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Re-introducing mortgage interest tax relief for landlords would both ease the housing crisis and drive income to the Treasury, according to data modelling based on the Bank of England Base Rate peaking at 5%.
Capital Economics, working on behalf of the National Residential Landlords Association (NRLA) has recently produced a study, which has shed light on the potential benefits of re-introducing buy to let mortgage interest tax relief to landlords.
The study indicates that such measures could simultaneously stimulate an increase in housing supply and bolster the Treasury's funds. The research highlights the potential positive impact of this policy change on the rental market and the broader economy.
According to the study, implementing tax relief for landlords would serve as a powerful incentive to boost the supply of rental properties. By reducing the financial burden on landlords, this initiative could encourage them to invest in additional rental housing units, thereby expanding the overall availability of affordable homes for tenants.
The findings further suggest that an increase in rental property supply would lead to greater competition among landlords. This intensified competition would potentially drive down rental prices, providing relief to tenants facing housing affordability challenges.
Lower rental costs would not only improve the financial well-being of tenants but also free up additional funds for discretionary spending, which can contribute to economic growth. Furthermore, the research emphasizes the positive impact of landlord tax relief on the Treasury's revenue.
How does this translate into numbers?
The study assumes a Bank of England Base Rate peak of 5%, and that is would remain at over 2.5% until the year’s end in 2027. Under this dynamic, 13% of rental properties are anticipated to exit from the market leading to a loss of £1 billion of income per year to His Majesty’s Revenue and Customs.
However, if tax relief on mortgage interest were reinstated, the study predicts that 110,000 fewer rental properties would exit the market and income from income tax and corporation tax to the Treasury would be £400 million.
Short-term loss for long-term gain
While tax relief for landlords would result in a decrease in tax revenue in the short term, the study suggests that the subsequent expansion of the rental market would lead to increased economic activity and job creation. As a result, tax revenues from related sectors, such as construction, real estate services, and associated businesses, would rise, offsetting the initial decrease.
The study concludes by recommending that policymakers consider implementing landlord mortgage interest tax relief as a potential strategy, to address the challenges faced by both tenants and the housing market. By providing incentives for landlords to increase their property portfolios, the supply of rental housing could be expanded, easing affordability concerns for tenants, while simultaneously benefiting the economy through increased tax revenues and job opportunities.
It is important to note that these findings are based on independent research and should be carefully considered by policymakers before implementing any potential policy changes. The impact of landlord tax relief would likely vary depending on specific market conditions and regulatory frameworks.
Will there be a change?
This is not the first time that the NRLA has demonstrated the impact of the withdrawal of mortgage interest tax relief, nor the first time they have presented data to support their view that it should be brought back.
However, politically it seems unlikely the government would make this change, given how much has been of the view that landlords are alleged to be responsible for the lack of homes for first time buyers.
Furthermore, as recently as January this year, the government rejected a petition proposing mortgage interest tax relief being reinstated.