According to the Chartered Institute of Housing (CIH), the tax relief offered to buy-to-let (BTL) owners is contributing to the problems faced by first-time buyers and their efforts to get onto the housing ladder.
At the opening of the CIH’s annual conference and exhibition earlier in June, CIH president, Paul Diggory, called on the government to tackle the runaway BTL market by scrapping the tax relief available to landlords.
Currently landlords can offset the interest they pay on their mortgage against rental income to reduce the amount of tax they pay. For this reason many intermediaries recommend interest only mortgages for BTL investors.
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The Inland Revenue considers rental income in a similar way to salary, and is therefore taxed at 22 per cent or 40 per cent for higher tax payers. As well as mortgage interest, landlords can also deduct other costs from the taxable portion of their income, such as maintenance costs on the property, service charges, fees for letting agents and wear and tear.
A matter of tax
The reason tax relief on the interest on mortgages on rental properties was initially introduced to encourage more people to invest in the rental sector, improving the standard of rented accommodation. This has been very successful, with the stock of rental accommodation improving massively. BTL supporters say tenants have never had it so good, particularly as the number of rental properties available has helped to keep rents down.
However, Diggory argues that the phenomenal growth in BTL investments is contributing to the affordable housing crisis by pricing first-time-buyers out of the market. He pointed to statistics from 2006 indicating that 11 per cent of all new lending in 2006 was in the BTL market, up 57 per cent from the previous year and totalling £100 billion.
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The CIH has urged the government to remove the tax relief currently available in an effort to direct whatever new affordable housing supply is available actually goes to those people who are struggling to get on the housing ladder.
In his opening speech at the conference, Diggory 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. We also want more to be done to halt the rise in the ‘buy-not-to-let’ market. 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.”
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He concluded: “Local authorities already have limited powers to tackle some empty homes but this doesn’t go nearly far enough. These empty flats are contributing nothing to the crisis in affordable housing or to the government’s sustainable communities agenda.”
Other tax breaks for landlords arise when they sell the property. Technically the sale of an investment property could result in a capital gains tax (CGT) bill amounting to 40 per cent of the gain. But going back to when the property was purchased, there are costs that can be deducted. These include legal fees, Stamp Duty and, later on, the commission paid to the estate agent on the sale. The cost of improvements, such as dividing the property into flats or putting in a new kitchen, can also be taken into account. But if a landlord has already offset these ‘improvements’ against rental income, they cannot also be used to reduce the taxable sale profit.
The taxable gain can, though, be cut by your CGT allowance. This is £9,200 per person this tax year – £18,400 if the property is co-owned. Savings can be made by holding the property as joint owners or by the owner moving in to the property for a certain period of time before its sale.
Feelings of injustice
Controversy over tax rules has strengthened feelings of injustice among potential first-time buyers unable to climb onto the housing ladder because they believe BTL investors are snapping up the cheaper properties.
The Guardian’s Money section has run a series of articles over the past few weeks, effectively blaming landlords for the first-time buyer crisis as well as a whole host of other problems. Research by Guardian Money suggests that BTL investors enjoyed tax relief worth £2 billion in 2006. Its analysis of the scale of tax reliefs received by landlords indicates that the annual subsidy is likely to rise to £3 billion by 2008, eclipsing the total amount spent by the government on social housing.
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“As recently as 2000, tax relief for landlords stood at just £200 million a year, but hectic growth in BTL lending – up from £9.1 billion in 2000 to £100billion today – has seen the amounts claimed in tax relief spiral ten-fold,’ wrote Guardian Money editor, Patrick Collinson. “Much of the money has been spent on snapping up new-build flats; it’s estimated that in London last year nearly 60 per cent of all new-build apartments were taken by BTL landlords.”
Filling the gap
However some argue that BTL has helped to fill the void left by first-time buyers that were already finding the market tough to enter. Many in the industry suggest that the real culprit is a shortage of affordable housing being built.
If the CIH suggestions were implemented and the ability to offset mortgage interest against the rental income for tax purposes was withdrawn then clearly there would be a cost implication to landlords. Putting the squeeze on the yield available through taxation can only add to the pressure that landlords have already felt as interest rates have risen.
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“Removing the tax relief may not be enough to see landlords withdraw from the market and some may still be attracted by the long-term capital growth of bricks and mortar,” says David Hollingworth of London & Country. “Some new landlords could be put off from entering the market but it would seem dangerous to impose a retrospective penalty on existing landlords that have made a considered decision when entering the market. It could prove to be a very blunt instrument and cause assets to be dumped – if too much property hits the market this could cause more than just a small correction to the first-time buyer market and have far-reaching consequences to house prices right the way up.”
Little cause for concern
For now at least it seems that landlords have little cause to worry. Although the government has said it will clamp down on tax evasion by landlords, there is little likelihood of reform at the moment and most in the industry say quite rightly so.
“Removing this ‘perk’ isn’t going to suddenly make life easier for first-time buyers. Landlords are an easy target and while demand from them has pushed up prices, it is not just this that is making it hard for first timers to get on the ladder – lack of supply is the main problem,” says Melanie Bien, associate director at Savills Private Finance. “A growing number of people are choosing to live on their own, putting extra demands on housing stock – it isn’t just ‘greedy’ landlords causing all the problems.”
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Bien argues that with yields falling and interest rates squeezing profit margins, landlords are struggling to make money as it is, and as house price growth slows, it will take longer to realise capital gains. “If you take away the tax relief as well, then what is the point? A removal of tax relief will put people off getting into BTL if they can’t make the numbers add up. It is already hard; this may make it too hard for some. A fall in the supply of rental accommodation will push up the cost of renting, making it even harder for first-time buyers who are saving up for a deposit to buy their own home. What we need is more housing, not making BTL so unattractive that landlords run from it in droves.”
Affordable housing
Affordable housing is another issue debated at the CIH conference. In his opening speech, Diggory called on the government to tackle the growing crisis by investing £11.6 billion in housing in the Comprehensive Spending Review scheduled to be announced this Autumn.
It is estimated that 1.6 million people are now on a waiting list for an affordable home and over 100,000 people are still living in temporary accommodation. In addition, key workers like nurses, teachers and police officers are unable to take up employment in key parts of the country because of the housing shortage.
The CIH and its partners want the government to commit to building 70,000 new affordable homes a year over the next three years with priority given to those people struggling to get onto the housing ladder.
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Keith Astill, managing director at UCB Home Loans, agrees with Bien that the principle reason for price increases is that there is an acute shortage of new housing available. He says the removal of tax relief could lead to trouble for many investors, who are generally only receiving yields on their investments of around 5 per cent. “It may also damage the housing market in many parts of the country, with a severe threat of price crashes as landlords are forced to off-load investments,” he says. “At present, I believe there is no need to rein in the sector. BTL has led to price increases in a very small number of areas where landlords have been investing heavily in BTL properties. However, for the majority of the mainstream housing market, it has had no effect whatsoever.”
As an alternative to scrapping relief from mortgage interest payments, Astill suggests restrictions should concentrate on two things. First, a limit to the level of purchases in single developments. He says oversupply of rental property in a single development is not a good idea for investors. Second, owners of properties that remain empty for long periods of time could face penalties, which could be tax-related.
No difference
Whether removing tax relief from mortgage interest payments is right or wrong, some argue that it will simply make no difference to the BTL market. Alex Hammond, PR manager at Kensington Mortgages, says the days of very large gains being made very quickly by BTL investors are behind us. But he reckons this is not necessarily a bad thing as, being a mature market, the BTL sector is much more stable than it was at its infancy and the sector has since seen the emergence of portfolio landlords who are investing in this market for the long-term benefits.
“Because of this trend for more experienced investors any change to tax relief on BTL investors is unlikely to have a profound impact on the market,” says Hammond. “Whether a BTL investment is subject to tax relief or not, the fundamentals to a successful investment still apply and they are, buying the right property in the right location for the right price, with the right mortgage.”
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Richard Beardshaw, Platform’s head of sales, agrees with Hammond that removing tax relief would have a minimal effect on the market in general. He says the point which has to be made is that although the removal of this tax benefit would deter some from entering into this market, the majority of current BTL investors are in it for the long-term capital gains, not short-term rental returns.
“The growth in the BTL sector has been fuelled in the large part by the pensions crisis that has hit millions and has offered a bona fide alternative investment stream for people planning for their retirement”, Beardshaw says. “The lifeblood of the market is the first-time buyer, so when talking about a housing crisis, we must look at what initiatives the government proposes that are designed to help this demographic, not use the BTL market as a scapegoat.”
