Taxation without justification


Monetary Policy

Shadow Monetary Policy Committee votes to hold bank rate

Labour Market

An economic analysis of the Treasury’s treatment of privately rented housing

  • The private rented sector has played a critical role in increasing and improving housing provision in the UK. Around 80 per cent of private sector tenants are satisfied with their homes and satisfaction in the sector compares favourably with that in the social rented sector. This contribution has gone unrecognised: instead, landlords have been made scapegoats for a housing crisis primarily caused by land-use planning restrictions.

  • The government has recently passed tax measures that discriminate against private rented housing, both as an asset class and as a form of housing tenancy. The most damaging of these measures is ‘Section 24’1 which prevents landlords entirely offsetting interest against rents before taxable profits are calculated. This move is unjustifiable and will raise rents. The Treasury’s rationale for the tax change has no justification in public finance economics and it is concerning that the Treasury would make the arguments that it has made.

  • As a result of Section 24, many landlords will pay huge amounts of tax as a proportion of profits. Interest rate rises are likely to cause the tax rate to exceed 100 per cent of their underlying profit in some cases. Tax will even be payable by some landlords who make a loss.

  • The government has also increased Stamp Duty on buy-to-let properties. Stamp Duty in general is widely regarded as one of the worst taxes from an economic efficiency point of view. The late James Mirrlees, Nobel Prize winner in economics wrote: ‘There is no sound case for maintaining stamp duty and we believe that it should be abolished’ and ‘Stamp duty and business rates defy the most basic of economic principles by taxing transactions and produced inputs respectively’. The government’s decision to increase Stamp Duty on buy-to-let properties will also damage the market and raise rents.

  • The increase in Stamp Duty was introduced with the expressed intention of promoting buying over renting. This may happen at the margin. However, any such effects will benefit a small minority of potential purchasers who will be relatively well off.

  • Increases in taxes on landlords are likely to reduce the supply of rental housing, increase rents, reduce quality and reduce the size of the ‘professional’ landlord sector which is most affected by the changes.

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Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.