By Mark Fairlie
The Royal Institute of Chartered Surveyors (RICS) has published the results of a survey predicting that rents will rise 15% in the next five years because of an increasing shortage in the supply of rental properties.
According to BBC News, the report suggested that the government needs to rethink the way that the private rented accommodation sector is regulated and taxed to dampen down rent inflation.
The forecasted shortage of supply will be caused, the report says, by smaller landlords exiting the market because of changes to the way the sector is taxed from 2020. This imbalance between supply and demand will be the determining reason for the steep increase in rental prices by 2023.
What’s changed for landlords?
The availability of cheap mortgages and favourable tax treatment are two of the factors behind the significant growth in the residential buy-to-let sector in the last two decades.
Prior to 2016, residential landlords could claim mortgage interest costs against their turnover as an expense. This benefit allowed landlords to reduce the amount of income they had to pay tax on substantially. Landlords could also claim a 10% wear and tear allowance automatically on their self-assessment forms.
A new system is being fully introduced from the 2020/2021 tax year after a transitional period of three years.
For a landlord on the higher rate of income tax, the amount of tax they have to pay on their buy to let investments will go up substantially. Here is an example of how the new system, when fully implemented, will increase a landlord’s tax bill on one of their properties:
|40% taxpayer||YR 16/17||YR 17/18||YR 18/19||YR 19/20||YR 20/21|
|Reduction in mortgage interest allowance||£0||-£938||-£1,875||-£2,813||-£3,750|
|Tax at 40%||£1,700||£2,075||£2,450||£2,825||£3,200|
|Mortgage Relief Due||£0||£188||£375||£563||£750|
Despite the fact that the landlord is taking in the same amount of money each month from their tenant and their expenses remain the same, the amount of income tax payable rises from £1,700 a year in 2016/2017 to £2,450 in 2020/2021.
Landlords buying property to rent out also pay higher stamp duty. In March 2018, the average UK house price was £227,871. Someone buying that property to live in would pay £2,057 in stamp duty while a buy-to-let landlord would be required to pay £8,893.
As quoted on BBC News, James Farrance, residential lettings director at Maidenhead’s Braxton estate agency, believes that
“Stock levels [are] declining as some landlords are reducing their holdings due to [the] tax and cost burden from the government increases. [Buy-to-let] investors are also thin on the ground, put-off by the crippling levels of stamp duty.”
Simon Rubinsohn, the chief economist at RICS speaking to the Guardian, said:
“The impact of recent and ongoing tax changes is clearly having a material impact on the buy-to-let sector, as intended.”
RICS argues that the increase in taxation that landlords have to pay means that more properties than expected are leaving the rental sector as landlords choose to sell up.
A Treasury spokesperson explained that the reason behind the changes in landlord taxation is to help people better afford a home to own by reducing the financial incentives and benefits available to landlords.
John Healey, the shadow housing secretary quoted on BBC News, said that the rise in rents followed
“eight years of failure” by the government and he pledged that his party in government “will fix this broken market with bold new rights for renters including an end to no-fault evictions and controls on rents.”
The former Prime Minister and leader of Mr Healey’s party, Gordon Brown, said in 1997 that
“I will not allow house prices to get out of control and put at risk the sustainability of the future.”
When Mr Brown came to power, the average house price was £62,800. During Mr Brown’s tenure as Chancellor of the Exchequer, house prices peaked in November 2007 at £184,000 – an increase of 192%.
Although more homes may be coming on the market for people to buy who want to live in them, the house price inflation experienced since 1997 now means that
“in most regions, it would take about eight years for the typical buyer to save for a deposit. This rises to nine years in the South East of England and to nearly 10 years in London”.