Nobody could have foreseen how big and powerful the buy-to-let (BTL) lending sector was to become back in the late 1990s. It has quickly developed from a ‘young upstart’ to a mature and well established part of the UK mortgage market.
The key to future success in this market for both lenders and investors relies on how well we adapt our attitudes to it.
We must be sure of future changes that are made to the rules and regulations that surround BTL lending and the way in which investors buying into the market are treated.
Given that the sector now accounts for almost £40 billion worth of lending annually and makes up around 10 per cent of all mortgages arranged in the UK, destabilising the BTL environment could have serious ramifications for other areas of the housing and lending market.
Exacerbating the problem
Paul Diggory, president of the Chartered Institute of Housing, recently called for the abolition of tax relief that is available to landlords. In his opening speech at the institute’s annual conference in July, Diggory said landlords should no longer be allowed to offset the interest paid on BTL mortgages against their taxable income.
Such relief gives an unfair advantage to landlords, according to Diggory, and simply exacerbates the problems faced by first-time buyers across the UK. As he said: “The government has acknowledged that there is an acute lack of affordable housing across the country so it does not make sense to still offer tax relief to those who buy, simply to rent. BTL owners have a financial advantage over those trying to buy their first home, as well as pushing house prices even higher. We hope the new Chancellor of the Exchequer removes this tax relief as part of the Comprehensive Spending Review due in the Autumn.”
Certainly Diggory could not be accused of sitting on the fence and forthright discussion of the issues in the BTL arena are both welcome and important. However, getting rid of the tax relief currently available to property investors does not seem to be the best way forward, and would raise a number of problems if it were to get the go ahead from a government that has already proved itself keen to generate revenue where possible.
Treating landlords fairly
So what of these problems? In the first instance there is an argument that suggests landlords are perhaps already unfairly treated. They have to pay capital gains tax on profits made from the sale of their properties as they are not their principal residencies. Residential home owners can happily accrue the profits they derive from their properties without fear of the taxman helping himself to a whopping share for the Revenue’s coffers and so many landlords will feel they already pay more than their fair dues on the money they make.
In truth, it is not unreasonable that this is the case and like any business, property investors are taxed on their profits. If these profits come from the sale of houses and flats within their portfolio, then so be it.
However businesses are also allowed to offset many of their running costs against their turnover for taxation purposes and surely the interest paid on the mortgage lending that supports their business is a fundamental running cost, which they must meet? As such, would it not be commercially unreasonable to withdraw such an allowance?
Knee-jerk reaction
But let’s suppose for a moment that the government decides this is a good idea and implements Diggory’s suggestions. The knee-jerk response of most landlords will simply be to increase rents, and so making it more difficult for existing and future tenants.
At the moment there are around 1.7 million people waiting for social housing. Much of this shortfall in social housing is made up by property investors and if rents rose, as they surely would under a new tax regime, then people who could least afford to pay more for the roof over their heads would be forced to take on bigger rental commitments.
Indeed, it would not only be social housing tenants that were hit, but also potential first-time buyers living in rented accommodation as they try to save for the deposit on their first home. Having to pay higher rents would inhibit their ability to save and simply see them renting for longer periods.
Diggory believes that many landlords are simply sitting on properties and are happy to take advantage of house price inflation without making any effort to lease them.
Even though there are some areas of the country where demand for rented accommodation is high, the majority of landlords do not want to be left in a situation where they are unable to rent. Most are unable to allow houses to sit empty if they want to maintain a healthy cash flow and so it seems that Diggory is overstating the situation when he claims: “If you wander around some of the new developments in our cities after work you can see there are no lights on – a clear sign that no one actually lives there. Investors can make enough money from rising house prices without having to let the flats to tenants – and they are buying whole floors or even entire blocks off-plan.”
The government should perhaps consider setting aside more affordable housing and designating it as such and not releasing it into the general property market. Indeed when the right-to-buy initiative was launched, huge numbers of new property owners sought to take advantage of the new rules and purchase their property at a knock down price before selling it on again in the open market for a considerable windfall.
Addressing all the problems
There is no doubt that affordable housing is an issue that has to be tackled effectively. The redevelopment and management of existing properties and brown field sites will be key and the careful supervision of new housing stock will also have its part to play. However, simply pointing the finger at landlords does not address all of the issues and may, in fact, lead to more problems than it solves.
Adam Smith, who many people refer to as the ‘father of economics’, developed four key canons of taxation. These principles still stand true today. He said that the costs of the tax should be low, the timing and amount should be certain to the payer, the means and timing to the payer must be convenient to the payer, and taxes should be levied according to the ability to pay. If you consider the ill-fated Poll Tax within this context, then it’s easy to see why it wasn’t a success.
Crucially modern economists have added other principles to the list. For example, a tax must not hinder efficiency or should involve the least loss of efficiency and it should be compatible with foreign systems.
It’s clear that any move to change the taxation system, and consequently the tax burden on BTL landlords, could increase costs for landlords and ultimately rents for tenants. It could also reduce the quality of rented housing stock. If administered badly could be a costly tax to collect and could hinder new entrants into the market. Ultimately, before making a decision, the industry would have to see firm proposals, detailing exactly the government’s plans. It would then need to have time to review and comment on the proposals and enter into a constructive debate with all affected parties. However, it’s appropriate that at this time market participants sound a note of warning regarding any additional interference in the market.
Putting the squeeze on the BTL market is something we should do with caution and unless it is done correctly it may well be the unintended who come off worse.
Changing the taxation rules around property ownership has already shown itself to be a tool that can have damaging influences on the market and it seems far from certain that new rules for BTL landlords would provide the way forward that is best for everyone involved.
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