RLA News Service

The current tax treatment of private landlords is stifling investment in the sector and major changes are required if the supply of rented accommodation is to be boosted to overcome the current shortage, according to one of the leading landlords organisations.

In a report produced for the Residential Landlords Association (RLA) at the end of last year, Professor Michael Ball of Reading University pointed to the £3.5 billion the private rented sector contributes each year to the Treasury as a result of taxes paid which no other housing tenure has to face. Given that it is tenants who end up paying for such taxes through higher rents, this equates to £1,000 per tenancy in the UK.

With the spectre of large scale disinvestment in the sector once the housing market improves, the RLA is calling on the Chancellor to make stimulating the rented sector a key part of the forthcoming Budget to boost supply and keep down rents.

Much of the burden falling on the sector is because of landlords being treated as investors and not businesses. This means that tax reliefs applying to businesses which recognise and encourage investment do not apply to landlords, even where they may have a number of properties.

The RLA has formulated proposals for tax reform which would level the playing field and attract greater investment in the sector. Although the changes would involve limited tax reliefs these costs to the Exchequer would be off-set by increased tax receipts from new, and larger, landlords and the investment that is made in renovating properties when they change hands or enter the rental market for the first time.

Among the measures the RLA is calling for is roll–over relief for capital gains when a rental property is sold to a first time buyer or reinvested in rental property. This would help first time buyers to get a foot hold on the housing ladder whilst freeing up much needed rental accommodation.

Also included in the package sought are inclusion for a limited period of rental property in Self-Invested Pension Plans (SIPPs), with safeguards to avoid abuses and the introduction of capital allowances for enhanced repair and refurbishment.

Speaking for the RLA, its Chairman, Alan Ward said:

“With rapidly increasing demand for rented accommodation and a supply shortage driving up rents, there is a real need for changes to the tax treatment of the sector to encourage it to invest. It is a nonsense that when landlords are running a business, that they should be hampered by a tax system that treats them as investors.

“Our proposals for change are cost neutral as they recognise the revenue that will flow from income to new and larger landlords and that every £1 invested in the sector provides a return to the economy of £3.50 through expenditure on building work and furniture.”

Notes

The RLA represents over 15,000 private sector residential landlords in England and Wales.

It is estimated that there are some 300,000 “accidental landlords” who are only renting because they have not been able to sell their properties for the price they want. Many of these will sell up once market conditions improve. This is equivalent to roughly 7% of all privately rented accommodation in England, Wales and Scotland.

The full list of the RLA’s proposals are:

Roll–over Relief for Capital Gains When Re-Invested - To encourage landlords to reinvest, roll-over capital gains tax should be allowed where the sale proceeds are being re-invested in a rental property for rent. Landlords are traditionally good at re-generating property, but they need the ability to move with the market and release capital without CGT liabilities.

Roll–over Relief for Capital Gains When Sold to a First Time Buyer - To help first time buyers and free up rental property, roll-over capital gains tax should be allowed where the sale is to a first time buyer with suitable controls to prevent abuse such as an upper limit on price.

Entrepreneur Relief for CGT – This would bring the sector in line with other businesses and encourage disposals where the proceeds are not to be re-invested. This, together with roll-over reliefs proposed would result in a churn of properties with more being refurbished.

Capital Allowance – Properties devalue as they are lived in and periodic refurbishments are essential if property standards are to be maintained. The tax system currently allows no relief for reinvestment and improvement until, and only if, a sale is eventually made. Indeed, the increased rent resulting from improvements is taxed making retention of quality and standards very difficult. Instead there should be a capital allowance for enhanced repair and refurbishment.

SIPPS - Self-Invested Pension Plans (SIPPs) should be allowed to buy residential accommodation for letting. To avoid possible abuse, the letting would have to be via a recognised agent, the property would have to be retained and let for a certain number of years and it would only apply to lower value properties. The RLA suggested a one property limit of £300,000 inside London and £200,000 outside. This would help the less well-off obtain accommodation. This could be a short-term measure to stimulate the market. There is over £1 billion invested into over 800,000 SIPPS, of which 200,000 could potentially invest into the PRS.

LESA - An expanded landlord’s energy saving allowance (LESA) needs to be incorporated into the general allowance for improvements to cover a wide range of energy efficiency improvements. The current limit is £1,500 which doesn’t go far on many properties, particularly older ones which comprise a high percentage of rented accommodation. The RLA is calling for the limit to be increase to £14,500.

These proposals would not lead to a loss of revenue to the Treasury because they would:

Bring many unoccupied properties into use, so generating fresh income.

Bring forward in time tax allowances which would otherwise be claimed at a later date.

Enable a greater turn-over of property, thereby boosting stamp duty receipts.

Boost other taxes. Figures suggest that every £1 invested in the PRS provides a return to the economy of £3.50 through expenditure on building work and furniture. On average, a sum equivalent to 10% of the purchase price of a property bought for renting is spent on renovating it. As well as VAT receipts on all purchases, there would be a boost to employment creating income tax receipts.

To bring empty homes back into use, all publicly owned empty accommodation should be subject to an auction to include landlords in the private rented sector. A one year deadline should be imposed for the property to be let to encourage swift investment in the property sold.

For further information please contact the RLA’s consultant, Ed Jacobs on 0113 278 0211 or email ed.jacobs@publicaffairsco.com or Alan Ward on 07764310325 or email award@rla.org.uk.