Mortgage costs: not so interesting for RROs

Missed this decision last year where Judge Latham, at the London FtT, takes time to deliberate on whether mortgage interest can be a legitimate cost that is allowed by the Tribunal to reduce an award made under a Rent Repayment Order (RRO).

He will have seen our arguments presented by us, in an earlier case in which he presided, regarding the validity of such deductions, summarised here (see section B).

Judge Latham asks in this more recent case:

34. There are two issues for this Tribunal to determine:
(i) As a matter of general practice, should we take into account mortgage interest in determining the profit made by the landlord?
(ii) If so, should we take it into account in this case?

He then considers that landlords have 2 streams of income from properties: rent and capital appreciation. The latter has often been overlooked by Tribunals that have allowed mortgage costs to reduce a RRO award: it is mostly an invisible income stream as it is not realised until sale (or re-mortgage, some might argue). However it can be substantial: Judge Latham points out that properties in Camden, the subject property’s borough, have increased in value fourfold since 1990. All tenants know that their rent is  paying their landlord’s mortgage: an uncomfortable fact for tenants that can’t get a mortgage themselves in order to “get on the housing ladder”. To allow those costs as a deduction for a RRO award adds salt to this wound.

As we argue in every case submitted: mortgage costs are now being phased out by HMRC as an allowable cost for income tax calculation on lettings by law-abiding landlords, so why, oh why, should they be allowed by HMCTS as a deduction for criminal landlords when calculating a RRO award?

Happily Judge Latham agrees this is anathema:

38. We therefore conclude that as a general matter of practice, it would not be appropriate to make a deduction for mortgage interest. We highlight three factors:
(i) A person who acquired a property with the benefit or a mortgage would be required to make the relevant interest payments regardless or whether or not the property is let.
(ii) Should the size of a RRO depend upon whether a landlord has taken out a loan of £1m, £0.5m or owns 100% of the equity? We suggest that it should not.
(iii) It would be invidious for a tribunal to seek to apportion the mortgage interest paid between to the capital and income elements of a landlord’s investment. We are satisfied that mortgage interest rather relates to the acquisition of a capital appreciating asset.

As it happens, Parker v Waller, §42, disallowed mortgage costs where they stem from a re-mortgage anyway. As this was also the case in the above matter, the  deliberations of Judge Latham were not actually necessary.  Though very welcome.