Removing Tax Hike on Rental Properties: A Potential Remedy for the UK's Housing Crisis
Analysis conducted by Capital Economics suggests that reversing the tax hike on rented housing could offer relief to renters and alleviate the ongoing housing crisis in the UK.
Since 2021, mortgage interest tax relief for landlords has been restricted to the basic rate of income tax. The research indicates that fully reinstating this relief in the private rented sector would help address the sector's supply crisis.
Impact of Tax Hike on Housing Supply
Over the past two decades, the private rented sector has experienced significant growth, with the number of properties increasing from 3.1 million in 2005 to 5.6 million in 2021. Approximately 70% of tenancies in this sector are supported by buy-to-let mortgages, making it highly susceptible to fluctuations in interest rates.
According to the report, if the Bank of England's base interest rate reaches 5% and remains above 2.5% until the end of 2027, as predicted by many, the UK could lose up to 13% (735,000) of private rented properties compared to 2021. Consequently, this would result in a significant annual loss of £1 billion in Income and Corporation Tax revenue for the Treasury.
Landlords affected by higher interest rates intend to offset 51% of the loss by increasing rents.
This leads to an average annual rental growth in the UK that is 4.7 percentage points higher than if mortgage rates had remained at their 2017-2019 average.
In a higher interest rate scenario, where the Base Rate peaks at 7.50% and remains above 4.00% until the end of 2027, the report projects a potential loss of over one million properties from the private rented sector, accounting for 18% of its stock.
This would result in an annual loss of approximately £1.2 billion in tax revenue. Average rental growth in the UK would be 7.6 percentage points higher compared to a scenario with lower mortgage rates.
By reintroducing mortgage interest relief (MIR) in full, Capital Economics estimates that the private rental market could retain 110,000 more properties, resulting in a £400 million boost in Income and Corporation Tax revenue for the Treasury.
Supply Crisis and Rental Inflation
The research is conducted against the backdrop of a severe supply crisis, which continues to cause difficulties for renters in their search for housing across the UK. Various stakeholders, including the Bank of England, the Government, and the cross-party Housing Select Committee, have warned that the demand for housing surpasses its supply.
Additionally, scrapping the mortgage interest reforms could help reduce future rental inflation within the sector and alleviate financial pressure on landlords planning maintenance and improvements.
The National Residential Landlords Association (NRLA) is urging the government to conduct a comprehensive review to assess the impact of recent tax increases on the sector.
This review should examine the effects of MIR changes on the supply of privately rented homes and the cost of accessing rental housing. It is crucial to consider the underlying rationale for these changes, especially as the Institute for Fiscal Studies has previously argued against the notion that landlords have enjoyed more favourable tax treatment than homeowners.
Ben Beadle, Chief Executive of the National Residential Landlords Association, said: "In 2015 the Government said it wanted to ‘create a level the playing field between those buying a home to let and those buying a home to live in’. In doing so it hiked costs for responsible landlords and totally ignored the burden it was to create for renters.
“In the midst of an unprecedented cost-of-living crisis, the Government needs to put economic reality before political pride and reverse this travesty of a reform. “Tax hikes on landlords, exacerbated by rising interest rates, have deepened the supply crisis. And as this research demonstrates the situation is unlikely to improve until and unless it is reversed. “A radical rejection of these damaging policies is necessary to help stem the tide of lost rental properties, limit rent rises, and boost Treasury revenue.”
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