Calling for Government support to ensure a thriving Private Rented Sector and buy to let market

The UK's private rented sector, housing 4.6 million households, has steadily grown since the early 2000s. Low interest rates have enabled this growth, encouraging many to invest in rental properties for income or pensions. Despite increased regulatory and tax changes, manageable costs have persisted due to low borrowing rates.

The period of rapidly increasing interest rates following the mini-budget has put pressure on landlords who in many cases will have seen their borrowing costs increase significantly.

The sector offers flexibility, supporting various economic needs and diverse demographics. It also plays a vital role alongside owner-occupation and social housing, providing unique benefits. We believe Government initiatives should support both landlords and first-time buyers without pitting them against each other.

Landlords may respond to policy changes by adjusting rents or reducing expenses. These adjustments may limit tenant choices, increase rents, and lead to poorer property upkeep.

It will be the most vulnerable tenants who are impacted most by these changes, particularly if they are not accompanied by an increase in social housing.

We support current legislative proposals like the Renters (Reform) Bill. However, sustained efforts are needed beyond these reforms to ensure the sector thrives. Neglecting these areas could prompt further landlord exits, potentially weakening the buy to let market.

We’ve proposed six key actions to the Government which we believe could deliver a thriving sector.

1. A moratorium on all but essential new regulation in the private rented sector

Regulation in the sector is characterised by piecemeal interventions, which often have no coherent link and are in response to short term campaigns. The changes in the Renters (Reform) Bill represent a coherent package for change which has broad agreement across the sector.

We’re concerned that following the introduction of the Bill’s measures there will be a switch back to the piecemeal approach to regulation which will cause increased uncertainty among landlords. We believe the Government should commit to a moratorium on all but essential new regulation for a minimum of three years (preferably five), after the Bill’s measures are introduced.

This would give Government, landlords and sector bodies time to analyse the impact of changes, including the end of Section 21 evictions as well as giving the market more predictability.

2. Maintaining the ability to access limited company structures

Landlords who own their properties through a limited company structure are more likely to be working full time in their business - 43% of limited company landlords reported earning a full-time income from property, compared to 26% of individual landlords.

Limited company landlords can offset mortgage interest, finance costs and mortgage arrangement fees against rental income.

If the Government’s aim is to deliver a well run private rented sector with professional landlords, the benefits of accessing limited company structures should be retained. The impact of making changes to this approach may cause landlords to leave the market, leading to fewer properties, higher rents and a lower tax take for the Government.

3. Reverse changes to mortgage interest relief

Since 2017 landlords have been unable to fully deduct interest costs from rental income when calculating income tax payments. Changes were introduced gradually and since 2021 it has not been possible to offset borrowing costs against rental income from tax.

While interest rates remained low this additional tax payment would have been manageable. The recent increase in interest rates have increased borrowing costs which landlords are now unable to offset against rental income when paying tax.

Analysis by the National Residential Landlord Association (NRLA) suggests these tax changes have contributed to there being 1.2 million fewer properties in the private rented sector than there might otherwise have been. The additional properties in the sector would also have increased tenant choice and helped keep rents at more affordable levels.

We believe HM Treasury should review the impact of landlord mortgage interest relief with the aim of reintroducing some level of support to ensure supply of homes into the sector can be maintained, particularly now interest rates are expected to remain higher than previously.

4. Review other landlord taxes

We’re highlighting two other key tax areas which, if reviewed, could deliver a more effective rental and wider housing sector.

Firstly, the higher stamp duty rate for additional properties requires landlords to pay an additional 3% on top of their normal stamp duty payment. This currently acts as a barrier, a review of the surcharge, including analysis of its impact on the supply of private rented housing, should be undertaken to assess its impact and set a future direction.

One solution is a rebate for landlords who let properties into the mainstream private rented sector and can demonstrate that they have done so via a tenancy agreement.

Secondly, Capital Gains Tax paid by landlords on the sale of property could be used as a tool to support landlords who want to sell to their tenants. Any landlord selling a property to a tenant should be exempt from paying CGT on the profits from that sale. This would incentivise landlords and potentially enable more people into home ownership by giving the landlord scope to offer a discount.

5. Incentivise landlords to carry out energy efficiency work

Significant improvements will need to be made to homes in the private rented sector if the UK is to meet its 2050 net zero targets. Around two-thirds of privately rented properties in England and Wales fall below EPC C and inefficient homes can lead to other problems including damp and mould.

There is evidence that tax incentives could help make investments more attractive, incentivising retrofit. Research by the NRLA has shown that 56% of landlords would install loft insulation and 63% would install double glazed windows if there was an incentive from Government such as a tax break or grant.

We believe it should be possible to deduct expenditure on improvements that result in an increase in the Environmental Impact Rating of the property or are included in an agreed list of measures (i.e., loft insulation, cavity wall insulation) when calculating tax. Analysis from E3G suggests this would represent a maximum tax revenue foregone of £1.2bn to 2028, or around £0.24bn per annum over 5 years.

6. Increase funding for social housing

While a professional, well run private rented sector should be able to offer housing for everyone we recognise that many people, particularly those who are vulnerable, would be best served by affordable social housing. Government should ensure that appropriate funding is available to deliver the additional 90,000 homes per year into the social housing sector as recommended by groups including the National Housing Federation.

For more information visit The Mortgage Works.

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