A more distant dream: Why new tax measures are not helping the housing supply

Houses in York
Donald Drysdale By Donald Drysdale for ICAS

15 July 2016

Donald Drysdale shares his concerns about government statistics on residential property acquisitions.

An article in the Financial Times last December addressed the difficulties faced by the UK government in trying to make housing more accessible. It claimed that the idea of an affordable tenancy, let alone ownership, had become “a distant dream” for many young adults.

At the time, individual landlords were still trying to come to terms with the announcement last July of new restrictions on mortgage interest relief. These will limit their relief to basic rate income tax, and will be phased in over four years from April 2017. This measure was purportedly designed to shift the balance of a tax system that currently favours landlords over ordinary homeowners.

My article in March on Tax policy and the Chancellor's home ownership crisis  highlighted concerns of the House of Commons Treasury Committee that making buy-to-let landlords the scapegoat for raising extra revenues might cause severe market distortions without resolving the underlying housing problems. 

The March 2016 housing boom

Official statistics assembled by the governments at Westminster and Holyrood reveal that, throughout the calendar year 2015, 1.23m UK residential property transactions valued at £40,000 or more were completed across the UK – that’s an average of 102,500 each month.

In January and February 2016 there was a quieter spell, with completions of only 84,000 and 91,000 respectively, but this was unexceptional as the market is always slow early in the year. Then a sharp hiccup occurred. The total rose to 173,500 in March – more than in any month since August 2007 – and then fell back to 70,500 in April. Ignoring any seasonal adjustment which statisticians might argue should be applied, the April peak was 90% up on the previous month and also 90% up on April 2015.

Similar distortions are apparent from the separate statistics for England, Scotland, Wales and Northern Ireland – with one exception. Although Scotland’s peak in April 2016 was 93% up on the previous month, it was only 44% up on the figure for April 2015.

A recent article from the Council of Mortgage Lenders provides a broad breakdown of these statistics by category of house purchase. The largest proportionate increase in March was in the number of buy-to-let acquisitions, up by an astonishing 180% on February. The number of cash purchases rose by more than 80% compared with February. Transactions by those moving house were up 60%, and purchases by first-time buyers were up by 28%.

Behavioural explanations

Last November George Osborne, the then Chancellor, announced the new 3% surcharge on stamp duty land tax (SDLT) that would apply from 1 April 2016 on the purchase of additional residential properties like buy-to-lets and second homes. In December John Swinney, the then Scottish Finance Secretary, followed suit with a 3% surcharge on land and buildings transaction tax (LBTT) from the same date. Both were aiming to encourage landlords to sell properties, in the hope that they would be acquired by would-be owner-occupiers.

Paradoxically, the new surcharges appear to have had precisely the opposite effect – acting as a spur that accelerated further investment in buy-to-lets and (probably to a lesser extent) second homes. Nonetheless, there was some compensation for the government as the Exchequer reaped a short-term reward by taking in almost £1.2bn in April alone – its highest ever monthly receipts from SDLT.

A distortion can be observed in the statistics for Scotland too. As a result of Scottish land registration procedures, LBTT is generally paid much earlier than SDLT so the published figures for tax receipts are not comparable. However, aggregate LBTT receipts in March and April amount to more than four times the sum received in February.

Looking back a year, the Scottish comparison with April 2015 differs because other factors were then at work. From 1 April 2015, the Scottish government replaced SDLT with LBTT north of the border, bringing a different rate structure that promised to favour buyers of lower-priced homes and target the most expensive 7% of properties. Forestalling activity distorted the flow of transactions around March and April 2015, with some buyers seeking to complete by 31 March and others waiting until April.

Conclusion

The 3% SDLT and LBTT surcharges were expected to discourage the growth of the buy-to-let sector, and the new restriction on mortgage interest relief was intended to make buy-to-lets less attractive to individual landlords.

The four-year transition to the new interest relief rules was intended to give individual landlords time to adjust. The government expected that many of them would disinvest, releasing more homes for owner-occupation.

Instead, it seems that a record number of investors have been attracted into the sector by the prospect of high investment returns, and that landlords are simply raising rents to compensate for the forthcoming reduction in tax relief.

This appears to be a case where the law of unintended consequences is hard at work. Perhaps it will give Philip Hammond, the new Chancellor, and Derek Mackay, now Scottish Finance Secretary, some food for thought as they consider their future housing strategies.

Article supplied by Taxing Words Ltd

Topics

  • Tax

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