"Put simply, the core mission for the government must be to attract landlords back into the market, or else we risk shrinking the number of properties available to hopeful renters to a point where renting becomes a luxury of the few, and the prospect of homelessness the threat for the many"
- Greg Tsuman - Martyn Gerrard estate agents
Any hopes for the rental market making a strong recovery in the year ahead came crashing down on 30th October, when the Chancellor announced a Budget that failed to please anybody currently involved in the private rental sector – be it landlords or tenants.
There was an opportunity for Rachel Reeves to undo some critically harmful tax policies bought in by the previous government; ones that unfairly penalise landlords and cause a domino effect across the wider rental market which ultimately lands at the feet of renters.
In the current framework, landlords are beset on all sides by taxes: when purchasing in the form of SDLT, when exiting in the form of CGT, and on the cost of operating a rental property business in the form of tax on mortgage interest.
Instead of pressing reset, ending the cycle of high rents caused by high taxes and incentivising landlords to remain in the market, Labour has kept in place a tax system that already has the rental sector on its knees, and introduced policies that could see it fall apart altogether.
Landlords leaving at record rates
As a result of the punitive tax burden they face, private landlords in the UK have been exiting the market at the fastest rate since the pandemic. The government has tried to argue that when landlords sell, it is either to other landlords or first-time buyers. This is a nice thought but very difficult to prove, and given the SDLT rate on additional dwellings before the tax burden of running a rental property kicks in, it is hard to imagine aspiring private landlords are scrambling to buy these properties from landlords who are looking to get out of the market.
When it comes to tax, landlords are treated differently than any other business, because due to Section 24 of the Finance Act introduced in 2017, landlords are prevented from claiming mortgage relief on their rental properties. As a result, they can in effect be taxed on a loss-making business.
Instead of fixing this issue, Labour has seen it fit to introduce a further stamp duty burden on second properties, raising this from 3% to 5%.
Now, it should be acknowledged that the current regime and the latest policies do directly benefit institutional and corporate landlords. These are important home providers, but at current they represent a very small section of the private rental market – in fact, the latest census figures from the government show that only 6% of private landlords are categorised as companies as of 2021.
Whilst there are benefits to encouraging these types of landlords into the market – for example, they are easier to police and regulate – creating an environment where only they can thrive will almost certainly monopolise the rental sector, which will in turn reduce competition and drive up rents, as well as removing any negotiating power that tenants currently have.
The market is therefore in dire need of investment from individual private landlords, and the Chancellor should be doing all she can to encourage this, not deter it. Put simply, the core mission for the government must be to attract landlords back into the market, or else we risk shrinking the number of properties available to hopeful renters to a point where renting becomes a luxury of the few, and the prospect of homelessness the threat for the many.
A tax on working people?
Besides the issue of supply-demand imbalance that the current tax system is creating, which in turn is pushing up rent prices, the tax burdens placed on landlords arguably contradict the government’s own rhetoric of protecting and supporting working people.
Ultimately, when landlords are faced with such a steep uphill tax battle, they have no choice but to pass on a large portion of these costs to tenants in order to maintain viability. As it currently stands, more than a third of Brits are affected by rent increases and a more limited pool of choice - and these issues will only get bigger following the Budget.
It is wilfully ignorant of the government to overlook that increasing the costs of running a private rental property business through taxes will ultimately hit the pockets of those that the business aims to serve – renters. The vast majority of private landlords, after all, want to be able to offer security of tenure at a fair price as much as tenants want to know they will have a home they can afford. The tax regime is perhaps the largest factor preventing landlords from being able to offer this.
The numbers are crushing
When it comes to demonstrating how difficult the tax regime has made it to be a private landlord, the figures perhaps paint the clearest picture.
The current tax system sees landlords paying a 20% tax on monthly mortgage payments; a 24% tax on gains (for those able to make a profit); and a 40% tax on rental income. And of course, don’t forget stamp duty, which everyone pays.
To put this into real terms, we can look at how this plays out in London, where the average rental yield is 5%. Based on this benchmark figure, a private landlord in London will be paying almost a year’s rent straight to HMRC before they even secure a tenant.
The numbers can also be traced directly to when damaging tax policies were introduced. In the immediate wake of Section 24 coming into effect, we saw rents rising by about 40%, and they have not come back down since.
The impact of this is also laid bare in the figures – with the mass exodus of landlords from the market and the spiralling rent prices in London, some councils in the capital are paying up to £4 million a day on temporary housing.
Clearly this strategy is not working, and the government needs to employ a joined-up approach which recognises that the current taxes on landlords negatively impact both renters and the rental market.
Learning from New Zealand
To look at a real example of the type of approach the UK government could take to resolve the issues with our rental sector, we can look at New Zealand, where the government was pragmatic in realising that higher taxes serve no benefit to public finances if landlords leave the market entirely.
New Zealand is in the process of repealing laws preventing tax deductions on mortgage interest for landlords after seeing the negative impact it has had. If the UK government fails to learn this lesson and continues to put landlords in a situation of high risk and low reward, then their departure from the rental market will only continue.
On the other hand, if the government acts now to fix the tax system for landlords, the benefits will be felt almost instantaneously. There are of course other challenges facing the rental market but reducing the tax burden would prove both a fast impact and long-term solution.
Time for action
The government had a free shot to immediately reassure those landlords that are left in the market, and to persuade would-be landlords to re-enter, by showing them that renting their property will be profitable. Unfortunately, it misfired completely.
With population growth at its current rate, we need to increase the private rental sector. The cold reality is that keeping it the same, or worse, shrinking it will see a spike in homelessness, which is already at unacceptable levels.
The sooner this disastrous tax regime is repealed, the better, for both landlords and tenants. Ultimately, we want to see a market where tenants can enjoy both choice and security.
To stop the exodus, Labour will need to incentivise landlords back into the market rather than saddle them with high costs and reasons to leave. Most of all, the government should take a common-sense approach which learns from the blushes of New Zealand and understands that taxing landlords will only diminish the supply of rental properties.
Waiting years to see the effects of more housebuilding is not good enough. We need reform in the rental market now if we are to find a realistic short-term solution to stop this spiralling crisis.
