The disastrous new tax on buy to let landlords is really a tax on tenants

Steve Bolton
Home Ownership Falls To Its Lowest Level In 30 Years
80 per cent of landlords own only one property, perhaps relying on their property for an income in retirement (Source: Getty)

Theresa May stood on the steps of Number 10 Downing Street last summer and pledged to help those “just about managing” families and build “a country that works for everyone”. After a divisive referendum campaign and a period of political turmoil, it was a reassuring message.

Tackling Britain’s housing crisis was quickly identified as one of the government’s top priorities. We had a Housing White Paper in February aimed at “fixing our broken housing market”. There were some welcome measures to stimulate housebuilding, and a pledge for new Build to Rent initiatives.

The rhetoric has been strong, but it’s action we should be focused on.

Government reforms that come into force today will disqualify mortgage interest from being classed as an expense for landlords with mortgages owned in their personal names.

Of course, mortgage interest tax relief is not the sexiest of subjects, and most people will be unaware of the changes – and perhaps won’t even care. But if you’re renting in London, if you’re investing in property as part of your retirement plans, or if you care about Britain’s housing crisis – you should pay attention.

Read more: First time buyer mortgage borrowing increases as stamp duty bites landlords

Section 24 of the 2015 Finance Act removes landlords’ ability to deduct their finance cost for residential property from taxable income, replacing this relief with a tax “deduction” equivalent to the basic rate of income tax. In practice this means many landlords are being taxed on a significant proportion of their turnover, rather than profit. Furthermore, it is estimated that vast numbers of accidental, amateur and professional landlords will be moved into a higher rate tax bracket.

Unincorporated, smaller landlords who pay higher rate tax will face an effective tax rate of 76 per cent for properties that are 50 per cent funded with a mortgage.

The government defends the policy by saying it will make the tax system fairer and will ensure landlords with higher incomes no longer receive the most generous tax treatment.

But 80 per cent of landlords own only one property and are “amateurs”, perhaps relying on their property for an income in retirement.

There is nothing fair about introducing retroactive tax changes that penalise small landlords. And just like the ill-considered changes to National Insurance contributions in the Spring Budget, the government has failed to fully consider the consequences of this policy.

Read more: Leave the buy to let market alone, Britain needs more landlords

The changes will affect more than just small landlords. Survey data of landlords by Orchard & Shipman suggests nine out of 10 landlords will increase rents in response to this policy. This is bad news for tenants.

In February, property experts at the Royal Institution of Chartered Surveyors (RICS) predicted that rents are set to rise by 25 per cent over the next five years. RICS said the increase in rents would be triggered by landlords decreasing their portfolios, leaving tenants to compete over a smaller pool of properties.

Pushing up rents in the private rented sector penalises some of the most vulnerable people in society – young people and low earners, those who are just about managing. Rent already accounts for almost 50 per cent of most private tenants’ costs, and we shouldn’t forget that 30 per cent of private tenants have a weekly household income under £300.

The government is also ignoring the lessons of history. In Ireland, similar proposals were introduced in 1998 that resulted in a 50 per cent increase in average rents. In the three years that the policy was in operation, average monthly rents in Ireland rose from €600 in 1998 to €900 in 2001.

Read more: Buy-to-lose: Is there value left in the UK letting market?

Attacking the private rented sector won’t solve the UK’s housing crisis, it will make it worse. If the government wants to fix what it calls the broken housing market, it needs to get on and build more homes. Indeed, under the coalition, housebuilding fell to the lowest level of any peacetime government since the 1920s.

Driving smaller landlords out of the market won’t help limit house price increases, it won’t help the thousands of young people in private rented accommodation in the capital saving for a deposit for their first home, and it won’t help vulnerable tenants worrying if they can afford their rent this month. This is a tenant tax in everything but name.

That is why I, together with concerned members of the private rented sector across the country, am leading the Axe the Tenant Tax Campaign. The campaign is fighting back against the disastrous changes to mortgage taxation announced by the previous chancellor and enforced by the current one. We will continue to warn people about the harmful effects of the tax changes, mobilise supporters and put pressure on the government to act.

The government is hitting the private rented sector, and it’s those “just about managing” families that will pay the price.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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