Paul Johnson, a notable figure in economic analysis as the Director of the Institute of Fiscal Studies and a visiting economics professor at University College London, has put forth a compelling argument for the removal of stamp duty for private landlords. In his recent articles in The Times and on the IFS website, Johnson sheds light on the disparities landlords face compared to owner-occupiers in terms of taxation.
According to Johnson, prospective landlords not only contend with additional stamp duty charges but also bear a heavier tax burden on various aspects of their property investments. Unlike owner-occupiers, landlords are subject to taxes on rental income, and recent changes have limited the tax relief on mortgage payments. This means that even higher-rate taxpayers, whose rental income just about matches their mortgage interest payments, are still obligated to pay a 20% tax on their rental income.
Johnson emphasizes the unequal treatment in the current tax system, drawing attention to the financial strain it places on landlords. The disparity becomes evident as landlords navigate a landscape where their investments are subjected to higher taxes, discouraging potential property investors from entering the market.
As discussions on housing policies and tax reforms continue, Johnson’s advocacy for the abolition of stamp duty for private landlords contributes to the ongoing dialogue on creating a more balanced and equitable taxation framework within the property market.
Landlords find themselves burdened by a complex array of taxes, with capital gains tax on property sales being a notable source of financial strain. Even on gains stemming from inflation, landlords are subjected to this additional tax, creating a substantial financial hurdle. When considering the complete tax landscape and disregarding stamp duty, the effective tax rate for a higher-rate taxpayer engaging in a buy-to-let property investment, utilizing a 50% mortgage, and selling after a decade, stands at approximately 76%. This rate further escalates to 86% for additional rate taxpayers (45%), reaching levels exceeding 100% for landlords with more significant mortgages.
Tenants, both current and potential, bear the brunt of these exorbitant tax rates imposed on landlords. As landlords grapple with increasingly stringent taxation, the inevitable repercussion is a surge in rental prices. The intricate and convoluted taxation framework surrounding property investments creates a challenging environment for landlords, ultimately impacting the affordability of rental properties for tenants in the long run. Striking a balance in property taxation is crucial to fostering a healthy rental market that benefits both landlords and tenants alike.
In analyzing the recent upward trajectory of rental prices, Johnson posits that a substantial contributing factor is the increased tax burden borne by private landlords. Despite acknowledging the potential lack of popularity in proposing a reduction or elimination of these taxes in the upcoming Spring Budget, he emphasizes the practical outcome of such a measure: a prospective expansion in rental supply that could, in turn, lead to a reduction in rental prices.
While the economic benefits for private landlords may not find unanimous support, Johnson underscores the tangible impact on the rental market that a strategic tax adjustment could bring about. By framing the discussion in terms of market dynamics and rental affordability, he suggests that reconsidering the tax landscape for landlords could serve as a viable solution to address the challenges faced by tenants in the current rental market.
Johnson adds that even for owner occupiers, stamp duty or its equivalent is “eye-watering” in some parts of the UK.
