Memorandum by Residential Landlords Association
(RLA) (SRH 33)
EXECUTIVE SUMMARY
OF EVIDENCE
1. Historically, the PRS has expanded since
the passing of the Housing Act 1988, greatly assisted by financial
institutions willing to provide funding (eg buy to let finance).
2. The current statutory regime provides
stability but this would be threatened by excessive and unnecessary
regulation.
3. The PRS provides accommodation in a flexible
way, coupled with easy access for tenants.
4. A thriving PRS is vital to the wider
economy as well as the housing market.
5. The PRS needs a choice of different types
of accommodation as well as a good supply of accommodation, to
flourish. Scarcity breeds problems in the PRS.
6. The PRS is under pressure due to increasing
demand for residential accommodation generally.
7. The PRS must continue to be seen as an
attractive and viable sector in which to invest with adequate
returns.
8. The financial institutions play a vital
part in providing the necessary funding.
9. It is important that investment in the
PRS is encouraged in order to provide an increasing supply of
different types of accommodation to meet different needs.
10. Taxation treatment should be the same
as for traders.
11. In particular, Capital Gains Tax Rollover
Relief should be available for landlords of PRS accommodation
(as is already the case with holiday lets).
12. There should be zero rating for conversions/major
refurbishment of residential accommodation (instead of the current
complex rules under which a 5% rate applies in certain cases).
There would then be neutral VAT treatment as between new build
and conversions.
13. The RLA is concerned at the increasing
regulatory burden on the sector.
14. The implementation of HMO licensing
has been botched. Some local authorities are hostile to the PRS
and are seeking to micro-manage it.
15. There is a perception that, as so often
happens, regulatory attention will be focused on the good landlords
whereas those who do not apply to be licensed would be left to
carry on unaffected.
16. Licensing will result in increased rents
and/or loss of accommodation. This is to meet the cost of licensing
fees and the works required, which are often unnecessary anyway.
17. There is real evidence that accommodation
is being lost already as a result of the imposition of licensing,
especially cheaper accommodation.
18. Professional/responsible landlords will
disinvest from the HMO sector.
19. There has been a failure by Central
Government to provide the necessary guidance about the purposes
of HMO licensing to create consistency, coupled with the lack
of a Code of Practice, to set the standards required. There is
a failure of co-ordination.
20. An extension of licensing through additional
HMO licensing, or selective licensing, will have adverse consequences.
Designating areas of low demand and/or anti-social behaviour where
there are problems, will be the kiss of death. No one will want
to live there, let alone invest in such an area.
21. The RLA considers that attempts at further
regulation will cause even more problems for the PRS.
22. There needs to be a housing benefit
scheme which provides the necessary financial support to the poorer
sections of the community.
23. The Pathfinder rollout should mirror
the trials which have already taken place; not be a different
scheme. Paying tenants housing benefit rather than direct payments
to landlords, means that many landlords now refuse to take housing
benefit claimants as tenants.
24. Administration of housing benefit is
still too slow/inefficient in the case of many local authorities.
25. Housing benefits should be paid in advance
to mirror the way in which the private, non-claimant tenant pays.
26. Housing benefits must underwrite market
rents, with a minimum amount of benefit being necessary to ensure
that accommodation is provided which is kept in a decent state
of repair.
27. The tenancy deposit scheme is a threat
to the PRS and there is a serious danger that it will be introduced
with inadequate preparation.
28. There should be a single regulatory
body for fire safety in residential accommodation. Currently,
both the fire-and-rescue authority and local authority can be
involved. In any event, shared houses should be treated as being
outside the scope of the fire safety order and are regulated by
the 2004 Act.
29. The single room rent for young, single
people should be abolished.
30. There needs to be a change of emphasis
to promote a PRS with landlords who are professional and responsible.
They need to be adequately trained.
31. The traditional way of regulation backed
with criminal sanctions is not the way forward, although it needs
to be reserved for the small number of bad landlords.
32. Instead, improved standards of management
need to be encouraged. Accreditation schemes are an example of
the way in which this can be achieved, together with a positive
relationship between Central Government, local authorities, the
PRS and tenants.
33. Tenants need to be regarded as consumers.
It is they who ultimately suffer from excessive regulation.
What the RLA recommends
(a) A reduction in the regulatory burden
on the PRS, as this is now increasing.
(b) A new approach to improving management
standards within the PRS in place of the current trend towards
criminalisation.
(c) Setting standards through a Code of
Practice, instead of an ever increasing number of statutes, regulations
etc. This would set out in simple terms what was expected of landlords/managers
in the PRS.
(d) Effective, central guidance on the implementation
of licensing to co-ordinate local authority actions.
(e) A risk-based approach towards housing
conditions as envisaged by the 2004 Act rather than reliance on
prescriptive standards.
(f) A level playing field for taxation so
that landlords were treated as traders including CGT rollover
relief.
(g) Conversions/refurbishments should be
VAT zero rated.
(h) Holding back on any further licensing.
(i) Proper piloting of the introduction
of tenancy deposits.
(j) A single enforcement authority relating
to fire safety.
(k) Amending housing benefit procedures,
including payment to landlords, advance payments, the abolition
of the single room rent for young people and, as a minimum, underwriting
the market rent for the locality.
1. The Residential Landlords Association
The Residential Landlords Association Ltd ("RLA")
is one of the two National Landlords Associations with membership
throughout England. The RLA represents private landlords in the
private rented sector ("PRS"). Members have well in
excess of 100,000 units of accommodation under their control.
Although being a landlord is a requirement for full membership
of the Association, many members also manage residential accommodation
for others. Associate membership is open to others involved in
the private rented sector, including local authorities.
Some members have significant portfolios but
the RLA also has members with smaller portfolios. Members range
from those who are involved on a full time basis to those who
own properties on a part time basis, including those who have
acquired properties under "buy to let" schemes. A considerable
number of members are also builders and developers.
2. Scope of the evidence
This evidence is directed towards the role and
effectiveness of the private rented sector in meeting housing
needs and the effectiveness of housing benefit as a means of providing
access to rented housing to those in need.
3. The History of the Private Rented Sector
Prior to the passing of the Housing Act 1988,
the PRS was withering. This resulted from the rent controls which
had been imposed by the Rent Act 1965 and the near impossibility
of obtaining vacant possession due to statutory security of tenure.
The PRS was contracting. There was no incentive to invest in repairs
or improvements. The fiscal regime was also skewed against the
PRS since, at that time, mortgage interest relief was available
to owner/occupants.
The introduction of assured shorthold tenancies,
as the result of the passing of the Housing Act 1988, meant that
landlords were able to let their properties at a market rent,
which was fundamental to the revival of the PRS. Its importance
cannot be over estimated. As a consequence, the private rented
sector has expanded. This process has been assisted initially
by the introduction of the Business Expansion Scheme but, more
significantly, by the willingness of financial institutions to
provide funding through "buy to let". The popularity
of this investment has been enhanced because of a perception that
pension schemes do not currently provide sufficient return in
the longer term.
The current statutory regime, which is endorsed
by all political parties, means that the sector has stability.
which has encouraged investment. This, in turn, has provided an
increased supply of properties to meet a demand for rented properties.
Recent developments have indicated that there could be a return
to excessive regulations which will damage the sector.
4. The place of the Private Rented Sector
in the Housing Market
The main advantages of the PRS are that it provides
a flexible source of accommodation, coupled with easy access,
compared with other forms of tenure. It also provides a wide variety
of different types of accommodation to meet differing needs but,
again, this is under threat due to burdensome regulations. Ease
of access results because there are not the formalities and expenses
associated with house purchase or the waiting lists, assessment
of needs and priorities, associated with social housing providers.
Entry into the PRS is simple in that, provided a property is vacant,
a tenant can be signed-up, pay the first payment of rent and any
associated deposit and move in. Allied with this is the fact that
the PRS offers short-term accommodation to those who do not wish
to make any long-term commitment. Once you are in social housing
it can be very difficult to move because you cannot readily find
an alternative property. If you purchase and wish to move then
usually you have to resell.
A thriving PRS is vital to the wellbeing of
both the economy and the housing market. It is fundamental to
the health of the economy that, in a modern technological society,
there is mobility of labour and population. People need to move
to find work or to study. The PRS facilitates this. It was very
difficult in the old days for someone moving to a new town to
find rented accommodation, but this is no longer the case. Unlike
20 years ago when there were hardly any, there is now a proliferation
of "To Let" boards indicating the variety of choice
available to those who want to rent. Choice and a good supply
of accommodation are vital ingredients for the PRS to flourish.
Those who want to rent in the PRS include:
— People on lower wages who are unable
to access social housing.
— Those who want to rent by choice.
— People who move to obtain a new job.
— Immigrants and asylum seekers.
— Those who are separated from a partner
or who are divorced.
— The elderly, perhaps because they
want to realise capital from their owner/occupied property.
— Young people who cannot afford to
buy because of rising prices.
— Those who are in between owning property.
— Graduates who have moved to a new
area for work and need to build up savings.
It is imperative, in the view of the RLA, that
there be a wide variety of accommodation of differing types which
is available for rent as well as the requisite quantity of accommodation.
It is scarcity which breeds the problems in PRS.
Increasing population in the country, due at
least in part to immigration, and smaller households/an increase
in single-person households, mean that there is increasing demand
for residential accommodation. This is manifested by increasing
house prices. The expansion of the EU has meant that many new
migrants arrive here to work and this is increasing the pressure
on the housing market generally. They are the very people who
want to rent. Frequently, they come for relatively short periods
to earn money to send back home. The expansion of further/higher
education has meant that there have been increasing numbers of
students who have looked to rented accommodation whilst they study
away from home. Young, single people often choose to rent and
an increasing factor is the growing number of young people who
simply cannot afford to get on to the housing ladder. It is vital
that there is a buoyant private rented sector to meet the needs
of all of these people who want to rent or often have no choice
but to rent.
There is also a lack of sufficient provision
of new social housing. Experience in the south east shows that
essential workers simply cannot afford to purchase and need to
be accommodated in the PRS.
The PRS has to cater, therefore, for what some
call the "intermediate" sector. This is the segment
of the market between those who cannot afford to purchase their
own homes and those who rent but who need support from the State
financially, usually through Housing Benefit.
It is imperative to recognise that the PRS will
only flourish if the sector is seen as an attractive and viable
investment. There must be an adequate return to service loan repayments,
to repair and maintain property and to carry out any requisite
improvements, as well as to show a sufficient profit. Although,
of late, house prices have risen, historically there have been
significant ups and downs, so this is a far from risk free investment.
The return has to justify the investment. It is imperative that
there is stability to maintain investor and lender confidence.
One cannot divorce the PRS from those financial institutions,
be they banks or building societies, who are prepared to provide
the necessary funding to purchase properties. Since the 1990s,
fortunately, financial institutions have taken a wholly different
view of the PRS than they did in the past and they now recognise
that it is a worthwhile sector of the housing market in which
they can invest by providing funds to landlords.
In the view of the RLA it is extremely important
that the PRS is encouraged to provide different types of accommodation
to meet differing needs. The accommodation can range from one
extreme: from very large houses down to bedsits, places in shared
houses and hostel accommodation. Indeed, in some respects, the
PRS is the main provider of certain types of accommodation such
as shared houses for groups of young people and students and bedsit
accommodation for single people. Over-regulation can prevent these
objectives being realised.
5. Taxation
Landlords investing in the PRS are treated for
income tax purposes as investors, not traders. Whilst the amendments
made to Schedule A have alleviated many of the problems surrounding
the treatment of expenses for taxation purposes, this tax treatment
has serious implications for the PRS. Landlords are treated in
a disadvantageous way in relation to any tax losses, in that these
cannot be set off against other earnings, only set against profits
from their letting business. The treatment of rental income as
investment income (as opposed to trading income), however, has
serious consequences in relation to capital gains tax ("CGT").
In particular, landlords cannot roll over gains if they re-invest.
They, therefore, lose the ability to defer capital gains unlike
other traders. This is a wholly anomalous situation in that those
letting-out furnished accommodation for holiday purposes are effectively
treated as traders and do qualify for deferral of CGT gains through
roll-over relief. It seems something of a nonsense that someone
who provides permanent accommodation is disadvantaged, as against
someone who provides temporary accommodation for holiday purposes.
The inability to claim CGT roll-over relief is seriously detrimental
to the PRS. It means that portfolios are frozen. Experience shows
needed major repairs/improvements are usually carried out when
a property changes hands. Landlords are forced to hold on to properties
because of CGT liabilities, but if they had the availability of
CGT roll-over they would then sell. This enables portfolios to
be diversified and developed as well as significantly increasing
the likelihood of works/improvements being carried out. Furthermore,
there would be a gain to the Exchequer in that Stamp Duty Land
Tax ("SDLT") would be paid when the property changed
hands. Thus, the lack of CGT roll-over relief is counter productive.
It means properties are not improved and that revenue is lost
to the Exchequer by way of SDLT.
The other concern, in relation to taxation,
is the lack of zero-rated treatment for VAT purposes when properties
are converted or undergo major works. Many properties in the PRS
lend themselves to conversion eg dividing up a large house into
a number of flats. It is, again, wholly anomalous that in such
a situation zero-rated VAT treatment is not available; whereas
it would be available for new build. This also skews the market.
Whilst there are some circumstances in which a reduced rate of
5% has been obtainable in relation to certain residential conversions,
the rules are complex and they still mean that some VAT has to
be paid. Zero-rating of residential conversions/major refurbishments
would enhance the provision of accommodation as well as making
additional accommodation available.
6. Regulatory Burden
The RLA is concerned at the increasing regulatory
burden affecting the PRS. The Housing Act 2004 has been a major
milestone for the PRS. The implementation of HMO licensing has
been botched. Local authorities have been cast adrift. Unfortunately,
there is an inherent hostility on the part of environmental health
officers to the PRS. Despite being told, quite rightly, by Central
Government that 97% of the landlords were responsible, local authorities
are embarking on a prosecution-orientated approach and wanting
to regulate/control the minutia of how licence-holders operate.
Anecdotally, the take-up of licensing has only been 25% of the
expected number of applicants. The perception of the professional/responsible
landlords who have applied is that they are going to be treated
as potential villains by local authorities. They are anticipating
that the efforts of environmental health officers will be concentrated
on them, rather than what they should be doing: namely, to seek
out poor quality operators. Unfortunately, as always, the bad
landlords ignore the system with apparent impunity and simply
carry on enjoying a business advantage over those who play by
the rules.
The RLA has consistently argued that licensing
will result in increased rent payable by tenants to fund the cost
of licence fees and the works required to comply with licence
conditions, which are often excessive and unnecessary. Accommodation
will be lost as a result. Unwarranted imposition of space standards,
or the requirement of excessive amenities, will mean that much-
needed accommodation is lost. Those needing cheaper accommodation
will be priced out of the market. Landlords will convert bedsit
type accommodation to self-contained accommodation, either increasing
the cost of that accommodation or leaving to reduced bed spaces
overall. Alternatively, properties will be converted back to single
units, where possible.
A survey of letting Agents into the effects
of HMO licensing, carried out by Residential Landlord and Fly
2 Let, has shown that 63% have seen landlords reducing the number
of tenants in their properties so as to avoid crossing the licensing
threshold. A third of agents have reported a rise in the number
of HMO type properties being sold off. This will have major consequences
because it provides much-needed accommodation at the cheaper end
of the PRS.
The RLA's concern is that the professional/responsible
landlord will have had enough of this and will disinvest, leaving
the way open to poorer quality landlords. They have the option
of re-investing in commercial property.
The main failure is that there has been a lack
of central guidance as to what are the purposes of HMO licensing,
coupled with the lack of a Code of Practice to set the standards
required. All the old latent hostilities on the part of environmental
health officers towards the PRS have been re-ignited. There is
a grave danger that an opportunity will be lost to enhance the
professionalism/responsibility of landlords in the PRS.
Clear evidence is now emerging that, contrary
to the intentions of Part 1 of the 2004 Act, Local Authorities
are seeking to rely on their own prescriptive standards rather
than adopting the risk-based approach that the Act now requires
in respect of housing conditions. HMO licences are improperly
being used in this way to deal with the conditions of properties,
when licensing was meant to focus on the fitness of those involved
and management standards
More information regarding the RLA's concerns
relating to HMO licensing and the Housing Act are attached in
the RLA Briefing Paper No. 1, which has been circulated widely.
Meanwhile, we are facing a situation where local
authorities want to extend by introducing additional or selective
licensing, even though they clearly cannot cope with mandatory
HMO licensing. In the view of the RLA selective licensing will
be the kiss of death to an area where it is applied. It is an
official statement that the area in question is an area of low
demand and/or anti-social behaviour/problems are prevalent. Who
would want to live, let along invest, in such an area? Responsible
landlords and their supporting financial institutions will avoid
such areas. In the current state of the housing market it is scarcely
the time to impose measures which will, undoubtedly, lead to a
flight of investors and it will be the responsible ones who leave
first. In the opinion of the RLA any attempts at further regulation
will cause even more problems for the PRS and there is an urgent
need to re-think the way HMO licensing and other types of licensing
are being introduced.
7. Housing Benefit
The RLA believes that it is vital for there
to be a housing benefit scheme which provides the necessary financial
support to the poor sections of the community to enable them to
rent their accommodation. Often they have no choice anyway because
social housing is not available to them. The proposed manner in
which the Pathfinder Scheme will be rolled out to the rest of
the country is of concern. It does not appear that the Government
now envisage rolling out the same scheme as has been trialled
through the pilot Pathfinder Schemes.
Importantly, the way in which housing benefits
are paid to tenants, rather than direct to landlords, has meant
that many landlords have ceased to take tenants who receive housing
benefits. Unfortunately, it is still all too common to find local
authorities who are dilatory and/or inefficient in relation to
the administration of housing benefits.
It is vital that housing benefits underwrite
market rents. Across the board the setting of rents by reference
to a large area defeats this objective.
Housing benefits should also be paid in advance,
to match the requirements imposed on private tenants who are not
reliant on benefit.
The existence of the single room rent which
means that young people are unable to find accommodation or are
compelled to take substandard accommodation. If a landlord is
providing accommodation at less than the going rate then he can
hardly be expected to keep it in repair, let alone improve it.
Young, vulnerable people suffer as a consequence.
There is a danger of a spiral of decline, in
that the market rent can be driven down, particularly if housing
benefits are assessed at too low a level. It is therefore important
that housing benefits do recognise that that landlord does need
a minimum return in order to be expected to provide the accommodation
at all, as well as to keep it in good repair.
8. Tenancy Deposits
The introduction of the Tenancy Deposit Scheme
is seen as a threat to the PRS. Whilst there may have been some
research which suggests that deposits are unreasonably withheld,
there has been no in-depth investigation of this issue. It is
very easy for a tenant to say, when questioned, that his deposit
is being withheld without justification, but if one were to investigate
properly it could well turn out that the landlord in question
was perfectly justified in withholding the deposit. As a result,
the PRS now faces a new, large, bureaucratic scheme which is being
introduced in a hurry, apparently with insufficient preparation.
This has all the hallmarks of yet another scheme which will go
wrong. The people who will suffer at the end of the day will be
the tenants who will not be able to get their deposits back to
pay a deposit on another tenancy. Contracts to run the scheme
will not be let until approaching Christmas but it is expected
that the scheme will be up-and-running at the beginning of April.
The scheme is being introduced without any kind of pilot trial.
It will have to process a huge number of small transactions and
has all the signs of a recipe of a disaster.
9. Fire Safety
The way in which fire safety in relation to
residential accommodation has been handled is a classic example
of complex regulations being introduced and considerable uncertainty
about its implications. The introduction of the Fire Safety Order
(the Regulatory Reform Order), in parallel with the 2004 Housing
Act, has resulted in a lack of co-ordination regarding the fire
safety aspects of residential and non-residential accommodation.
In many cases there are now two regulators: the Fire-and-Rescue
Authority and the Local Authority. There is uncertainty as to
how the legislation affects one major segment of PRS—the
shared house. The RLA advocates:
— One regulator only for all residential
accommodation.
— Shared houses should be outside the
scope of the Fire Safety Order, as they are already well covered
by the 2004 Housing Act provisions.
10. The need for professionalism
The RLA advocates a PRS where landlords are
professional and responsible. The RLA encourages landlords to
undertake training. Over the years, the way in which Central and
Local Government has approached the PRS is to enact regulatory
provisions, backed up by criminal sanctions. This approach has
been perpetuated by the Housing Act 2004 in many respects.
Unfortunately, the Government has failed to
get across the message that the purpose of the 2004 Act is to
adopt a risk-based approach and to improve standards of management
and guidance. Insufficient resources have been provided to implement
the Act, as well as a lack of explanatory material/sufficient
training for those involved. Unfortunately, as with so much in
life, it is a matter of perception. If landlords are potentially
criminalised and tarred with the same brush as the few rogues
(which one finds in every walk of life), responsible investors
will avoid the PRS. Likewise, they will do so if the sector is
over-regulated and those already in the PRS will leave it.
What is needed is a whole new approach to the
way in which the PRS is regulated. A co-operative approach between
landlords, Central Government, Local Government and tenants is
required. Criminal sanctions need to be reserved for the few bad
landlords. The fact that this approach can work has been shown
by the way in which accreditation schemes have flourished in the
last 5 years or so. On the other hand, excessive regulation is
ultimately passed on to the tenant as the consumer, either by
increased rents or reduction in the amount of accommodation (or
both).
Tenants need to be treated as consumers and
the best way of achieving this is by promoting a well-regarded,
professional PRS, coupled with a good supply of suitable accommodation.
Only if the economics are right and the burden of regulation is
reduced can this result.
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