By 
Landlords are being unfairly blamed for the housing crisis, according to a hard-hitting report by one of the country’s leading research groups.
In its latest publication the Institute of Economic Affairs (IEA), a free-markets think tank, said the Government’s recent tax changes for buy-to-let property owners defied “any basic economic analysis”.
The report, seen exclusively by Telegraph Money, has called for a major overhaul of the way properties, particularly rental homes, are taxed. It argues that landlords are being “discriminated against” compared with owner-occupiers.
In some instances, landlords will face an effective tax rate of more than 100pc after 2021, when tough new rules fully take effect.
The authors of the report – Rosalind Beck and Philip Booth, two academics specialising in the property market – warn that the changes are likely to result in higher rents for tenants and a fall in the supply of rental housing as landlords leave the sector altogether.
Quality landlords are likely to be replaced by less reputable investors, the report warned. Complicated planning rules are the primary cause of the country’s housing shortage, it states, with many projects unable to proceed, thanks to onerous restrictions on developers.
Reforming the way landlords are taxed was the brainchild of former chancellor George Osborne. Between 2017 and 2021, the once favourable tax regime is being replaced with much stricter rules.
Previously, investors were able to offset their mortgage interest payments before calculating their income tax bill. By 2021, landlords will be limited to a 20pc tax credit, after tax is calculated. This will leave many with significantly higher costs.
The report highlights the case of one landlord, known as “Caroline”, who has successfully rented a range of properties in the South of England for two decades. In 2015, her properties generated £333,000 in rent. Given maintenance and other business costs of £113,000 and a further £155,000 in mortgage interest, she made a profit of around £65,000.
This resulted in a tax bill of £15,200, an effective rate of 23.4pc, and meant she had an income of £49,800. By the time the Government’s reforms are fully implemented, the same landlord will face a tax bill of £54,100 and will earn a post-tax income of just £10,900.
This is an effective tax rate of 83pc. The IEA said if interest rates were to rise to the point that mortgage payments and maintenance costs exceeded the rent, Caroline would still face a tax charge, even though she would make a loss. In reality, the landlord has to increase rents to pass on these costs to tenants.
Other tax changes have also had the effect of reducing the supply of rental homes. A three percentage point stamp duty surcharge has applied to all purchases of second homes since April 2016, meaning landlords looking to expand have been hit with much higher purchase costs.
But rather than raking in extra cash for the Treasury, the stamp duty tax intake has actually fallen by £1bn in the last year, from £12.9bn in 2017-18 to £11.9bn the following year.
Mr Booth said: “Recent tax changes to private rented housing will raise rents and reduce the supply of houses for rent. The Government, under policies set in train by Mr Osborne, is subjecting private landlords to a sustained assault by increasing stamp duty and not allowing finance costs to be fully deducted for tax purposes.
“This policy contradicts the basic principles of sound tax policy and the Treasury’s justifications are disingenuous. The policy may create situations in which over 100pc of a landlord’s profit is due in tax.”
Desperate measures
Landlords who want to expand their portfolios are using increasingly creative tactics to grow. Telegraph Money has previously reported how investors, particularly in the South of England, have seen returns decline in recent years. Some desperate landlords have taken to buying elsewhere in the country but have been caught out by unruly tenants destroying their properties.
This included the case of Chris Yates, a 30-year-old accountant who struggled to manage his properties in Kent and Norwich from afar. Mr Yates has now moved back to Norwich and is selling his homes in Kent after tenants illegally sublet one of his properties and caused £6,000 worth of damage.
Others are turning to holiday lets, short-term rentals that retain favourable tax breaks, rather than purchasing more buy-to-let homes. Using a holiday let could help loss-making landlords turn a profit from their properties, provided they are able to meet the additional rules surrounding these types of rentals.
Such rules include ensuring that the property is fully furnished and that no single tenant occupies the property for more than 155 days each year.
The IEA report suggests that the Government rolls back the changes to stamp duty and mortgage relief. Such changes have made the tax system “more complex and less economically coherent”, the authors warn.
The think tank said discrimination between types of property should end, this means that homes held in corporate vehicles should not be treated in a more beneficial way than those owned by an individual. Even if it were replaced by another form of property tax, stamp duty should be abolished altogether.
“The Government has changed the tax system in a way which leads to private landlords being taxed more harshly than other forms of business,” the report said.
Comments