Finance Bill

Written evidence submitted by the Residential Landlords Association (FB 18)

1.0 About the Residential Landlords Association

1.1 The Residential Landlords Association represents the interests of landlords in the private rented sector (PRS) across England and Wales. With over 20,000 members, and an additional 20,000 registered guests who engage regularly with the Association, the RLA is the leading voice of private landlords. Combined, they manage over a quarter of a million properties.

1.2 The RLA provides support and advice to members, and seeks to raise standards in the PRS through our code of conduct, training and accreditation and the provision of guidance and updates on legislation affecting the sector. Many of the RLA’s resources are available free to non-member landlords and tenants.

1.3 The Association campaigns to improve the PRS for both landlords and tenants, engaging with policymakers at all levels of Government, to support the aim of a private rented sector that is first choice, not second best.

2.0 Executive Summary

2.1 The Finance Bill will enact a number of measures that will have a detrimental impact on the supply of affordable homes to rent and will lead to an increase in rent.

2.2 A survey by the Residential Landlords Association has found that following a number of taxation changes to the way they are taxed, 84% of landlords are likely to consider increasing rents to cover their increased tax burden. 78% have said that the changes would deter them from investing in more rented properties.

2.3 The net effect of these changes will be a reduction in investment, leading to fewer properties becoming available, and an increase in the amount tenants have to pay.

2.4 To support the Government’s home ownership ambitions and to enable landlords wanting to exit the market have a more appealing route to do so, the new 20% rate of Capital Gains Tax should be applied where a landlord sells a property to a sitting tenant. Safeguards can be put in place to prevent abuse. This more directly supports the aims of the government to transfer property from the rental sector to owner occupiers.

2.5 The three percentage points stamp duty levy on the purchase of properties to rent will serve only to deter landlords from investing in the sector at a time when a greater supply is needed. This should not be applied where a landlord invests in a property which adds to the overall net supply of housing. Linked to the above measure this promotes investment and provides tenants with a new route to home ownership.

2.6 An RLA survey of almost 1,200 landlords found that of those currently paying the basic rate of income tax, over 60% said that the decision to base income tax on gross income and not profit would push them into a higher rate of tax despite their income not increasing.

2.7 The Bill should include a provision that the right to deduct mortgage interest before calculating tax should be retained even if interest is only relieved at the basic rate. This prevents landlords being pushed into higher tax bands while still increasing their tax burden.

2.8 We believe that the mortgage interest relief changes should only apply to new borrowing and not penalise those who could not have reasonably anticipated this change when they invested in the sector.

3.0 Background

3.1 Clause 72 of the Bill reduces the basic rate of capital gains tax (CGT) from 18% to 10%,

and the 28% rate to 20%, on most gains made by individuals, trustees and personal representatives. This will expressly not apply to the sale of residential property.

3.2 Clause 117 applies a three percentage points levy on stamp duty on the purchase of dwellings to rent out.

3.3 These measures should be seen alongside measures taken in the Finance Act 2015 which changed the basis of taxation for landlords with income tax charged on income and not profit. It also stipulated that relief on mortgage interest for landlords will only be allowed to be claimed at the basic rate in a change to be phased in over a four year period from 2017.

4.0 Reforming Capital Gains Tax

4.1 The RLA believes that Clause 72 of the Bill should be amended to apply the lower 20% CGT rate to landlords where they sell their property to a sitting tenant.

4.2 The Government wants more owner occupiers and more property released from buy to let to

owner occupation.

4.3 Landlords should be incentivised to sell off properties to sitting tenants so achieving both

objectives.

4.4 Given all the various changes to the tax treatment of landlords it is likely that more will want to exit the market as renting becomes financially unsustainable for them. Those that do could be encouraged to do this in a positive manner if there is an incentive in the tax system.

4.5 RLA research has found that 77% of private landlords would consider selling their property to

tenants if the tax liability was waived. This would suggest that many might be encouraged if the tax liability was reduced.

4.6 Tenants need alternative routes into the sector which do not require payment of a large sum of money in one go (alongside the taking out of a substantial loan) and minimises other burdens such as moving costs and Stamp Duty. Buying the home they already live in reduces these ancillary costs and also allows for a flexible arrangement where the purchase price is spread over a period of time.

4.7 The waiving of CGT in this circumstance is supported by the Royal Institution of Chartered Surveyors and the Association of Residential Letting Agents.

4.8 To address concerns that such a move could potentially be abused, an amendment could ensure that:

· It is targeted at existing landlords and should not in any way be seen as an incentive for investors to buy properties, and therefore undermine the Government’s overall approach to the buy to let sector.

· It includes a condition that the tenant purchasing the property has been in occupation for at least a year. This would prevent false tenancies being granted to prospective purchasers on the day before completion.

· The transaction is for a market value. This helps to ensure that the transaction is real and is not being used to reduce CGT on some other taxable transaction.

5.0 Stamp Duty Changes – Reforms Needed to Boost the Supply of Housing

5.1 Clause 117 of the Bill should be amended to ensure that the new three percentage point stamp duty levy is not applied on properties that landlords invest in which add to the overall net supply of housing.

5.2 New housing is needed across all tenures, including private rented properties.

5.3 An analysis by Savills [1] suggests that one million new homes to rent will be needed by 2021. In February the Treasury Select Committee noted [2] : "Addressing the "home ownership crisis" must not come at the expense of a shortage of homes to rent. The Chancellor should make clear what he intends to do to help those who want or need to rent, and to ensure a healthy supply of properties in the private rented sector."

5.4 The decision to impose a stamp duty levy on the purchase of properties to rent in Clause 117 will serve only to stifle investment in such properties. This will add to the existing shortage in some areas and so increase rents and reduce choice.

5.5 The Treasury Select Committee has noted [3] that "the stamp duty surcharge is likely to reduce

the supply of privately rented properties, and hence result in higher rents."

5.6 Following the 2016 Budget, the RLA surveyed landlords on their response to the combined effect of recent tax changes. It found that 84% were likely to consider increasing rents as a result of the changes to cover the increased cost. 78% felt that the changes would deter them from investing in more rented properties.

5.7 The higher rents are, the more difficult it becomes for tenants to save for a deposit so the Government is acting against its objective of increasing home ownership.

5.8 Whilst the Chancellor has argued that the Stamp Duty levy is about freeing up more properties for purchase instead of being bought for buy to let there is very little evidence to support the assertion that landlords and home owners are competing for the same properties. A recent report by the London School of Economics has noted [4] : "The (very limited) research into direct competition between investors and private owner-occupiers has found that nationwide only a minority of sales to landlords involved bids from both types of buyer."

5.9 This supports all the evidence from the RLA which is that landlords often buy types of properties

not wanted by owner occupiers either, for example because they need a large amount of investment or are too large and landlords are buying them to convert into HMOs. They also buy in areas not sought after by owner occupiers.

5.10 It seems totally counter-productive to discourage landlords from undertaking new build. 39% of

landlords have reported to the RLA that they would be more likely to invest in new build rented housing if the levy did not apply.

5.11 Simply making it more difficult and expensive for landlords to purchase does not increase the opportunities for first-time buyers and does nothing to increase the overall supply of property.

6.0 Mortgage Interest Relief

6.1 The 2015 Finance Act changed the basis of taxation for landlords with income tax charged on income and not profit.

6.2 Relief on mortgage interest for landlords will only be allowed to be claimed at the basic rate in a change to be phased in over four years from 2017.

6.3 An RLA survey of almost 1,200 landlords found that of those currently paying the basic rate of

income tax, over 60% said that the change to taxing gross income would push them into a higher rate of tax despite their income not increasing. No other business is taxed in this way.

6.4 Ministers have argued that 1 in 5 landlords will be affected by the changes to mortgage interest relief. This is despite no details having been given about how this figure was produced and how many landlords were questioned.

6.5 A challenge in the High Court to this legislative change has been mounted, asserting that it is unlawful as it gives substantial benefits to companies as against individuals.

6.6 We believe the Bill should include a provision that the right to deduct mortgage interest

before tax is calculated should be retained even if interest is only relieved at the basic rate.

6.7 We believe also that the mortgage interest relief changes should also only apply to new

borrowing.

6.8 Making these two changes would ameliorate this measure and make it less directly unfair to smaller landlords.

July 2016


[1] Savills Press Release, "No end to rising demand for rented homes", 2nd February 2016 - http://www.savills.co.uk/_news/article/72418/198859-0/2/2016/no-end-to-rising-demand-for-rented-homes.

[2] Treasury Select Committee, "Spending Review and Autumn Statement 2015", Sixth Report of Session 2015–16 (HC638), Page 33 - http://www.publications.parliament.uk/pa/cm201516/cmselect/cmtreasy/638/638.pdf.

[3] Treasury Select Committee, "Spending Review and Autumn Statement 2015", Sixth Report of Session 2015–16 (HC638), Page 33 - http://www.publications.parliament.uk/pa/cm201516/cmselect/cmtreasy/638/638.pdf.

[4] London School of Economics, "Taking Stock - Understanding the effects of recent policy measures on the private rented sector and Buy-to-Let", 11th May 2016, Page 5 - http://lselondonhousing.org/wp-content/uploads/2016/05/GRP12392-LSE-report-design-WEB.pdf.

 

Prepared 7th July 2016