Tax increases will drive much-needed landlords from sector, says LSE

Posted: 26/5/2016

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Tax increases for private landlords will drive some out of the sector, while others will pass the costs on to their tenants, stretching household budgets and putting home ownership further out of reach.

The warning comes from a new report by the London School of Economics, Taking Stock.

It analyses the private rental sector and its importance to the UK housing mix.

Despite the Government’s clear championship of the institutional build-to-rent sector, the report says that small private landlords will continue to be the backbone of the private rented sector.

The report says that demand for private rented accommodation is set to grow, and that to meet this, there needs to be investment in the sector.

However, it points out that the UK already treats private landlords for tax purposes less favourably than many other countries, ahead of further clampdowns.

These include a surcharge on Stamp Duty Land Tax for landlords, removing the wear and tear allowance, and reducing the amount of mortgage interest eligible for tax relief.

Authors Kath Scanlon, Christine Whitehead and Peter Williams find the sector has more than doubled in size in the past 15 years and now accounts for almost one-fifth of all dwellings.

Despite government initiatives to encourage institutional investment, the bulk of properties are owned by individual landlords with only one or two buy-to-let properties.

The report concludes: “Even if institutional investors enthusiastically enter the market, individual landlords will remain dominant – as they are across Europe.

“Shrinking the sector therefore does not seem a sensible way forward, given what we know about unmet demand and need.”

The Government has recently changed the tax treatment of private landlords in several ways, including imposing a surcharge on Stamp Duty Land Tax for landlords, removing the wear and tear allowance, and reducing the amount of mortgage interest eligible for tax relief. These changes will hit small landlords particularly hard, argues the report.

Irrespective of any regulatory changes, the authors suggest that demand for private renting will continue to rise, with individual landlords remaining the dominant providers. They highlight concerns over whether there will be sufficient landlords to meet continuing growth in tenant demand.

The report finds:

  • The growth of buy-to-let is in part a product of the low returns available to investors elsewhere in the market, and that driver is likely to continue.
  • High house prices and the need for large deposits make it unlikely that younger households will enter owner-occupation to the extent they did in the last four decades, increasing their reliance on the private rental sector.
  • The new tax treatments will damage landlords’ returns and create disincentives to invest in the sector.
  • The Government’s goals for the private rental sector are multiple and sometimes inconsistent.
  • Improved data is urgently needed to inform policy.

Kath Scanlon said: “There have been a number of recent changes in the tax treatment of small landlords, and more generally in the tone of policy discussion about the private rented sector.

“These decisions seem to reflect anecdotal rather than hard evidence, as there is a striking lack of data about landlords and their business models.

“The current government favours institutional landlords, but even if that part of the sector were to grow rapidly, small landlords would still be the backbone of the industry.

“We need a private rented sector that works for the long term with policies that reflect the housing challenges the UK faces.”

Download a copy of Taking stock: http://lselondonhousing.org/wp-content/uploads/2016/05/GRP12392-LSE-report-design-WEB.pdf

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