Landlords should be stripped of property tax reliefs to prevent a ’buy-to-let boom’ fuelled by the new pension freedoms, according to housing expert Andy Knee.
Knee, director of property services group LMS, said the changes that will allow over-55s to access their pension as cash risk creating further generational imbalance in home ownership.
The latest figures from the Office of National Statistics reveal just how quickly home ownership is falling among younger generations.
As recently as 1991, 65% of 25 to 34-year-olds in England owned their own home but this figure had fallen to under 45% by 2012. In the 35-to-44 age group the figure has reduced from 80% to 60% over the same timeframe.
Knee believes the new pension freedoms will result in a wave of older people snapping up properties to rent out, resulting in a ‘BTL boom’ and pricing younger people even further out of the market as they will be targeting similar properties.
He said the next government should take heed of the Green Party, which is calling for cuts on BTL tax reliefs. The party’s housing manifesto states mortgage interest relief, where interest paid can be offset against tax, cost the taxpayer £5.8 billion in 2010/11 and is worth more today due to the rise of the rental sector.
Knee said this relief was given based on the idea that being a landlord was a job but argued for many it was not. He added it was out of step with other savings and investments and should be scrapped.
‘The problem with tax relief on BTL mortgage interest is the justification is that people are in business and it is relief on a business cost but the reality is most people do not go on the road to BTL as employment but see it as a savings vehicle,’ he said.
‘If you are making profit on [money invested in] shares you cannot offset the money used to buy the shares against it – [mortgage interest relief] is wrong and not compatible [with other taxation].’
While buy-to-let companies can claim mortgage interest relief, they do not have a capital gains (CGT) allowance to offset some of their profits against. However, individual landlords not only receive mortgage interest relief but also have a CGT allowance of £11,100 for this year, which allows private landlords to ‘have it both ways’, said Knee.
The combination of landlord reliefs and pension access could be toxic for those with dreams of home ownership.
Knee said that ‘rightly or wrongly’ individuals felt they knew property better than stock markets and would be more inclined to buy properties with their pension cash.
‘People believe they know property. They have a home and may have even inherited a home and become an accidental landlord, and they see [property] as a straight forward way to make money,’ he said.
‘Those with smaller pension pots who think the stock market is too risky and do not want to buy an annuity, will look to property. It will put further pressure on price, especially if we do not deal with the lack of supply.’
Neil Lovatt, director of Scottish Friendly, said the pension changes had ‘estate agents…rubbing their hands in gleeful anticipation’.
‘The baby boomer generation has always had an unhealthy obsession with property. This has been manageable, even beneficial to the economy when people slowly climbed the property ladder,’ he said.
‘But the new pension rules will essentially bankroll a generation, allowing them to buy into an already over-inflated market in the expectation that it will help fund their retirement.’
He added that property ownership was now becoming ‘the preserve of the old and the rich’ and baby boomers ‘getting a second bite of the cherry’ could mean generations of younger people find it too difficult to buy.
Rental changes needed
In order to ensure ‘Generation Rent’ are not stuck paying someone else’s mortgage forever, Knee said a clampdown on tax relief for landlords should go hand-in-hand with reform of rental policy. Labour has already proposed a cap on rent increases in the private sector and abolition of letting fees to give tenants a fairer deal.
‘The regulation has tipped in favour of landlords,’ he said. ‘[The problem is] if you take mortgage interest relief away then the rent will go up…can the market stand that?’ he said.
He agreed that private rental property was needed but that the regulation surrounding it should be fairer.
‘There is an imbalance in society and wealthy people are getting wealthier and [the government] should not give [landlords] tax relief to help them become wealthy.’