The young didn't come out of Wednesday's Budget well. George Osborne cut housing benefit, scrapped university maintenance grants and restricted the new higher minimum wage to the over-25s. But amid the gloom, the Chancellor struck a blow for the younger generation: cutting tax relief for landlords.
Over the past decade, home ownership has declined as young adults struggle to afford rapidly rising house prices. With nowhere else to turn, they rent. Part of the reason for the rising prices is the tax regime that makes property so attractive as a pension investment. because landlords can claim tax relief on the mortgage interest they pay, they can afford to pay more for a house than someone who wants to live in it - who don't get that relief. Landlords also get a blanket 10% wear and tear allowance, whether or not they replace anything.
Osborne has promised to double the number of first-time buyers, so he has slashed this relief in order to level the playing field. Higher rate taxpayers will now need to pay tax on the income they spend on interest, and all landlords will have to prove they replace or repair their properties to get wear and tear relief. Finally, your landlord might get around to replacing that tatty sofa and installing a new boiler.
Industry groups immediately began warning that landlords will be forced to put up rents. This is rubbish and, as operators in the free market, they ought to know that.
Landlords are already charging as much as they can get away with, and in places where there is a housing shortage, this is a lot. Adding a couple of extra costs won't make a bit of difference to demand. And out of 4.75m private rented homes in 2013, only 1.46m had a mortgage on them, so there are a lot of landlords out there who won't have any relief to lose.
But that's not to say there are no problems with the policy.
It won't actually create a level playing field between first time buyers and landlords, because landlords will still get basic rate tax relief on their mortgage interest. What it probably will do is level the playing field between property speculators and bona fide businesses. Corporations of every stripe get to claim interest as a business expense, so you might find higher rate landlords descending upon Companies House en masse so they can start paying much lower Corporation Tax.
This might not be a bad thing: landlord groups always protest that their members are running businesses, but too many landlords are just in it until they can sell for a profit, evicting their tenants in the process. More landlords becoming companies should therefore be a good thing if it means they rely less on rising property prices to make a return, and more on decent tenants who they can convince to stay for a long time.
However, tying up properties in a company would limit the amount of income raised for the Exchequer. Generation Rent has campaigned for tax to be recouped from landlords and invested in building more houses, but the Treasury estimates this policy will raise only £2bn between next year and 2021. No amount of landlord baiting will make up for failure to increase the supply of new homes.
In addition, a lot of landlords who face a higher tax bill might genuinely be unable to afford the mortgage and be forced to sell. They don't need a reason to evict a tenant so many may get their marching orders. Alongside this policy the government needs to start protecting tenants from no-fault evictions, and support councils, housing associations and other long term investors to step in and buy up homes with sitting tenants. Extra vacant homes on the market would also be good news for would-be owner occupiers.
There are pitfalls that need careful navigation, but cutting tax relief for landlords is at least one measure that favours the young over the old in an otherwise crushing Budget. And even for those of us who are nowhere close to becoming first time buyers, landlords now have an incentive to make their properties nice places to live.Suggest a correction