The ‘Unintended Consequence’ of encouraging Landlords to sell their Properties to Tenants

It would appear the Government it is set to unveil a policy aimed at helping tenants become homeowners in the Budget later this month. The policy will centre on offering tax incentives to encourage landlords to sell their rental properties to their long-term tenants.

It’s an interesting strategy. Younger people are finding it increasingly harder to buy their home because property prices have grown at a much higher rate than wages. Meanwhile it is this generation which is more likely to vote Labour and who voted Remain in the 2016 EU Referendum. Younger people are feeling disengaged with current politics, and it is therefore a crucial Budget if the Conservatives are to persuade more younger people to vote for them in the next General Election.

So, what is the proposed policy – and crucially, will it work?

Currently, landlords who sell their rented property are liable for a Capital Gains Tax bill of 28% on the increased value of their property. Under the proposed policy, if the tenant has been renting the property for three years or more, and the landlord sells the property to the tenant then the landlord won’t be liable for the tax, and the landlord and tenant can share the tax advantage.

Estimates are that around half a million tenants could benefit over the next five years, and both the landlord and the tenant will be better off by around £7,500 each. This would undoubtedly provide a hefty boost towards the tenant’s deposit and could enable them to become a homeowner. Therefore, on the face of it this policy could become something of a vote winner.

However sadly we don’t think it’s quite the perfect idea that Ministers may hope:   

  • It shouldn’t be assumed that tenants will want to (or be financially able to) buy the property they’re currently renting
  • Not all landlords will want to sell their rental property. It might be their retirement strategy.
  • Finally, the Property Ombudsman looks down on any sales transaction fees being charged to landlords should the tenant buy the home. That could potentially put agents out of pocket.

Therefore, the odds of benefiting from the scheme are slim. Only those tenants lucky enough to be in the right home, just at the time their landlord decides that now is the right time to sell-up will benefit from this generous tax break.

Unless of course the policy encourages landlords to exit their property earlier than they originally planned. This could lead to serious unintended consequences. The private rented sector needs an increased number of homes available to rent to meet growing demand – the demand for homes is not being met elsewhere in the market. However, if this policy is “successful” it won’t actually see any new homes being made available, but instead will see the supply of properties available to rent reduce.

In the event that a landlord and tenant agree a ‘Rent to Buy’ arrangement, then the landlord should be encouraged to re-invest in the PRS. However, even the Stamp Duty Land Tax liability won’t be met by the savings in Capital Gains Tax – let alone any other additional costs of purchasing a new property, and so it’s unlikely that the landlord would re-invest. A reduction of around half a million homes available for private rent – approximately 14 % of current stock - when we’re already seeing a slow-down in the rate at which landlords are investing is a daunting prospect.

Unfortunately, only those tenants and landlords who take part in the scheme will benefit – but sadly everyone else in the private rented sector could actually end up worse off.

Instead of squeezing landlords out, the Government should use the Budget on October 28th to recognise the contribution landlords are making to the supply of homes and encourage them to remain as investors. Removing the additional 3% Stamp Duty charge on the purchase of second homes will encourage more landlords to invest in the sector. Meanwhile, reversing the tax relief changes which are currently being phased in will help to stop private landlords from selling up.

The issues facing the UK housing market won’t be fixed by squeezing landlords out and encouraging them to sell their stock. Reduced supply against a backdrop of growing demand is only going to see rental prices rise.

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