Axe the tenant tax?
Recent tax changes for private landlords work against improving energy efficiency in rented accommodation, argues CIH Northern Ireland policy and public affairs manager Justin Cartwright.
The Department for Communities (DfC) recently published its proposals for changes to the regulation of the Northern Ireland private rented sector (PRS), in order to make it a more attractive housing option.
Successive studies have shown that the Northern Ireland PRS works reasonably well. However, this isn’t always the case. There are landlords and tenants who do not adhere to the law or principles of good practice – some deliberately, others unintentionally. Therefore DfC’s proposals aim to address specific problems and their causes.
The proposals are many and varied, covering supply, affordability, security of tenure, tenancy management, property standards, dispute resolution and tenancy deposits. They include requirements for:
- A declaration of property fitness at registration, with greater enforcement carried out by councils. Most tenant dissatisfaction in the PRS stems from physical property conditions. There is evidence of poor conditions at the lower end of the market and rates of unfitness (while still low) are highest in the PRS compared with the social and owner-occupied sectors.
- A minimum energy performance certificate (EPC) rating for lettable properties. The PRS is the tenure with the highest proportion of fuel poverty, with almost 50 per cent of private tenants having to spend more than ten per cent of their income on energy costs.
CIH Northern Ireland is broadly supportive of the proposals, and a poll of CIH members in Northern Ireland shows that members – including private landlords and letting agents – are also very supportive. For example, 92 per cent of poll respondents support property fitness declarations with enforcement.
Minimum EPC ratings for lettable properties is the sole proposal of which a majority of respondents were not in favour. Nor is CIH Northern Ireland convinced that this is the best approach to raise energy efficiency levels.
Properties with lower EPC ratings are typically older homes that are difficult to improve without major capital investment, and many landlords are not in a financial position to invest in the improvement of these properties. The Northern Ireland PRS is generally dominated by small scale landlords who make modest returns once all costs are taken into account.
Energy efficiency is an area where tax incentives could drive standards more effectively. For example, the UK Government could allow landlords to treat improvements that bring properties up to a minimum EPC rating as an ‘allowable expense’, so they get a timely tax benefit from the investment. Repairs and maintenance costs are already allowable deductions, including for restoring houses to their original condition, which helps to address unfitness.
However, the UK Government’s recent changes to the tax system which relate to landlords have not been targeted at improving standards. Instead, they have introduced new restrictions on the costs that landlords can claim as a tax deduction.
For example, 100 per cent of loan interest costs relating to a rental property was an allowable deduction against rental income in 2016/17. However in this financial year it’s been reduced to 75 per cent, and it will continue to fall in 25 per cent blocks until it reaches zero per cent in 2020/21. This will have the effect of increasing the tax bill for many landlords.
The change has been dubbed the ‘tenant tax’ by some landlord groups, due to the costs that could be passed on to tenants. But is this a fair description?
Landlords in Northern Ireland tend not to increase rents during tenancies, not wanting to ‘rock the boat’ where tenants are meeting their rent responsibilities. This means there will be many longer-term tenancies where rents are below market levels.
These landlords could seek higher rents with a reasonable prospect of getting them, in order to cover additional costs. I recently spoke with one such landlord in Northern Ireland who is planning on increasing her rents for the first time in years, since the tax changes put her £5,000 in the red.
Another outcome may be that some buy to let investors sell their properties, relieving pressure on house prices and releasing homes perhaps for first-time buyers, while reducing supply of rented accommodation. But we know that there are higher levels of negative equity in Northern Ireland, and landlords may not be in a position to sell.
In short, the impacts of the tax changes are likely to vary across the UK depending on the characteristics of local markets, but I expect there to be some impact on tenants in Northern Ireland which raises affordability concerns.
What we know for certain is that the DfC proposal to improve the energy efficiency of private rented accommodation is not being matched by tax incentives from the UK Government. This should give us pause for thought when considering introducing a requirement that would mandate capital improvements in privately rented homes.