Tax change could result in UK landlords putting up rents by 20% to 30%

Tenants in the UK private rented sector face potential rent increases of up to 30% as a result of tax changes, it is claimed in a new analysis report.

Tax changes, including the 3% extra stamp duty on additional properties, that have affected landlords are having a negative effect on the supply of rental properties and are not the neutral, non-discriminatory system that had been suggested.

Indeed, David Miles, professor of financial economics at Imperial College London, says that the planned changes to tax for buy to let landlords due to be introduced in April should be abandoned.

‘Stamp duty is now being levied at a higher rate on properties bought to be rented. Most properties bought by private buy to let investors will pay an extra 3% in tax. And starting from April 2017 the rate at which interest on mortgages used to acquire buy to let properties can be offset against tax on rental income will be reduced from an investor’s marginal income tax rate down to the basic rate,’ he said.

‘If these changes were a move towards a more neutral (non-distortionary) system of taxation of rented property, relative to owner occupied property, they would have a rationale. But rather than being a move towards neutrality, as was claimed, they in fact represent a further penalty against private provision of rented properties by potential suppliers who cannot, or chose not to, invest via a corporate entity,’ he pointed out.

He believes that the reason for increasing the tax distortion against the rental sector is far from clear and it is hard to understand why the Government would want to deter provision of private rented accommodation from smaller landlords.

He argues that generally rents would need to rise between 20% and 30% to offset the impact of the Government’s tax rises and added that the tax changes are unlikely to make it easier for first time buyers to enter the market.

He has made a series of calculations that generate a required initial rental yield of 4.9%. This jumps to 5.83% if the only tax change is to reduce the rate at which interest is deducted against tax to the basic rate.

He suggest that to offset that, rent would need to be increased by about 20%. If the effect of the rise in the stamp duty rate is taken into account the yield needs to be 6.1% which would require a rise of 25% in rents.

‘The effects of the tax changes are clearly large. Generally rents would need to rise between 20% and 30% to offset them, more often than not rents need to rise by closer to 30%. The impact of the reduced tax deductibility of interest payments, which affects cash flows every year, is substantially larger than the impact of higher stamp duty, which effects cash flows only at purchase and is spread over the length of the landlord’s investment,’ Miles explained.

‘Of course not all rents would go up this much. Some buy to let properties are bought with cash or owned by basic rate tax payers, and for these landlords it is only the stamp duty change that would require higher rents. And part of the adjustment to the tax changes might come through lower house prices. But given the size of the private rented sector one should expect most of the adjustment to come through higher rents rather than lower house prices,’ he added.

His report, which was written before the recent Housing White Paper which backs more homes to rent being built, also suggests that the current market places too much emphasis on home ownership.

‘Aspiring first time buyers are hardly helped by squeezing the supply of rental property and driving rents up. We should want to avoid a situation where people feel pressurised into taking big mortgages relative to their income early in life because the rental option is so poor. A property market in which people in their 20’s borrow five or more times an inflated income at what are a currently very low interest rates, and then struggle a few years down the road, is something we should not want,’ Miles pointed out.

‘The view that owner occupation is a form of tenure that people should aspire to at the earliest possible point in their lives is deeply flawed. A tax change that reduces the incentive to supply rental property is entirely counterproductive. It should be abandoned,’ he concluded.

The Residential Landlords Association (RLA) has found that a majority of landlords will be negatively impacted by the tax changes and wants the Government to use the unexpected extra revenue from its stamp duty levy to halt the implementation of the mortgage interest changes, or at least apply it only to new borrowing for new housing.

‘Professor Miles’ assessment proves that current tax policy will be counterproductive in making rents affordable and increasing supply to meet the growing demand. It is time for the Government to think again,’ said David Smith, RLA policy director.


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Written by: Houseladder