Tax Changes Lead to Rental Rise

Tax changes could lead to tenants in the private rental sector facing rent rises of up to 30 per cent, according to new analysis from Imperial College.

The introduction of tax changes, including the 3 per cent stamp duty levy introduced in April, is having a negative impact on property supply. This has led to David Miles, professor of financial economics at Imperial College London, calling for the plans to be abandoned on the basis that they penalise investors who chose not to incorporate to avoid the tax. He said: ‘If these changes were a move towards a more neutral (non-distortionary) system of taxation of rented property, relative to owner occupied property, they would have a rationale. But rather than being a move towards neutrality, as was claimed, they in fact represent a further penalty against private provision of rented properties by potential suppliers who cannot, or chose not to, invest via a corporate entity.’

Miles has estimated that rents would need to see growth of between 20 and 30 per cent to offset the impact of the tax changes, worsening the current situation for tenants without actively helping first time buyers. Miles’ calculations determined a required initial rental yield of 4.9 per cent, moving to 5.83 per cent if the tax change was merely to reduce the rate at which interest is deducted against tax to the basic rate. To offset this would require rental rises of 20 per cent. However, when considering the rise in stamp duty, the yield would need to reach 6.1 per cent, requiring a 25 per cent rental rise.

In his report, written prior to the recent Housing White Paper, Miles asserted the idea that there is currently too much emphasis on the importance of home ownership. He explained: ‘Aspiring first time buyers are hardly helped by squeezing the supply of rental property and driving rents up. We should want to avoid a situation where people feel pressurised into taking big mortgages relative to their income early in life because the rental option is so poor. The view that owner occupation is a form of tenure that people should aspire to at the earliest possible point in their lives is deeply flawed. A tax change that reduces the incentive to supply rental property is entirely counterproductive. It should be abandoned.’

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