Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.

“Upcoming tax changes have ignited debate about the role private landlords should play in meeting the UK’s housing needs. Focus has fallen on buy-to-let but, as the Institute for Fiscal Studies, among others, has noted, landlords are taxed much less favourably than home owners.”

That’s according to Michael Ball, professor of urban and property economics at Henley Business School at the University of Reading in an opinion piece written for City A.M.

Following George Osborne’s Summer Budget and Autumn Statement last year, which outlined plans for a gradual reduction in the amount of interest rate relief claimable by buy-to-let landlords, and an additional 3 percentage point levy on stamp duty when buy-to-let properties are purchased, the Residential Landlords Association (RLA) asked Professor Ball to produce an independent report on what effects these changes would bring.

“I estimate that higher rate income tax-paying landlords who own about 40 per cent of market-rented housing in the UK are likely to be adversely affected. The negative impact on post-tax returns is also likely to be high. My modelling suggests that landlords paying the basic rate are likely to see average returns falling by around 10 per cent as a result of the changes, while returns for higher rate taxpayers look set to fall by between 30 and 40 per cent because of the added effect of the loss of financial cost relief,” concludes the Professor.

Ball thinks that landlords will receive little public sympathy for their plight as buy-to-let landlording continues to take a battering, not just through these swinging tax measures, but through a plethora of new regulations affecting the private rented sector (PRS).

“Surely landlords can afford to take the hit given alarmist headlines about rising rents?

Buy-to-let landlords have long been seen as making a fortune at the expense of rents, but as Professor Ball says:

“Delve deeper into the statistics, however, and it becomes clear that things have not been as rosy for landlords as many suggest. Returns from rental income have for many years been compressed as a result of house prices rising faster than rents. As figures from the Office for National Statistics and LSL Property Services suggest, between the crisis year of 2008 and late 2015, average rents increased by 21 per cent – not much more than general price inflation over the period– while house price growth was 45 per cent. There was a similar divergence in the boom years prior to 2007. Only continued strong rises in house prices would make investment attractive for many landlords under the new tax regime and that outcome is both undesirable and unlikely.”

Ball sees this leading to a lack of much needed investment in the PRS as the declining returns from renting out property are set against rising returns from other assets.

“There is already a shortage of properties to rent in many areas and the consequence can only be higher rents. This will inevitably make it harder for first-time buyers to save the funds required for a deposit to buy a home of their own.”

Ball thinks the idea that homes will be freed up for first-time buyers is largely bunk. Many rentals such as houses in multiple occupation (HMO) will be “unappealing to first time buyers” and similarly will be the areas where much renting is concentrated.

“The main competitors faced by first-time buyers are existing home owners, whose tax breaks and high own-equity make them strong players in the market-place,” says Professor Ball.

By lowering returns on rentals Ball thinks the government will create a diminution in the quality of the housing stock not dissimilar to Labour’s threatened rent controls: “As the government implements its tax changes, my analysis suggests that future post-tax rental returns may be insufficient to incentivise good quality repairs, as for many investors post-tax annual cash flows will often not cover the costs of on-going major repairs and improvements.

The larger more organised and professional landlords may be driven out leaving more small-scale landlords, less affected by the tax changes, to buy-up their properties  This, Professor Ball thinks will lead to landlords to “overall be less equipped to offer a professional service.”

“Landlords whose total incomes fall within the basic rate tax band often need all their rental income for their own immediate use, and so are less able to deal with unexpected out-of-pocket expenses and are more financially vulnerable in what is a risky market-place,” he says.

Ball thinks that using a company to invest by converting to corporate status will offer “little advantage to most tax-stretched landlords once the resultant taxation of dividends is taken into account.”

Neither does Ball think that large-scale build-to-let investors are “necessarily the answer, as they require significantly higher target rates of return than typical private landlords. Those extra required returns can only be funded out of higher rents or additional tax breaks.”

With Wednesday’s 2016 coming up Ball suggests a tax break for larger property holdings and for quality assurance schemes that would encourage professionalism among individual private landlords. In addition, he says that tax reliefs to help build-up sinking funds for the periodic major repairs that inevitably arise with housing would incentivise property maintenance and would “bring the UK into line with equivalent depreciation allowances available in many other countries.”

Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.


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