A million families to face rent increases due to tax changes

by | Oct 18, 2016 | Blog post, Finance & Taxation Reform, Housing Supply & Rents

Over the last year significant changes have been announced by the UK Government that will impact the future of the private rented sector. To assess the effect of these changes, we have developed a longitudinal research project to assess the state of the sector over the long term through a series of quarterly surveys. Currently the government are introducing major reforms to the taxation of the sector, including changes to Mortgage Interest Relief (MIR), Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT). Currently landlords are able to offset the amount of interest they pay to their lenders annually on their mortgage against their tax bill, as the interest paid is treated as an expense of their lettings business in the same way as any other business. However, from next year the government is phasing in a reduction in the amount that can be claimed and replacing this with a basic rate relief tax reduction. As we feel this is a significant issue for landlords and the sector, this was one of the focuses of our first quarterly survey of 2,883 landlords across the UK.

How will taxation reform affect landlords?

Our research identified the current reforms to taxation of the sector has had a negative impact on the future investment decisions by landlords. 77% of landlords reported the recent budget changes will negatively impact on rental income and 67% of landlords will have reduced profitability due to changes to Mortgage Interest Relief alone.

One of our major concerns from the findings is the scope of the impact of these changes on landlord turnover, with 68% of landlords reporting that these changes would reduce their profitability by at least 20%, and 14% of landlords reporting the change would reduce profitability by over 60%. A further concerning result is 36% of landlords reported the removal of MIR would result in them making a loss on their investment. These findings clearly indicate the potential negative impact of these reforms on those providing homes to millions of households across the country.

Our findings clearly show that landlords will receive less of the rent paid to them, as more of it will be heading to the Treasury as tax, but what will this mean for the sector?

We argue these taxation reforms will either force landlords out of the sector and/or reduce property conditions as landlords will not be able to afford to make repairs. And this is supported by the findings with, 58% of landlords considering reducing investment in their portfolios because of the changes, 54% of landlords are not confident about the future of the sector, 66% of landlords not planning on purchasing any additional properties, and, with 31% of landlords considering leaving the sector. This is despite RICS arguing that 1.8 million new homes are needed by 2025.

Many anti-PRS groups and commentators will argue that this is a success, however, the argument we would like to put over to them is what will happen to those tenants who depend on the PRS for a safe and secure home when their landlord is forced to sell up and evict? Or significantly raise rents to offset the taxation reform?

With the decline of the social housing sector, lack of affordable homes being built and tightening of credit for first time buyers; these changes are not going to help improve renting for tenants, landlords or the country. What we need are tenure neutral policies that help to make renting better for all.

How will taxation reform affect tenants?

Our findings have identified serious implications for the financial health of the sector, on continued investment by landlords and offer a grim outlook for tenants. As a direct consequence of George Osbornes changes, tenants are facing a reduction of investment in their property and increases in rents as landlords seek to offset the impact of these reforms. These rent increases are to be expected within the next 12 months, with 56% of landlords planning to increase rents during this period, the majority citing the changes to mortgage interest relief as the main reason.

These changes are not going to help landlords, but the group who are going to be most affected by these changes are tenants. But which types of tenants are likely to be affected?

Our research findings show the typical properties being let by landlords are two or three bedroomed houses rented to single families, with the majority of landlords letting to families with at least one child. According to the lasted English Housing Survey 37% of the 4.3 million households in the PRS are households with dependent children (this equates to 1.6 million households with dependent children). We argue the Government’s changes to taxation will negatively impact over a million of families who depend on the sector for a home. This could potentially disrupt children’s education and causing financial worry for parents who may have to choose between feeding their child or paying the rent on time.

This is something that we do not want to happen. We want and work hard for a sector that works for tenants, landlords and the wider communities. We believe that it is not too late for the government to change their approach to these reforms, and prevent unnecessary financial difficulties for tenants and landlords. We are intensifying our efforts to lobby the government against these changes and we have had a number of successes, including a leading Tory Peer coming out to criticise his own party.

If you would like to read our research report in full, it is available here.