of interest expense, which is £3,500 of ‘profit’. Fair enough.

But the tax system sees it entirely differently. On his £12,000 income, he pays tax at 45%, which is £5,400. Note this is not 45% on the ‘profit’ element of £3,500.

The taxman gives him a 20% tax credit for his mortgage interest [so £8,500 x 20% = £1,700] off his tax bill, giving a total liability of £3,700 [being £5,400 above minus £1,700]*.

This point is key – Tom is paying tax on the income at 45%, but only receiving 20% relief for his mortgage interest expense**.

In almost all other cases, you get a full tax deduction for your expenses. For example, if you sold toys for £100, but paid £75 to purchase them, you’re taxed on the ‘profit’ of £25.

That leaves Tom with £12,000 rental income, minus £8,500 of mortgage interest, minus £3,700 of tax to pay, meaning at the end of each tax year he is NEGATIVE £200 in terms of his cash position. He’s paying the taxman for the privilege of renting out a property.

So Tom has two options. He could increase rents to cover the shortfall. Or he could sell the house and exit the market, reducing the supply of rental properties – thereby increasing rental prices.

*The actual legislation is more complex than this. The 20% tax credit for interest above is the maximum Tom could get, but it could even be reduced below this.


**No such restriction applies to interest incurred by property companies. The mortgage interest is fully deductible. So if you’re wondering why almost all property investors are using companies and why buy-to-let companies are now the largest single type of business in the UK, this is it.

HMRC have announced they are to begin taking tax debts directly from the bank accounts of individuals who owe them money*.

Direct Recovery of Debts scheme has been around since 2015 but is historically exceedingly rarely used by HMRC. From 2016 to 2018 a total of 19 payments were taken with this method.

But with greater pressure than ever on public finances, and enormous unpaid amounts owed to HMRC (£42.6bn in July 2025) I suspect we’ll see HMRC using this method more commonly. Other countries – such as Spain and USA – frequently use this method to recover tax debts.

*Thankfully, there are a large number of taxpayer safeguards in place before HMRC can dip into your bank account. The debt needs to be £1k or more, HMRC needs to leave £5k or more in the bank account, and taxpayers have the right to appeal against the removal of funds on various grounds, such as hardship.

“My company has loads of cash – should I buy a house to live in via my company?”

The answer to this is no – it’s a terrible idea. Here’s why:

1. One of the most valuable reliefs available to homeowners is Private Residence Relief, which exempts any gain on a sale*. Houses owned by companies don’t qualify.
2. Companies automatically pay a 5% Stamp Duty Land Tax surcharge when purchasing residential property. On a £500k property, that’s a difference in a £15k liability and a £40k liability.
3. A company may have to pay the Annual Tax on Enveloped Dwellings (ATED). That’s £4,450 every year for a property worth £500k.
4. If the occupier doesn’t pay market rate rent to the company, they’ll have a taxable benefit for the equivalent amount each year. So a £20k rent would give a higher-rate taxpayer an £8k personal liability each year**.

A better idea might be to borrow the cash from the company and use that to buy the house personally, but that also comes with tax consequences.

*Private Residence Relief is also the costliest tax exemption to the exchequer each year, amounting to relief of around £31bn – more than VAT relief on food and Income Tax relief on pensions.

**The company would also have to pay 15% Class 1A NIC on the taxable benefit.

Is tax trying to do too much in the UK?

You might think taxes are to raise money for government spending, and you’d be right.

But our politicians love to use taxes to achieve a huge number of other objectives:

1. Manage demand and economic stabilisation – like the VAT cut on food and drink during covid.
2. Change the distribution of wealth, to make society more equal. To what extent you think the tax system should do this likely depends on your political persuasion.
3. Correct for ‘externalities’, where without tax the free market would ‘misprice’ a good as it would not reflect its true cost or benefit to society. See high taxes on cigarettes and alcohol, and conversely reduced VAT on energy saving goods like heat pumps and solar panels.
4. To further industrial policy – like R&D tax credits, creative sector reliefs and investment zones.
5. As a blunt tool for social policy – like the Inheritance Tax exemption in marriage, and the Residence Nil Rate Band Inheritance Tax relief only being available to those with children.
6. As a stand-in for region policy – such as free ports and devolved tax powers in Wales and Scotland.
7. Even for welfare delivery like tax credits such as working tax credit and child tax credit.

Taxes are used too frequently in the UK where regulation, direct spending, structural reform or subsidies would often be better suited.

There’s a reason the UK has the longest tax codes in the world, and this is it.

As an example, see Public Interest Business Protection Tax. It’s a tax with around 25 pages of legislation, 20 pages of technical notes… that no one has ever paid. Per Dan Neidle, it’s “a very weird measure which is using a tax to do the job of the energy regulator, presumably because the energy regulator was being too slow”. Was tax really the right tool here?

Someone on Reddit asked if they could sell their house to their kids for £1.

Another person helpfully tells them that if they do, the kids will pay Stamp Duty Land Tax on the full market value of the house. And their response got upvoted to the top of the thread.

They were trying to assist, but that’s completely wrong.

Stamp Duty Land Tax is based on ‘chargeable consideration’, which generally means cash. So if you are gifted a property, you don’t pay any Stamp Duty*.

It literally tells you this on HMRC’s own website**.

If you have a tax query, typing your question in Google followed by ‘HMRC’ or similar is probably a good place to start. HMRC have a huge amount of guidance, manuals and factsheets freely available for which they don’t get enough credit.

**Note if the property has a mortgage on it, and you take over this debt, you’re deemed to have ‘paid’ the person gifting this amount. So you’d pay SDLT on the mortgage value you took over
**https://www.gov.uk/guidance/sdlt-transferring-ownership-of-land-or-property#:~:text=consideration%20is%20given.-,If%20you’re%20given%20property%20as%20a%20gift,Stamp%20Duty%20Land%20Tax%20threshold.

Is there going to be a very short but expensive time to die in the UK?

With a raft of Inheritance Tax legislation published last week, it appear the government is not going to change course in regards to the big Inheritance Tax grab. The measures include limiting Business Property Relief/Agricultural Property Relief, and bringing pensions into the tax net.

The reforms come into force fully on 6th April 2027, and the latest date for the next general election is August 2029. Reform, who are now heavy favourites in the odds to win, have pledged to abolish Inheritance Tax completely.

This could, in theory, give an incredibly expensive (from an Inheritance Tax perspective) time to die in the UK, from 6th April 2027 to around sometime in 2029.

Ultimately, this could create a stark IHT lottery: your estate’s tax bill may depend less on your lifetime planning and more on the timing of your death – and the outcome of the next election.

If you file your self-assessment on gov.uk, it might be calculating your tax wrong, and you might have more tax to pay.

Unbelievably, after Reeves’ mid-year change to the Capital Gains Tax rate from 20% to 24% the gov.uk‘s filing service hasn’t been updated. The system will tax all gains at 20%.

E.g the gov.uk website will say a £20,000 chargeable gain made between 30th October 2024 and 5th April 2025 gives tax payable of £4,000, when it’s actually £4,800*.

HMRC have produced a ‘work around’ which includes a separate calculator with a manual adjustment required to the CGT payable on the return, but that’s a pretty poor solution.**

*Assuming they are a higher rate taxpayer. This is the difference between £20,000 at 24% = £4,800 and £20,000 at 20% = £4,000.

If they are a basic rate taxpayer, it’s an even bigger difference. It would be £20,000 x 18% = £3,600 (actual rate) versus £20,000 x 10% = £2,000 (rate given by gov.uk).

**https://www.gov.uk/guidance/work-out-your-capital-gains-tax-adjustment-for-the-2024-to-2025-tax-year

The FT calling the non-domicile rules a ‘tax loophole’ is simply incorrect. A loophole is “an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded”.*

The laws were designed and written into legislation by Parliament on an entirely deliberate basis. That’s not a ‘loophole’.

An example of an actual tax loophole might be that you can buy a commercial property within a company and pay 0.5% Stamp Duty, but if you buy the property itself you pay c. 5% Stamp Duty.

Looking for a new income stream? How about ratting out your tax evading mates?

HMRC has announced that later this year a ‘whistleblower’ scheme will be launched for informants of tax evasion*. Under the scheme, you will be compensated a portion of the additional tax HMRC receives. The exact figure hasn’t been announced, but estimates are around 10% to 25%.

It’ll be based on the successful whistleblowing schemes in Canada and the US. In the US over £7bn has been recovered since the scheme’s inception, bagging the whistleblowers a cool $1.2bn.

So next time you’re at the golf club and overhear someone bragging about putting their holidays through their company, start taking notes!

https://www.gov.uk/government/news/boost-for-side-hustlers-as-300000-people-to-be-taken-out-of-tax-returns-government-announces

Rachel Reeves needs to find another £5.8bn, following the U-turn on the Universal Credit/Personal Independence Payment (£4.5bn) bill and the reinstatement of the Winter Fuel Allowance (£1.3bn). Where will she get this from?

Labour have absolutely tied themselves in a knot by pledging not to ‘increase tax on working people’, nor increasing VAT or Corporation Tax. My predictions for the Autumn Budget:

1. A further increase in dividend tax rates. Note that most director/shareholders – even of one man band companies – will take a small salary and the rest in dividends, so this would affect them badly. And it is hard to exclude them from the ‘working people’ definition.
2. Further freezing of tax thresholds. I am confident that this will be done, as it’s more politically palatable and not seen as a ‘tax rise’ by the public, although in practice it absolutely is.
3. Raising Fuel Duty, which has been frozen since 2011. Separately, with increases in electric cars (incentivised through the tax system) Reeves will at some point have to understand how Fuel Duty income will be replaced.
4. A reduction in higher or additional rate relief on pensions. At present, higher and additional rate taxpayers can get 40% or 45% relief respectively on their pension contributions. Reeves might change this to a maximum of (say) 30%.
5. Reducing the tax free draw down on pensions – to a cap of say £100,000, rather than 25% of the pension value.

Any tax rises will be hugely unpopular, particularly if they are linked (which opposition parties will no doubt do) to the increased funding bill for Universal Credit/PIP.