Residential landlords are a resilient bunch – they have had to be – but policies introduced over the last decade or so, both regulatory and taxation-wise, have effectively driven a not insignificant number out of the private rental sector (PRS).
Recent data from Propertymark, in a survey of its member agents, shows that between March 2019 and March 2022 the number of properties available to rent through letting agents halved. During this three-year period, 84% of landlords who removed their property from the rental market did it to sell; over half of the rental properties sold in March 2022 did not return to PRS.
Now, there might be some in positions of power that view this as a success. After all, hasn’t it been a policy of numerous Governments to move PRS property into the hands of owner-occupiers? As recent as last week, the Prime Minister mentioned the imminent Renters’ Reform Act and an ambition to increase homeownership, so the intention remains clear and present.
But then you have to realise the importance of the PRS to the UK housing market. A sector which provides housing to 4m-plus households. Not all of these can, or even want, to become homeowners, and why not embrace the flexibility rental accommodation offers. Across the channel, and as an example, renting is the norm rather than the exception with 48% of households in Germany renting. In the Netherlands the number is 42%.
Perhaps this is why there is so much talk of rental controls? But again this fails to understand the consequences of such action. The likelihood is that landlords will continue to sell up, and the supply of property will continue to contract. Where will these people live if landlords do this?
What I want to do here is highlight the various regulations, tax rules and legislation which, in my opinion, is not helpful, and which – if the Government wants to maintain PRS housing supply – it may want to review.
Again, this is not exhaustive and it is predicated on the fact that the Government wants to maintain strong PRS supply, when these policies have effectively been introduced, or are on the horizon, to do the opposite. But, at some point, a real tipping point will be reached and the consequences will be severe:
Capital Gains Tax (CGT)
When a basic-rate taxpayer sells a property today they pay 18% on gains. Given that property is the largest investment most of us will make in our lifetime this feels high, especially when compared to the CGT paid when selling other assets such as shares (10%) or Entrepreneurs’ Relief which is available to those selling their business. In isolation this is not helping anyone who wants to develop a property business, but the situation gets worse. For those that are higher and additional-rate taxpayers CGT is 28%. Paying 28% CGT is no encouragement to new entrants to the (PRS).
Section 24 Tax: Mortgage Interest Rate Relief
Phasing out interest rate relief has been a big disincentive to landlords and perhaps the reason why the majority of purchase activity is now by SPV limited company. Income tax relief landlords receive for mortgages is restricted to the basic rate of tax. This means the amount of income tax paid on rental income is now higher than a few years ago, particularly if you become a higher or additional rate taxpayer. It is very likely that higher or additional rate taxpayers currently pay more tax than the profit they make.
3% SDLT surcharge on second properties
The 3% stamp duty surcharge is intended to act as a disincentive to the purchase of buy-to-let properties and deter investors from the private rental sector. How is this helpful in solving the housing crises in this country? As a percentage this appears insignificant but in London and the South East this could easily be more than a year’s rent receipts.
End of Section 21 Notices
The Renters’ Reform Bill, due to arrive later this year, will make Section 21 notices a thing of the past. Landlords, very much aware of this, will now be even more selective as to who they allow to rent from them. Again, how is that helping tenants on low incomes looking to rent a property in the private rental sector? And while the intention is good, this will add cost, time and effort – all to be absorbed by the landlord.
Levelling Up White Paper
According to the Levelling Up and the Decent Homes Standard in the Private Rented Sector papers, more regulation will be introduced including the possibility of a National Landlord Register. Like the Renters Reform Bill I believe the intention is good but the unintended consequences not fully considered. Any such action will only add cost and further regulation that may be too much for landlords to bear.
Discretionary Licensing cost
We’ve noticed ever more areas being subject to discretionary licensing and, where a fee is payable, fees have increased well in excess of inflation. This is pushing landlords away from certain areas where rental accommodation is desperately needed.
Minimum energy efficiency standards (MEES) Regulation
The Government has committed to upgrade as many private rented sector homes as possible to EPC Band C or better by 2030. Again, the intention is good but the timeline to execute this may be ambitious. If landlords are not able to upgrade properties many will be unlettable in a few years. We are not talking thousands of homes here; this could be a large proportion of the four million-plus properties in the PRS. Not only is this discouraging investment, it could also lead to many landlords exiting the PRS
As mentioned, this list is by no means comprehensive. I’ve not even mentioned the PRA underwriting standards for buy-to-let contracts or how affordability is being squeezed with rising interest rates or the landlord community approaching retirement age. Individually and collectively past, present and future policies have contributed to the demise of the PRS, and will continue to be counterproductive in solving the housing crisis in this country.
Perhaps the die is cast? Perhaps this is exactly what the Government wants to achieve? But, if this is the case, then it is surely underestimating what the PRS does within our housing market, and what it will mean for tenants if it continues to erode supply. The time to review some of these policies with an intent to make the PRS part of the solution is upon us.
Jannie Vermeulen is co-founder & chief risk officer at Fleet Mortgages
