Housing Secretary Michael Gove has ruled out any reversal of Section 24 or other tax changes which have hurt landlords in recent years.
The Select Committee on Housing has written to Gove earlier this year demanding the government review the impact of recent changes to taxation rules in the buy-to-let sector “with a view to making changes to make it more financially attractive to smaller landlords.”
The Select Committee - which is an all party group of MPs analysing government policy on this area - says that at the very least Gove’s department should “be much clearer about what role it wants the private rented sector to play in the wider housing mix and, in particular, whether it values the involvement of landlords with very small portfolios.”
In a lengthy response, Gove tells the Select Committee “while it is right that people should be free to purchase a second house or invest in a buy-to-let property, the government is aware that this can affect other people’s ability to get on to the property ladder.“
Under the old system, landlords received relief on their finance costs (including mortgage interest payments) at their marginal rate of income tax, which meant that higher rate taxpayers received a more generous tax relief than those on lower incomes.
“To address this, and make sure that all landlords are treated the same by the income tax system, the government phased in a set of reforms to restrict finance cost relief to the equivalent of the basic rate of income tax. The reforms mean that all landlords will now receive the same amount of relief. It also reduces the disparity in income tax treatment between homeowners and landlords.”
Gove’s response points out that landlords continue to be able to claim relief at their marginal rate of income tax on the day-to-day costs incurred in letting out a property, such as letting agent fees and replacing furniture. He continued “the government’s position is that finance costs are different to other expenses. Having a mortgage on a property allows the landlord to purchase a more expensive property and incur larger gains on the investment than they would have done without the mortgage. As with all aspects of the tax system, the government keeps the tax treatment of property income under review and any decisions on future changes will be taken by the Chancellor in the context of wider public finances. We need a thriving private rented sector that helps to accommodate these people’s housing needs. Given that 43% of landlords own one property and over 80% of landlords own one to five properties, we understand that the reforms contained in the Renters (Reform) Bill must work for smaller landlords as well as larger businesses.”
Signs landlords struggling most as number of households in mortgage arrears leaps by 18%
The number of mortgage holders who have fallen significantly behind on their repayments has risen by 18% over the past year, according to industry data that suggests landlords may be struggling most. UK Finance said 87,930 homeowner mortgages were in arrears during the third quarter of the year - up 7% on the previous three months but still running at less than half the number seen in 2009 following the financial crash.
It noted a leap in the number of buy-to-let (BTL) mortgages in arrears, rising 29% over the same period to just over 11,500. The increases in arrears are driven by the combined impact of both cost-of-living pressures and higher interest rates, its report noted.
In particular, interest rate pressures are felt more acutely in the BTL sector, where landlords may not be able to raise rents to cover the increases in their payments. Interest rate rises imposed by the Bank of England since December 2021 to tackle inflation had an immediate impact on borrowers whose payments were linked to the Bank's base rate of interest.
Since then, those leaving fixed rate terms have also faced paying hundreds of pounds extra per month on new deals - adding to wider cost of living pressures that remain despite the rate of inflation falling sharply from its 2022 peak above 11%.
Most landlords downbeat as buy to let becomes ever-less profitable
A new survey suggests that over three fifths of landlords say private renting is becoming less attractive as an investment option.
The survey - of 500 landlords by the Yorkshire Building Society - says a critically short supply of private rented housing could leave those needing help most stranded, as the findings suggest those landlords disenchanted with buy to let currently serve couples with dependent children (34%), single parent households (18%), the low paid (9%) and those with disabilities (4%).
However, the majority of private landlords say they are still committed to doing their bit to stem the shortfall, with two thirds intending to stick around for at least five years. Almost two fifths, though, say the government should do more to support the rental sector in light of changes to regulation and taxation which are making it harder for them to operate profitably.
The survey was part of the building society’s Home Truths report, which also surveys 500 first-time buyers and 500 remortgagers.
The results show that the increased cost of living, historically high house prices and interest rates at levels last seen almost two decades ago are the main reasons people are struggling to invest in bricks and mortar. But almost two-fifths of first-time buyers planning to purchase in the next year – over half would like to stop wasting money on rent; almost a third plan to renovate and create a ‘place to call home’; and around two-fifths want eventually to buy as an investment.
When it comes to mortgages, the growing minority of borrowers don’t fit the ‘vanilla’ mould, as a result of changing societal dynamics. Therefore, almost four in five first-time buyers and nearly as many remortgagers indicate that homeownership is becoming an elite privilege, due to factors like the changing make-up of income and rising house prices.
Ben Merritt, director of mortgages at Yorkshire Building Society, says “the reality is that family structures are changing due to things like greater life expectancy prompting a rise in multigenerational living. More people are working for themselves, or employed as contractors, meaning they have unstructured incomes; while factors like the shift to hybrid working following the global pandemic are changing what they want from a home, and therefore their borrowing needs. As a mutual building society, this means we have come full circle, and are stepping in to provide outside-the-box solutions - just as we were set up to do back in 1864. We’ll continue to rise to the modern-day challenges by innovating to offer today’s borrowers suitable pathways to home ownership.”
The findings also highlight that consumers are making significant changes to overcome the affordability challenge and get a foothold on the housing ladder, with almost nine out of 10 making responsible lifestyle choices to prioritise the biggest investment most of them are ever likely to make. Of these, over half were prepared to forego holidays, half eat out less and two-fifths buy less new tech. Almost all first-time buyers surveyed were saving towards a deposit, expecting that to take them four-and-a-half years on average.
Other examples of how people are adapting include buying homes later and looking to pay them off over a longer period of time - the average age of first-time buyers taking part in the research was 35 and 58% of them confirmed they would be buying a house later than intended as a result of the current economic climate.
Furthermore, seven in 10 mortgage holders are considering extending their mortgage terms – four-fifths of those into retirement, with an average age expectation for paying them off, of almost 70. Seeking financial support from parents was an option for almost a third of first-time buyers and from wider family members like grandparents, aunts and uncles for one in 10.
Merritt also stated “if ever the industry needed a burning platform, the findings in the report are it. We’re determined the progress we’ve made over the past century-and-a-half shouldn’t be lost. Ground-breaking modern solutions are needed from lenders like ourselves, and other industry stakeholders including the government, to ensure the mortgage and housing markets continue to meet the needs of current and future generations. It’s encouraging, after almost two decades of unusually cheap credit have likely led to some less responsible spending habits, that people are starting to take the financial commitment homeownership represents more seriously, and cutting their cloth accordingly. These good financial habits will stand them in good stead in all aspects of their lives.”