Landlords' lost appeal won't help housing crisis

7 October 2016   By Samantha Smith

LANDLORDS represented by Cherie Booth have lost their legal challenge against the Government's plans to remove the tax relief they receive on buy-to-let properties.

home buying new keys
Credit: Brian A Jackson/

The challenge was thrown out of the High Court by Mr Justice Dingemans, who said, "It would be a miserable spectacle watching a case bound to fail ... fail."

With his ruling, buy-to-let landlords can now only lobby against the Government's plans, which mean they will lose out on tax relief worth 40% or 45% of their annual mortgage repayments.

They and Mrs Booth (aka Cherie Blair) argue this will drive up the cost of rent for their tenants, who will now suffer as part of the Government's attempt to clamp down on buy-to-let landlords purchasing swathes of the UK's limited housing stock.

While the Government's rationale may be correct insofar as these landlords have been a factor in constantly rising house prices, merely placing onerous costs on landlords won't be enough on its own to solve the housing crisis.

Clamping down

In fact, it's possible that it may worsen this crisis, insofar as already rising rents will possibly rise even faster.

So far, the April introduction of a 3% stamp duty surcharge on second homes hasn't had any noticeable effect on these rents, with their increases since this introduction remaining in line with previous increases.

However, the changes in tax relief look set to have a greater impact on the costs landlords face.

First announced in the budget of July 2015, they'll cap the tax relief landlords enjoy on their mortgage repayments at 20% from April 2017 onwards.

Added to this, landlords will also be paying income tax on the turnover from their buy-to-let properties, rather than on their profit.

This is an important change, because with it, landlords will be paying significantly more tax.

For example, if a landlord receives £12,000 a year from his tenants but - owing to mortgage and maintenance costs - makes only £3,000 in profit, then he would be taxed on this £3,000.

However, from April 2017, he'll be taxed on the full £12,000 gross he brings in from his tenants.

Combined with the reductions on tax reliefs, the implications of this change are potentially huge, with some studies suggesting that landlords could end up losing money in as many as 70% of UK towns.

And it gets worse for landlords, because aside from the increase in stamp duty, they'll lose the right to automatically claim 10% of the value of the rent against wear-and-tear costs.

Instead, if they want to save this 10% from tax, they can do so only if they actually do have to pay for any repairs.


This is why the group of 250 landlords launched the legal challenge against the Government, since they fear that being a landlord may no longer be profitable after the changes come into effect.

However, to be more precise, they argued in court that the changes would ultimately be a tax on tenants, since landlords would inevitably raise their rents to cover their increased costs.

This may indeed be the case for those landlords who can afford to take the risk on buy-to-let mortgages after April 2017, yet the example of the increase in stamp duty suggests that many might simply pull out from the market.

This is because rents showed no marked increase after the hike in the duty. Not only that, but the purchase of buy-to-let mortgages fell away dramatically in the month after the introduction.

They declined by 85% compared to the month before, and by around 50% compared to the same month (April) in 2015.

This is a massive drop. Given that the added 3% stamp duty surcharge is only the tip of the iceberg when it comes to the Government's attack on buy-to-let landlords, it indicates that the other changes will have a similar if not worse effect on the numbers of buy-to-let mortgages being issued.

100,000 less

However, if the Government thinks that this will solve the shortage of affordable housing currently affecting the UK, they'd be wrong.

That's because the house crisis isn't simply about landlords buying up housing stock, but because the UK isn't building enough new homes.

For instance, in 2007 the Labour Government set a target of 240,000 new properties to be built each year, after the Barker Review of Housing Supply wrote a report stating that 250,000 needed to be constructed to avoid skyrocketing prices.

Unfortunately, after reaching a post-war low of 135,500 in 2012/3, the slightly recovered tally for 2015 was still only 142,890, some 100,000 short of the necessary total.

It's for this reason as much as anything else that house prices rose in 2015 by 7%, at a time when average wages are rising only by 2%.

Therefore, if the Government wants to achieve more with their squeeze on landlords than simply taking in more tax, they should invest more in the building of new houses.

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