Help Solve the Housing Problem
The Tories are concerned that working age benefits cost about £100bn per year. About a quarter of that is housing benefit, and about 40% of housing benefit goes to private sector landlords – £9bn pa. This public money pushes up house prices and is a factor in the distorted property market. The real gainers are the said private sector landlords.
Tax private rental income more. I can’t immediately find statistics for the size of the private rental market – what I’d like is the aggregate private rent paid – so I’m going to estimate. There are about 4m privately-rented homes in the country. According to the Valuation Office Agency, the average monthly rent for England is £720, which amounts to an annual rent of £8620. Assume for the UK as a whole it will be rather less because of the distorting London factor, so I’ll assume a mean annual rent of £6k. Multiply by 4m and you get an annual private rental market of £24bn. Tax is already paid on some of that, but the net income is going to be substantially less after allowing for mortgage interest and other expenses including repairs and maintenance. I guess – though there may be treasury and HMRC figures to correct this – that the total income tax take from the sector is less than £2bn. It’s certainly well below the £9bn paid to the sector in housing benefit.
My suggestion is that all Schedule A income from residential property should be taxed at the higher rate regardless of the taxpayer’s other income. It could cover the cost of housing benefit.
This will hurt a lot of private landlords. Do we feel sorry for them? Just a little. But in most cases, the reduction in their net income after tax will be easily absorbed. Some private landlords will be highly-geared and will have borrowed substantially; it is possible that they will be forced to sell up and there will be cases of individual hardship (although hardship is probably too strong a word). Others will find that property is no longer such a satisfactory place for their money and will sell up by choice rather than imperative. This will release some private-sector rented property onto the market for owner-occupation and will tend gently to push down already-inflated house prices.
Impact on rents
Opponents will argue that it will push up rents as landlords try to recoup the cost of the extra tax through rent rises. This is unlikely; rents are determined by supply and demand, not by cost pressures. If anything, the result will be to lower rents because of the overall impact on capital values.
Administration and anti-avoidance measures
To make this work, HMRC should undertake to register all private tenancies. Changes would be made to housing legislation, so that the landlords’ protection of an assured shorthold tenancy would be conditional on registration with HMRC. An unregistered tenancy would be automatically protected in favour of the tenant who would gain indefinite security of tenure, the right to a fair rent assessed by a tribunal and the right to buy. The register would be publicly-accessible and would generate the necessary pages for the landlord’s tax return. The cost of developing such a register would be relatively small and substantially less than the annual revenue a new tax would generate; it is essentially a database.
Restrict Housing benefit through caps and stricter eligibility criteria. Clearly this is what the Tories would prefer as it would hurt their kind rather less. It is, however, likely to be much less effective. Fair tax on private rental income would have a much clearer and measurable impact on government finances.