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Property tax: the implications for UK housing provision


Our Mortgages Managing Director, Richard Rowntree, explains why it is important for policymakers to consider the wider implications of property tax on the attempts to address the UK’s housing shortage. 

Although housing was one of the areas of focus for the Autumn budget, there seemed little that would have any major impact on the private rented sector.  

Previously mooted Capital Gains Tax (CGT) increases didn’t come to bear, and Rishi Sunak made no changes to Stamp Duty Land Tax (SDLT).  

But, in their fiscal review and economic outlook, the Office for Budget Responsibility (OBR) noted how the SDLT surcharge, payable on the purchase of additional properties, had been increased from 3% to 4%. 

This was labelled an error by the OBR but has left some with suspicions that the change was considered by ministers and could be introduced in the near future. 

So, how would the policy change impact the PRS? 

As part of a wider shake-up of Stamp Duty in 2016, the threshold at which tax was charged was lowered to £40,000, resulting in an additional 3% duty being paid on practically all buy-to-let (BTL) property transactions. 

Ahead of the change coming into effect in April 2016, the value of BTL mortgages written for house purchase climbed to a high of £4.3 billion in March, before falling to £600 million the following month. 

This effect is acknowledged by the OBR and was referenced in the ‘Behavioural responses to changes in tax rates and thresholds’ section of their report, stating that CGT is ‘Like stamp duty’ in that ‘it is also prone to time-related behavioural responses, such as the ‘forestalling’ (bringing forward) or ‘stalling’ (delaying) of activities in response to pre-announced tax changes.’ 

But the impact of the surcharge was not confined to these short-term time-related behavioural responses - had it not been for the SDLT increase and changes to tax relief on BTL mortgage interest, announced the same year, landlords would have gone on to purchase an additional 250,000 homes, according to forecasts by Hamptons. 

We’ve seen high levels of demand for rented property for prolonged periods and the SDLT holiday incentivised landlords to invest and meet this. With fundamental drivers of growth, such as increasing population and household numbers, it is unlikely that we’ll see this demand drop significantly. Recounting how the market reacted to similar policy changes in the past, we can see how any future increase in SDLT could deter some landlords from further investment. 

This would likely be compounded by mortgage rates that are set to rise from the historically low levels we’ve seen over the past few months. And while some would argue that a lower proportion of properties owned by BTL landlords would mean more stock available for first-time buyers, simple supply and demand principles show that any reduction in the number of PRS homes would not only reduce choice available for tenants but increase demand and ultimately cost.  

It is also important to recognise that the PRS is relied on by some who cannot afford to buy their own home, the number of which would increase if interest rates make borrowing more expensive. Add to this, rising inflation increasing the cost of living, and it is quite feasible that home ownership aspirations will be put on hold for some. 

While would-be buyers wait until the squeeze on household finances eases, resulting in them being able to afford to save more for deposits and borrow more, the PRS will offer affordable and flexible homes that meet the needs of these people in the short-term.     

This is why I believe that property tenures should not be pitched against each other, but instead, viewed as pieces of the same puzzle.  

What has been referred to as the Stamp Duty holiday was not actually a giveaway, but a reduction of a charge. Treasury figures show that residential SDLT receipts totalled £12.58bn for the year beginning Q3 2020, up from £9.15bn during the same period the year before.  

Alongside this, the OBR pointed out that the tax associated with the buying and selling of property, namely SDLT and CGT, is close to its ‘Laffer curve’. This economic theory illustrates the relationship between tax rates and the revenue subsequently generated and is so-called because the ‘curve’ highlights how once taxes are raised over a certain point, revenue actually starts to fall as taxpayers alter their behaviour in a bid to mitigate. 

With the next budget only six months away, I would urge policymakers to consider the wider implications of property tax on the attempts to address the UK’s housing shortage.