Author Mark Richards

Thanks to recent changes introduced by former Chancellor George Osborne, private landlords are going to face higher tax bills. But this is likely to lead to a shortage of property to rent – and rents rising faster than house prices.

According to recent findings from think tank the Resolution Foundation, one in 10 adults in the UK owns a second home. Many people have inherited a property, others have bought one – or more – as an investment. A high proportion of these homes are rented out: add in the country’s professional landlords who own multiple properties, and you would think that the UK would have plenty of affordable housing available for rent.

Far from it – because the other side of the coin is that four in every 10 adults in the UK own no property at all, meaning that they are forced to rent.

The number of people owning a second home grew by 30% between 2002 and 2014: as you might expect, the majority of second home owners are ‘baby boomers,’ those currently aged between 52 and 71. According to the Resolution Foundation, those born since 1981 own just 3% of the country’s second homes. Unfortunately, however, the number of people forced to rely on the rental sector has also risen significantly – so it is no wonder that rents in the UK are so high.

Britain vs. Europe

No, not Brexit – the cost of renting.

A report in the Independent quoted the National Housing Federation, who stated that private rents in the UK are the highest in Europe, swallowing more of people’s income than anywhere else on the continent. The average UK rent is nearly double the European average and more than 50% higher than countries with similar wage levels, such as Germany and Holland. On average Brits who rent hand over 40% of their income to their landlords – compared with a European average of 28%.

The NHF’s report said the findings illustrated the “raw deal” faced by British renters and called for an increase in house-building to provide more affordable homes for rent – hopefully helping to force down prices. David Orr, chief executive of the NHF, said,

“How can we expect people to raise families, start businesses or save for their first home if they don’t even know where they can afford to live? We are simply not building enough due to under investment and problems with the land market.”

According to the Federation’s report, the average monthly rent in the UK was £750, compared to £520 in Holland, £500 in Germany and just £447 in Italy. Those comparative figures used by the Independent were correct at the end of 2013. Has the situation improved since then? Hardly – with the Guardian reporting in March that the average monthly rent for the UK in 2016 was £921 per month.

In London, the situation is even worse, with the average rent in London now more than £1,500 per month. Given that not everyone in the capital is a merchant banker, it is small wonder that many people are having to do two or three jobs just to make ends meet.

The sting in the tail is that not only are British renters paying more, they are also less secure than renters in Europe. They have the shortest tenancies, and over the previous five years, 77% of UK renters had moved, compared to 43% across Europe.

It is going to get worse…

private landlords

But now it looks like the situation is about to get worse for those who are renting, with surveyors predicting that many landlords are likely to pull out of the housing market thanks to policy changes introduced by the last Government. Two-thirds of the surveyors asked by their trade body said that this year was likely to see fewer, not more, private landlords. In turn, this will lead to increases in rents, with rents likely to outpace house prices over the next five years. Paul Bagust, from the Royal Institute of Chartered Surveyors, said the predictions were,

“Concerning: a functioning private rented sector is crucial to a healthy housing market.”

What changes are private landlords facing?

In 2015 the former Chancellor George Osborne announced a series of measures that he claimed,

“Would rebalance the housing scales in favour of first-time buyers and away from landlords.”

Simply put, changes were introduced in response to complaints from first-time buyers that they simply could not get on the housing ladder as they were being regularly outbid by private landlords.

The changes included the introduction of a 3% stamp duty surcharge on newly purchased second and subsequent properties – so if a landlord buys a property for £200,000 then there is an extra £6,000 of stamp duty to pay. There was also the scrapping of landlords’ wear-and-tear allowance and the phased reduction of tax relief on buy-to-let mortgage interest.

You are probably not going to shed many tears for private landlords, but let just explain the changes they will face in more detail. Before the changes, landlords could deduct both mortgage interest and other allowable costs associated with a let property (for example, repairs) from their rental income before calculating how much tax was due. This meant that the income declared to HMRC was much lower than the rental income received, keeping costs down and keeping many landlords in a lower tax bracket.

But from April of this year landlords saw the amount they can write off for tax purposes drop by 25% each year through to 2020 when they will have to declare all rent as income, pay tax on the total and then claim back 20% as a tax credit.

What impact will the changes have?

The changes will have a significant impact on the profits of many private landlords – and the prediction from the RICS is that many will simply decide it is no longer worth it and sell up, with in many cases the properties no longer being available for rent. At which point the simple law of supply and demand takes effect, and the RICS is now predicting rent rises of 3% a year over the next five years, compared to house price rises of 2% a year in the same period.

It is our old friend, the law of unintended consequences. Changes are introduced to ‘rebalance the housing scales’ to help first-time buyers – but they end up rebalancing the scales against those who are renting.