The high level of mortgage tax relief which became a feature of the housing boom in the 1970s and 1980s did not exist in the 1930s. There was in the 1930s and it still exists today, a hidden subsidy to owner-occupiers through tax composition which adds to the ability of building societies to attract investment capital and thereby provide cheap and in effect subsidized loans for home ownership. This came about as the collection of tax on small investments in building societies was difficult and a composite rate had been established by 1894 in a compromise between the building societies and the Inland Revenue. Under this voluntary agreement, interest on building society deposits was taxed at source, but at only fifty per cent of the normal tax rate. In 1921, a further agreement was reached in which the effective tax rate was set at twenty five per cent of the new higher standard rate so as to not penalise the lower-income investor. By 1926 a level of £5,000 was set per investor but it would have been easy to circumvent this limit as investors could deposit in the names of various family members and with different societies. By 1938-39 the limit was raised to thirty six per cent of the standard rate tax. At no time before or since was the composite tax arrangement so favourable to investments in the building societies especially by high tax payers.
There was a further hidden subsidy via the rating assessments. In evidence to the Inter-Departmental Committee on the Valuation for Rates in 1939, Walter Harvey of the Halifax Building Society said that ‘dwellings built between 1919 and 1939 had been valued with reference to valuations placed upon older houses…statistics and evidence showed that, speaking generally, post-war owner-occupied houses are 30% under-assessed’. The National Federation of Home Owners in evidence to the same committee said that council houses were rated at lower levels than owner-occupied ones. As the assessment of rateable values was made by the Inland Revenue District Valuer’s Office it was outside the control of the local authorities and reflected the considered view of the Valuation Office. In their evidence they said that ‘The rating valuation of council houses when on an estate is to reflect that fact that living in a council house was less desirable [than living in an owner-occupied home]’ (51). Mr Hyde, one of the rating valuation officers who was at a conference on rating assessment committees in 1937 was quoted in the Western Post on 14 February 1937 as saying ‘There is a social stigma attached to living in a council house’ (52). Mr Hyde also made submissions to the above mentioned committee in 1939 and his views were echoed in paragraph (vi), (c) of the Report which said that ‘The preference for non-council houses may justify a somewhat lower level [of rateable values] for council houses (as a way of assessing the gross value) of a council house’ (53). In the case of Head v Newcastle Corporation the Recorder said that ‘There was no doubt that some people would pay more to live in a house at High Heaton…than a council house’ (54). This would indicate that those houses with the very lowest rateable values were houses built by the local authorities. So occupiers of local authority housing also enjoyed a hidden subsidy. This aspect of subsidy has been mentioned to illustrate that the working-class buyers were paying more in rates for their homes than the council tenant.
In the 1930s it was possible to offset the mortgage interest payments against income as it was with any other interest payments. But the ‘basic rates of taxation were such that the reduction in tax liability was not a significant consideration at a time of low levels of direct taxation’ (55). The lower-paid owner occupier paid very little tax and therefore the ability to offset mortgage interest against income was of very little benefit. Becoming a home owner also made him liable for Schedule A Tax but again the small house was outside the scope of this tax. Daunton concludes that there was no significant incentive for the lower paid to purchase a house just to obtain tax relief as he was hardly paying any income tax, but ‘there were tax considerations which effected, to a greater or less, the implications of investing in building societies, and buying a house… and against investing or owning rented property. Both the private landlord and the owner occupier were deemed to have an actual or notional income from property [Schedule A Tax] and could make deductions for interest payments and repairs’ (56).
(51) HLG 56/100.
(52) Western Post (14 February 1937), p. 24.
(53) Report of Assessment Committees 1937 (H.M.S.O., 1937).
(54) Heads v Newcastle Corporation, 31 January 1931.
(55) M.Daunton,loc.cit, p. 243.
(56) M.Daunton,loc.cit, p.245