Why Rachel Reeves’ landlord tax would make bad situation worse

Yet another proposal to fill the £50 billion hole in the UK economy has emerged, with UK landlords the target this time. As Chancellor Rachel Reeves struggles to find areas to raise revenue without touching income tax, National Insurance or VAT she is spreading the net wider with the private rented sector (PRS) the latest area for taxation.

The proposal is that landlords’ income from rents would be charged with national insurance (NI). This unprecedented move would make landlords the only investors in the UK who would be charged in this way. Those who have income from investments, pensions, savings etc would not be subject to NI.

The problem with this idea is that it definitely won’t raise as much money as they expect and the people who will end up paying for this additional tax will be the tenants. It is estimated that adding National Insurance to landlords’ income could cost as much as £1,000 a year. Most landlords would be unable to absorb this additional cost and would need to increase rents accordingly.

The revenue raised is expected to be around £2bn but as with all of these estimates they assume that an increase in tax would not result in changes in behaviour. There would be many landlords with perhaps one or two properties who will consider leaving the sector if NI is charged on income.

Furthermore, the assumption that this is ‘unearned income’ is also questionable. Most landlords have to work hard to maintain their properties, attract and retain tenants, and complete the administrative work that is involved in providing a home in the PRS. With little or no work involved in having investments why should landlords be unfairly singled out for additional taxation?

Indeed, this could result in a rush for the exit for many landlords for whom this would be the last straw. The outcome of fewer available properties would again be borne by tenants as rents would rise as even greater shortages occurred in the marketplace. Far from addressing the current housing emergency this would simply exacerbate it and make a difficult situation even worse.

If many more landlords left the market, then revenues raised from this additional taxation would be considerably lower than anticipated, resulting in poor income generation and a worsening housing market.

It may also push some landlords into holding their properties within limited companies which would make earnings from renting exempt from NI as well as offer other tax benefits. Again, this would depress the likely tax take from this measure.

There is always a considerable gap between the projected earnings from any new tax and the reality of how much is collected. New taxes almost always result in changes in behaviour which politicians seem unable to grasp.

With demand for homes in the private rented sector already high and projected to increase further this is a retrograde step which will do little to address the economic blackhole or the housing needs of millions of tenants. Instead of targeting landlords the Chancellor should be using the forthcoming budget to encourage greater investment in the PRS by expanding the market rather than putting forward policies which can only limit it in the long term.