Article Posted -
20 Nov 2015

George Osborne’s revelation, in the Summer Budget (2015) that landlords would no-longer be able to claim tax relief against their finance costs at their marginal rate of Income Tax took the market by surprise.

The NLA has estimated that in excess of 341,000 landlords will be directly impacted by the change. With many more unaware of the effect that the Chancellor’s policy will have on their future business opportunities.

We believe that a significant volume of landlords will be forced to sell property, 26 per cent of landlords surveyed recently stated they would have to sell some properties and 5 per cent are already planning to exit the sector completely.

This is likely to remove upwards of 615,000 units of rented accommodation from the private rented sector – as a direct consequence of Mr Osborne’s decision – at a time when the Government is committed to increasing supply to meet demand.

Perhaps  more concerning for those relying on the PRS for their homes is the impact the change will have on rents.

Around 58 per cent of landlords planning to stay in the market, and who are effected by the change, have decided that they will need to increase rents to cover the cost and a further 14 per cent refuse to rule it out depending on their circumstances when it comes into force.

Taking each region in turn, the impact is likely to be most pronounced in London, where average rents are already in the region of £1,134 per calendar month and will need to rise almost 10 per cent to cover the cost of the tax change.

The North West of England and Wales are likely to be least effected, although will still witness rises of 6.03 and 5.39 per cent respectively.

 

Click each region below to see the impact the changes are likely to have on average private rents:

 

This is even more striking when you consider the current rate of increase in private rents – according to the Office for National Statistics – and the degree to which rent inflation will accelerate given the Treasury’s changes to landlord taxation.

 

TYPICAL HOUSEHOLD RENT

ONS PRIVATE RENT INFLATION

AVG. PROPERTIES

AVG LTV

PCM REQUIRED INCREASE (£)

RENT INCREASE (%)

East Midlands

£530.76

2.1%

8

54%

£40.58

7.65%

East of England

£612.39

2.7%

12

43%

£49.94

8.15%

London

£1,133.60

4.1%

7

41%

£112.75

9.95%

North East

£453.71

0.5%

12

51%

£27.93

6.16%

North West

£537.62

0.7%

12

51%

£32.42

6.03%

Scotland

£510.08

1.6%

10

52%

£48.45

9.50%

South East

£777.06

2.7%

9

42%

£59.31

7.63%

South West

£682.11

1.8%

8

47%

£50.03

7.33%

Wales

£550.47

0.5%

9

45%

£29.68

5.39%

West Midlands

£588.25

1.9%

9

55%

£42.79

7.27%

Yorkshire & the Humber

£524.63

0.9%

13

50%

£34.23

6.52%

 

 

Mr Osborne must take action to mitigate the impact of these policies. Landlords cannot absorb the costs which will be generated by the change and rents will inevitably rise at a rate faster than has been witnessed for decades. 

The effects will be felt throughout the economy and will be disastrous. 

Comments

Submitted by 124219 on 25 December 2015 - 8:12pm

This policy will worsen the housing shortage.

Large HMOs will become uneconomic.

Selling them as is will be uneconomical due to high SDLT.

They may be sold as s singe dwelling (say 8 housing units to 1) but this is unlikely.

The only reasonable approach is to convert to flats which first time buyers might afford (say 8 housing units to 3)

Submitted by 57102 on 23 December 2015 - 2:02pm

This new policy strikes me as cheap PR "Let's hit the hated landlords".. something you would have expected from the other side of the political spectrum.. not the conservatives.

It is short-sighted and dare I say stupid: We landlords are business people, pragmatic in our business. As much as all of us members of the NLA are operating honestly and aiming to give a good service to our tenants, we are also in this business to derive an income. In my case this is the only income I have. Most of us will not accept to see our after-tax income drop by 20% or more without reacting. The only way we can react to mitigate this unfair and not properly thought through measure is to raise the rents (really easy to do when you operate in London). I am sure that most Landlords will do this. Ask Mr Osborne and his ministers to take a 20% pay cut and they may start to understand how some of us feel...Even better, lets start with the MPs..

If Mr Osborne and his colleagues want more young people to access home ownership and think that by hitting Landlords that way they will release more housing stock into the market hence facilitating access to home ownership, he is mistaken. That policy will simply raise the rents higher, indirectly making it even more difficult for the young people who are currently "generation rent" to save for a deposit.. as most of their income will go into the rents.. If Mr Osborne wants to make it easier for these young people to buy, this is very laudable, but the only thing he needs to do is to build more houses for them, hence supplying the market with new stock... Oops, that costs money.. too difficult.. lets drop that one, shall we?

To conclude my rant, I think this policy can be defined as "own goal" for the governement or "shooting oneself in the foot". Yes the treasury will raise more money from it.. but ultimately the people paying for this will be the tenants in terms of higher rents..

Submitted by 81518 on 11 December 2015 - 10:58am

RE: Peter Charon on 7 December 2015 - 1:57pm

I absolutely agree. I have already started thinking about such letter (of course with the local MP details) and very much support the idea of NLA helping with an adaptable template.

The way the Government acted is really perverse: Firstly allowing to release pensions capital, knowing that lots of would-be pensioners will invest in the property. Then the Government will take everything back in the tax.
Clever, isn't it!?

Of course the richest (like Osbourne, Cameron, Blair and the like) will hugely benefit. The ordinary people who want to provide for themselves for the old age will be punished. Evidently it is better spend, spend, spend and ask the state to provide for you when you are old and fragile!

NB: I am still corresponding with my MP, who in turn coressponds with a Mr Fawkes from the Government. His replies say nothing, lots of usual governmental tosh.

We will only do something if we act together.

Submitted by 79849 on 7 December 2015 - 1:57pm

I agree with several posters. Of course this is about tax - he has to raise it from somewhere having prevented himself from any raises in Income, NI or VAT. So LL's are being clobbered. Absolute waste of time and energy lobbying MP's on this one. Its populist, for now! As someone who was involved in Local Gov as well as being a Private Sector LL whenever we needed to raise any costs, we always used the same trick. The correspondence would go out, asking for more money, but putting the blame fairly and squarely where it belongs. On the Government. That's why I think the NLA should draft a template - which we can all use - when, regrettably, we have to explain why we are all putting rents up, way beyond inflation - say 8 - 10%. That's to cover the loss of the 10% wear and tear allowance, the withdrawal of interest relief and the latest 3% additional stamp duty. But that letter should also include the name and contact email of the local MP. Sorry Philip I don't agree with you - because if only a few of us act then of course it won't make a difference and those with higher rents will lose out if other similar accommodation is available around the corner at a lower rent - but if we all act in unison - then that is a different matter. The chart above suggests the NLA's 60000 members have an average portfolio of 9+ properties each. That's 540000+. Let's say an average of 2.5 tenants - some will be 1 bed flats some large HMO's so its just a guess - but that's still 1.35m+ tenants. All getting a letter saying rents are going up, but these are the reasons why, so its the Gov's fault not ours. If lots of MP's get lots of emails from our 1.35m + respective tenants, that's a different sort of lobbying. Plus, if we all put our rents up significantly, before too long they will all filter through to local reference rents, and hence Mr. Osborne will see his Housing Benefit bill go the wrong way. Local Authorities will undoubtedly see a surge of people being evicted for non-payment of rent, and their temporary accommodation bills (b & b) will soar. This is not a one-way street for the Chancellor if we all act together! The NLA should lead the way, avoiding the obvious cartel arguments. The fundamental problem is that we all know we are running businesses, but everyone else thinks it is just a sideline. Rent control is always a risk but it is very interventionist and risks alienating an awful lot of people who would more likely than not vote Conservative. Peter

Submitted by 40595 on 5 December 2015 - 10:20am

Is the NLA challenging the Government about this change in taxation on behalf of its members?How can it be fair or just that essentially 'rental income', ie income derived from a legitimate business is NOT treated in the same light as ALL other forms of income as regards to tax? As regards to consequential rent increases as predicted in the above article, will this not simply give a mandate to the Government to introduce rent controls?I think unless we, collectively persuade Mr Osborne to drop this tax change, the 'buy to let' world will be a fast diminishing sector...

Submitted by 7434 on 5 December 2015 - 10:19am

The governor of the Bank of England, Mark Carney, has mentioned the buy to let market several times in his statements in the last 12 months. It is his opinion that the buy to let market is distorting the housing market and pushing up house prices in an unsustainable bubble. I believe George Osbourne is responding to pressure from the Bank as Mr Carney believes it is a threat to the overall economy. Unfortunately, many landlords, myself included, have invested in the sector to provide pension income in retirement. I believe the tax changes announced during the summer penalise people like me in particular. I am not rich enough to own the houses outright and have mortgages on all of my properties. I also become a landlord many years ago when BTL mortgages were very new and generally not available to limited companies (who are also exempted from the tax). The policy therefore penalises a particular group of non professional landlord who have prudently invested to provide a pension for themselves and their families. Large corporate landlords and very rich landlords are exempted from the tax. This is a poorly conceived and executed policy which will have unforeseen effects on the housing market. The inability to offset legitimate business expenses against income is punitive and unfair. The most recent stamp duty policy makes more sense, in so far as it will dampen down the BTL market and is more likely to achieve Mr Carneys goal. If costs for landlords increase, it is inevitable that they will try to offset this by increasing rents. Others have commented that we can only charge what the tenants will pay, but if rents increase across the board, they will have little choice, as people still need somewhere to live. Eventually, the market will stabilise with higher rents. Thus the policy will also penalise the less fortunate in society ( as this will extend to tenants in receipt of housing benefit) and those who do not have the means to buy themselves. Is the chancellor going to take up the Labour policy and introduce rent control next as the final nail in the coffin?
Neil from Plymouth

Submitted by 9947 on 4 December 2015 - 9:47pm

There is very little chance of Mr Osborne backtracking on this one,landlords will have to adapt accordingly.Accountants that I have contacted have no quick fix schemes either,we are all going to have to make some big decisions.The days of small deposits and large mortgages for BTL is over,this was always a dangerous tactic anyway in my view.Quality not quantity is the way forward.As we are losing the default 10% wear and tear allowance it is my I intention to spend money on our places and liaise with tenants and move towards slightly enhanced rents.The idea of kicking tenants out and remarketing properties at bigger rents is not feasible,we try and prevent voids.We want good quality,long term happy tenants.

Submitted by 17168 on 4 December 2015 - 6:51pm

I agree with Matthew Gibb, the post by Phillip Knight is the only one that matters. Landlords cannot increase rent just because they want to. We all let at the going rate depending purely on supply and demand (unless possibly you have long term tenants below the going rate). It is very unhelpful to get scaremongering, inaccurate and un-thought through statements such as this from our own 'august' body. NLA should do better for us.

Adam

Submitted by 1839 on 4 December 2015 - 5:39pm

I think that to date there is only one posting that makes any sense, read that posted by
Philip Knight on 4 December 2015 - 1:51pm.
Ignore the rest.

Submitted by 33622 on 4 December 2015 - 5:36pm

Increasing tax revenue from landlords does not address the root cause of the housing crisis in this country. Market forces are determined by supply and demand which currently equates to demand exceeding supply due to a rising population and not enough new homes being built to satisfy demand.

Rental is only 20% of the housing stock so the other 80% is already owner/occupied. Are the owner/occupiers going to buy another 1m homes from landlords selling up? I don't think so. Are owner/occupiers going to buy 8 bed HMO's from landlords? I don't think so.

So Mr Osborne's desire to encourage owner/occupiers won't change the housing landscape. What will happen is that rents will go up because landlords are running a business for profit like everyone else and they cannot absorb the cost increases without passing them on to their customers. Housing once again has become more expensive in this country.

Submitted by 72416 on 4 December 2015 - 5:26pm

The problem with predicting the outcome of a large, sudden change is that there are many knock-on effects and interactions. What we can say with a fair degree of confidence is that there will be unforeseen and unintended consequences. Rent rises will probably be one of these. Economically, anything that tends to reduce the supply of a good or service will tend to raise its price. The actual amount depends on the elasticities of supply and demand, and is very difficult to estimate.

Although individual landlords may not be able to raise their rent immediately, and individual tenants may not be able to afford higher rents, in the long run market forces will prevail, as they always do. On the demand side, the UK has a growing population and a growing number of households. On the supply side, few houses are being built and the Chancellor seems set on reducing the size of the private rental sector. All these effects suggest an upward pressure on rents.

If, like me, you already own several properties with little or no mortgage debt on them, and you don't intend to increase your portfolio, the overall effect of Mr Osborne's changes will probably be positive: my rental income will rise. I see this as a good thing since it's effectively my pension in payment.

Let's hope the politicians aren't foolish enough to try to impose rent controls. But that's another story.

Submitted by 87581 on 4 December 2015 - 4:48pm

It is clear that Mr Osbourne just doesn't seem to grasp the nature of our industry, we provide, in most cases high quality housing for those who are do not need to rely on social housing (thus reduce the burden). There is no other asset class or business where individuals are expected to pay tax on money they will simply never see and unfortunately as mortgage payments are not going to go down in response to this ill thought our plan, rent will have to increase. I wonder how the additional cost in housing benefit will compare to the amounts of additional tax collected.

Submitted by 55266 on 4 December 2015 - 4:37pm

I assume that the rent increases shown are per year each year for 4 years! I have just done a quick calculation for a recent BTL mortgage and worked out that I need to increase the rent by 22% over the 4 year period just to pay for the new BTL tax. Remember that I have to pay tax at 40 or 45% on the increased rent so that the after tax value is enough to pay for the new tax amount. Obviously I will still need to have an additional increase on top of those 6% rent increases to account for inflation or general market costs.

Submitted by 51587 on 4 December 2015 - 3:20pm

I was letting at below the market level to guarantee I got the type of tenant I wanted. 3 years 100% let. I have put the rent up £50.00pcm to cover this for when it comes in. Now I will see if my tenants stay or not.

Submitted by 8986 on 4 December 2015 - 2:48pm

Osborne is probably one of those wealthy landlords who doesn't need a mortgage and hence will not be affected by his proposed tax announcements. Certainty most of his buddies will also fall into that category.

The truth of the matter is that we simply do not know what will happen in the future, we know what Osborne intends (tax grab, lower housing prices and lower rents in London), but there is too much going on across Europe and within particular nations at the moment for any future predictions to be meaningful.

What tenants and other prospective property owners truthfully desire, is not only to be able to purchase a property, but to also benefit from the property’s capital growth.

Osborne would need to tread very carefully indeed.

Submitted by 52343 on 4 December 2015 - 2:01pm

This seems like a smoke and mirrors type data manipulation of the kind political parties indulge in. Please NLA do honest analysis that the savy economists in the Treasury will treat seriously.

We all know that rents are set by supply and demand only. Landlords selling will reduce the rental demand by taking FTB's out of the rental market. If this analysis were correct then an increase in interest rates will cause rent increases - where is the data linking those parameters?

I'm disappointed, Ed

Submitted by 142608 on 4 December 2015 - 1:51pm

Your headline "Osborne's #TurnoverTax to result in rent hike!" is risible.

You cannot just increase rents by 10% at will because the Chancellor demands more tax! In the real World, rents are determined by how much tenants are willing and able to pay not what landlords require to meet their tax obligations. Except in cases of very old tenancies where the rent hasn't changed for years or there are other special circumstances where a kindly landlord is essentially providing a subsidy rents will be approximately at that level already.

Osborne doesn't like BTL and by means of the turnover tax and increased stamp duty on BTL purchases has fired a couple of warning shots across the bows of private landlords to encourage them to sell up and increase the supply of property suitable for first time buyers. Many private landlords are evidently not taking the hint, instead preferring to play the fool by lobbying their MP's for preferential tax treatment and even trying to recruit their tenants as allies and sympathisers in the process!

The level of incomprehension of basic business realities among some landlords is mind-boggling.

Submitted by 56534 on 4 December 2015 - 1:44pm

This has nothing to do with supply and demand it is to do with TAX pure and simple.
We are the whipping boys and girls at the moment as we have continuously been demonised in the usual outlets Express, Mail, etc. A number of people will be made homeless by this tax. I will be evicting a number of tenants as a result of this punitive tax. This government cannot be trusted......remember they were keen to get people to cash in their pensions to buy cars, property etc. The Government are the same people who own UK Asset Resolution formerley Mortgage Express they are keen to force landlords to sell up as they will make billions in CGT.

Be under no illusions the Government does not care about tenants or landlords but just trying to balance the books. Trust them at your peril!

Submitted by 41856 on 28 November 2015 - 7:06pm

From your article it would appear that 615,000 properties may be removed from the rental market. If landlords are going to sell these properties then they have to go somewhere. First time buyers may be able to buy some of these therefore having a neutral effect on the number of occupied properties but increasing the number of owner occupied properties.

If more ex landlord properties come onto the market then prospective homeowners and second time buyers will have more choice. Exactly what the chancellor wants.

Submitted by 81518 on 25 November 2015 - 11:36am

We have been lobbying our MP for months already - and absolutely at no avail. What we are getting back is a lot of tosh about fair society, nothing else.
The only reasonable action to take now is to take tenants on board. When I speak to people who rent rather than own, virtually nobody is aware that these new tax regulation will result in all landlords increasing the rent (those wealthy enough not to have a mortgage will of course benefit the most in our fair society). As long as the tenants do not understand the consequences of Osborne's action they will not protest, not write to their MPs, will be only keen to hear how the landlords are being punished.

I realise it is easier said than done, but worth exploring.

Nina