Landlord taxes cost Treasury £1.5bn as Gove hints at change

The NRLA has released a report, which claims that government taxes on landlords have come at a cost of £1.5 billion to HM Treasury, whilst Housing Secretary Michael Gove hints that tax changes may be afoot for the private rental sector.

The National Residential Landlord Association (NRLA) commissioned economics insight firm, Capital Economics, to investigate the impact of taxes on landlords.

The findings suggest that, not only have restrictions on mortgage interest tax relief contributed to 1.2 million fewer private rental sector (PRS) homes being available to tenants in the UK, but that this has also resulted in a loss of £1.5 billion to the Treasury in revenue.

These outcomes are of great concern to the government, especially given the decrease in PRS accommodation is resulting in higher rents at a time when the cost of living crisis is particularly affecting those with lower incomes, who typically comprise the tenant population.

Not only this, but the changes made to the PRS were intended to make things better for tenants, not worse.

What does the report show?

The report contrasts two date ranges, looking at the compound annual growth rate of private rented housing stock. Over the period 2010 to 2016 the growth rate was 3.7%. However, from 2017 to 2021 this growth figure was just 0.4%.

2016 was the year that mortgage interest tax relief ended, to be replaced by a fixed 20% tax credit.

However, the analysis cites eight policy changes as potentially contributory to the reduction in the growth rate of the PRS housing stock:

1. 2015 Summer Budget withdrawal of mortgage tax relief, to be effective from 6th April 2017.
2. 2015 Autumn Budget 3% stamp duty surcharge on additional properties, effective from 1st April 2016.
3. 2016 March Budget Capital Gains Tax (CGT) maintained at 18%/25% for residential property, but reduced to 10%/20% on other assets, effective from 6th April 2016.
4. 2016 Autumn statement ban on lettings agent’s fees to tenants in England, effective 1st June 2019.
5. 15th April 2019 Consultation to remove Section 21 no fault evictions, effective date to be confirmed.
6. 2021 Autumn Budget window within which CGT to be paid increased to 60 days, effective from 27th October 2021.
7. 2015-2021 Various changes to Energy Performance Certificate regulations and introduction of Minimum Energy Efficiency Standards (MEES), which are ongoing.
8. 2022 Autumn Budget CGT allowance reduced twice, from 1st April 2023 and then from 1st April 2024.

In its analysis, the report reflects on the fact that with so many policy changes occurring during this range of time, it is hard to isolate one in particular that could be responsible for the decline in rental stock.

However, it proposes that if the growth rate had remained at 3.7%, there would have been 6.8 million properties within the sector, equating to around 1.2 million more than were actually available.

Chief executive of the NRLA, Ben Beadle, commented on the findings:

“At a time when renters are struggling to find a place to live, today’s research shows that the Government has shot itself in the foot.

“The decision to restrict mortgage interest relief has not only stifled investment in the very homes tenants need, it has also come at a considerable cost to the Treasury in lost revenue.

“When you consider that the Government’s rationale for the changes has been refuted by the Institute for Fiscal Studies, it is clear that the Chancellor needs to review this misguided tax hike.”

Gove hints at change for landlord taxes

On 21st March in the House of Commons, the private rental sector became a subject for debate, during which Jeremy Corbyn highlighted the challenge of rents rising and calling on the government to bring in a rent freeze:

“The issue of the private rented sector is devastating in inner-city areas such as mine, where private rents are now going up—the worst I have heard is an 80% increase—because of the end of restrictions on them. Will the Secretary of State take some action to bring about a rent freeze in the private rented sector?”

To which Housing Secretary Michael Gove responded; disagreeing with the fact that a rent freeze is what is needed:

“I think there are legislative changes that we can make in order to help those in the private rented sector, including the abolition of section 21, but if we want to ensure that there is a pipeline of affordable private rented homes for people, there are two things that we need to do. First, we need to improve supply, particularly in London, and to do so in partnership with the Mayor of London, who has not always been as energetic as his predecessor in bringing forward new homes. The other thing we need to do is make sure there is fairness in the tax treatment of landlords and others.”

He went on to add:

“A rent freeze, while often attractive, has the effect, as we have unfortunately seen in Scotland, of reducing the supply of rented homes.”

Good news for landlords

There are three positive signals to landlords within Mr Gove’s speech, and one which Scottish landlords will be keen for their own parliament to respond to:

1. A rent freeze is not on the cards
2. Supply is recognised as being a key factor in need of change
3. That Gove feels that the tax treatment of landlords is fair

The third point begs the question whether the Housing Secretary views the current position as fair or not.

If he were to accept the findings of the NRLA report, there could be every argument for suggesting it isn’t and that tenants and landlords alike would benefit from a change.