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Blog Series: Dear Prime Minister to be… [2: Tax]

Article Posted - 21st November 2019


Dear Prime Minister to be… 

As the country gears up for the General Election, we are calling on the newly elected Prime Minister to take a strategic approach to the private rented sector, and address issues which affect landlords' ability to plan and run effective businesses. 

Uncertainty is the enemy of investment and the inability to plan for the future has led to landlord confidence reaching an all-time low. The next government must recognise the value the majority of landlords offer – and ensure criminals in the sector are removed. 

They need to take informed policy approaches to the key issues of possession, taxation and energy efficiency, to harness the value of the private rented sector effectively and avoid unintended consequences in making renting harder to access for tenants. 

Tax reform 

Landlords have faced increasing tax burdens over recent years, with the removal of mortgage interest rate relief on income tax, the introduction of the 3 percent surcharge on stamp duty, and the reduction of the letting relief on capital gains tax. Research by the NLA earlier this year estimated that the total income tax contribution by private landlords exceeds £3.8 billion annually – more than double Tesco's entire 2018 tax bill, and 62 times Amazon's UK corporation tax payments. 

The abolition of mortgage interest relief announced in 2015 (Section 24) is estimated to add a further £2 billion to the income tax recouped from landlords. While the tax receipts may be attractive, increasing burden is leading to many landlords to reconsider the future for their businesses. 

Section 24 changes 

From 2020/21, the full impact of changes to income tax liability for landlords will come into effect.  

Landlords have responded to the change by reducing the size of their portfolios, or exiting the market altogether (see graph below, from the NLA's quarterly survey).  

As interest rates rise, so will the risk that the cost of finance will exceed gross rental income for some landlords. The withdrawal of interest rate relief will only exacerbate this, with rises in interest rates leading to an increase in costs 20 per cent larger than it would have been, had the relief been left in place. This will reduce landlords' ability to weather interest rate hikes. For example, a £200,000 property leveraged at 70 per cent and with a gross yield of 4.8 per cent will become loss-making at an interest rate of 5.2 per cent. Previously, this threshold would not have been reached until interest rates reached around seven per cent.3 

We have been in a period of historically low interest rates since the 2008 Financial Crisis. However, the prospect of an orderly Brexit also raises that of interest rate rises – meaning the impact of Section 24 will be even more keenly felt. 

Chart above shows percentage of landlords who plan to either increase or reduce the size of their portfolio in the next 12 months. Source: NLA/BDRC quarterly survey of landlords 

Capital Gains Tax 

Introducing a CGT cut or taper would help facilitate the disposal of poorly-performing property and diversify people's financial investment portfolios. Our member survey showed 35 per cent of landlords had ‘delayed' selling property because of the implications of CGT, and 29 per cent added that they feel unable to retire because of the CGT they will have to pay.4 The NLA believes that this situation benefits nobody. Property is retained by landlords who would rather release the equity they have built up, and the wider economy suffers because this money cannot be spent.  

A package of Capital Gains Tax reduction measures could be utilised to encourage the sale of poorly performing investment properties; properties where the proceeds will be entirely reinvested into the lettings business; properties invested in, and utilised, for more than 10 years; and suitable properties that are sold to existing tenants. 

Recommendations to the Treasury 

Develop a tax policy which encourages landlords to invest in the market long-term, whilst also facilitating the sale of properties where appropriate. 


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