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Government needs to review tax policies to incentivise landlords – Propertymark

  • 05/09/2023
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Government needs to review tax policies to incentivise landlords – Propertymark
The government should review taxes that apply to landlords as the heightened tax burden for landlords is contributing to a “serious lack of available rental properties”, a report has found.

According to a position paper from Propertymark, which used survey data from members and other organisations, a significant factor in the lack of growth in available properties in the UK are the “financial implications and barriers” in purchasing a buy-to-let property.

The report pointed to higher rates of property tax on buy-to-let properties, withdrawal of tax relief on mortgage interest, removal of 10 per cent wear and tear allowance, maintaining Capital Gains Tax (CGT) for rented property at 18 per cent for rented properties and 28 per cent for higher rate taxpayers and an increase in corporation tax.

Tax relief on mortgage interest has been replaced with a 20 per cent tax credit and at-cost relief is in-place for wear and tear allowance.

Propertymark said: “This has resulted in a system where landlords are unable to offset finance costs against tax liabilities, reducing opportunities for small investors to enter the market.

“The current system also discourages landlords from being able to actively improve their properties as repairs and maintenance are tax deductible but not improvements.”


Tax attack on all fronts

Diving into specific tax changes, Propertymark said that the decision to phase out mortgage interest relief may have been the “correct decision” in 2016 when it was implemented but record high interest rates meant the economic landscape was “remarkably different”.

It said that thousands more landlords pay tax under the changes, and some landlords have been pushed into a higher tax bracket despite income not increasing as tax was applied to turnover rather than profit.

Landlords have consequently upped their rents for new and existing tenants and cut back on expenses like property maintenance.

The body added that extra tax has led some landlords to “sell up altogether and leave the sector” and in the long term, this would impact the value and quality of properties in the rental sector.

Looking at stamp duty in England, an aspiring landlord buying an additional property in the UK for £290,000 would pay £10,700 in stamp duty. This compares to around £2,000 for a main resident.

For Land and Buildings Transaction Tax (LBTT) in Scotland for additional property worth an average £185,000, the tax comes to £11,900, compared to £800 in LBTT for a main resident.

Landlords in Wales, who pay Land Transaction Tax (LTT), buying an additional property for £215,000 would expect to pay £9,825 whereas a main resident would pay nothing.

Regarding CGT cuts, from which landlords were excluded, sale of shares in a property-owning company incurs tax of 20 per cent and an individual selling a second property pays 28 per cent, making the asset class “less attractive at a time when the supply of rented homes is tight”.

It added that the move ignores the “positive contribution made by landlords and property companies as the incentive is to invest in companies over property”.

The report added that introduction of the rent freeze cap in Scotland has led to landlords increasing rents between tenancies to cover costs and anticipated costs in “due to fear of ongoing rent control legislation”.

The financial burden and costs for landlords have increased and investment into the private rented sector has stalled as landlords debate whether to stay in the sector.

Propertymark added that the Welsh government should consider exempting new long-term rental properties form the four per cent LTT on additional homes and consider wider access to grants and interest-free loans available for private landlords to bring empty properties back into use.


Government should develop policies that promote ‘long term investment’

Propertymark recommended that the government should review all taxes relating to private landlords to “develop policies that promote long-term investment in the sector and reduce costs for tenants”.

The government should also scrap the mortgage tax relief hike to level the playing field between individual landlords, who are subject to tax changes, and those set up as a business, who are not.

Other recommendations include reducing taxes on additional property, bring back tax relief for energy efficiency, reducing CGT thresholds and avoiding rent controls.

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