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Has Osborne done enough to shore up the shaky housing market?


Chancellor George Osborne faces huge challenges in reforming the UK housing market as landlords move to dodge new tax charges and structural planning problems persist.

Among a raft of changes announced in the Budget earlier this month, Osborne declared plans to alter tax relief for landlords.

The higher rate of mortgage interest relief will be withdrawn gradually over a four-year period from April 2017, with relief eventually restricted to the basic rate of income tax.

The Chancellor also followed through on a manifesto commitment to open up allowances on inheritance tax to include family homes and bar individuals from claiming permanent non-dom status.

And two days later, Osborne set out reforms for the planning sector in a bid to deal with supply problems.

The Chancellor said these were the policies of a Government “unwavering” in its support of home ownership.

But will they work?

Tax relief

Experts warn landlords may simply move to limited company status, or include the extra cost imposed by the tax relief changes in rents.

Buy to Let Business managing director Ying Tan says: “This is certainly not encouraging landlords by any stretch.

“But landlords are adaptable and resilient, and what we will see is a movement towards limited companies.

“Firstly, the corporation tax will only be 18 per cent by 2020 and secondly, all the expenses, including mortgage interest, will be tax deductible.”

Mortgages for Business managing director David Whittaker agrees increasing numbers of landlords may seek company status, but adds many could be put off by the potential for stamp duty and capital gains taxes in moving over their existing portfolios.

“Sometimes it is worth standing back and looking at these things very carefully, and we’ve yet to see which lenders are going to broaden their activities to include limited companies,” he says.

Nonetheless, Tan says opportunities for first-time buyers are unlikely to result.

“In theory, if there are more landlords selling then there might be more stock, but I think ultimately the only way you are going to improve options for first-time buyers is to build more houses.

“The change is dragging the carpet out from under landlords’ feet, but the fundamental problem is there are not enough houses, so by trying to make it harder for landlords you are not really addressing the problem.”

Capital Economics property expert Hansen Lu says landlords are likely to respond to the tax relief changes by increasing rents for tenants, though he adds this will be mitigated by competition.

He says: “On the one hand landlords could accept a lower rental yield and that is likely to happen for a little while, but it seems quite unlikely that will remain the case, and rents will eventually have to increase.

“The change only affects landlords in higher tax bands, so if a landlord was earning under the 40 per cent band then they would be unaffected.

“You have got competition between different landlords and only a subset of those landlords will be affected. So you won’t necessarily see rents jump up immediately but more gradually over a long time.”

Whittaker suggests the reforms may be part of a broader move to increase tax receipts from the sector.

“It’s not being used as a measure to slow down the growth of buy-to-let. That’s an unconnected event.

“This is HMRC bringing landlords to the centre of the radar. There’s a lot of checking up to be done on declarations of income from the landlord community.

“So whilst the number currently affected may not be that significant, HMRC is firing the starting gun on a new relationship with landlords.

“Those that manage their affairs properly have nothing to fear, but there are certainly members of the community who should be very afraid.”

IHT reform

The impact of a manifesto promise to expand the IHT allowance to include family homes remains unclear, however.

The changes, which come into effect from April 2017, raise the individual IHT threshold from £325,000 to £500,000 when property is included, giving a married couple a shared £1m threshold.

Savills UK head of residential research Lucian Cook says the plans could encourage those in high-value areas to hold on to their homes, regardless of allowances for downsizers to carry forward the increased IHT allowance.

“Downsizing is critical to the efficient use of our housing stock and recycling housing wealth between generations, which is an important means of helping younger households get on or trade up the housing ladder,” Cook says.

Knight Frank head of UK residential research Gráinne Gilmore says the downsizers’ allowance may help release more large homes back into the market.

“However, the tapering of the IHT bands upwards over the coming years mean that some may be tempted to sit tight in their home until they can downsize and retain the maximum housing IHT allowance, creating short-term stickiness in this market,” Gilmore says.

“The next step for policymakers will be to focus on is delivering housing suitable for downsizers – properties in the right location and with the right specifications for older residents.”


Osborne also took the opportunity to bar permanent non-dom status, as well as banning its inheritance.

Prior to the election, some had warned that such a move could lead to non-doms fleeing the UK, but BDO partner Richard Morley now suggests such fears were overstated.

“We are not going to see a mass exodus of non-doms,” he says.

“If they are buying properties through offshore companies, they are already paying massive stamp duty, plus the annual tax on enveloped dwellings which was put up by 50 per cent last year. It is not stopping them. They still see the UK as a place to have a trophy asset of prime London property.”


All of which has made the Chancellor’s reforms to the planning sector more critical than ever.

Osborne is seeking to grant automatic planning permission for brownfield sites in England, while major housing projects could be fast-tracked, and rules on extensions in London relaxed.

In addition, planning powers will be devolved to mayors in London and Manchester, while there are also plans to introduce new sanctions for councils that do not deal with planning applications quickly enough.

Home Builders Federation head of communications Steve Turner says: “If we can ensure councils have housing plans in place, and speed up application processing that will go a long way to addressing the biggest constraint on supply.

“The biggest constraint has been not enough land coming through the planning system to meet demand. The other issue is that once a decision has been made to build, it should not be taking years to get on site and lay bricks.”

Building Societies Association mortgage policy adviser Robert Thickett agrees, but warns planning and development services are also facing budget cuts.

“In theory, these changes will act as a downward pressure on house prices, but there is such a massive disparity between the volumes of properties we need to be producing versus what we are producing. There are huge structural problems with the UK housing market.

“It is not just planning; there is a shortage of bricks, a shortage of qualified builders. Lots of young builders left the sector in the recession and they have not come back.”

And while Planning Officers Society communications manager John Silvester admits some local authorities have been too slow and inefficient, he disputes they represent a bar on progress.

“Planners tend to be of the view that it’s not planning that’s the problem, it’s the economy,” he says.

“If people could afford the housing and house-builders were building enough in the right places than that would make it better.

“A cynical view might be that planning is easier for politicians to tackle than many of the other issues, so they get on top of that.”

Expert view

Lucian Cook, head of UK residential research, Savills

The plan to increase the inheritance tax threshold will be of the greatest benefit to mature homeowners in London and its hinterland. While many older homeowners will welcome the changes to IHT, the downside could be to encourage those in high value areas to continue to hold onto their homes for longer, irrespective of the ability for downsizers to carry forward the increased inheritance tax allowance.

Downsizing is critical to the efficient use of our housing stock and recycling housing wealth between generations, which is an important means of helping younger households get on or trade up the housing ladder.

The changes in tax relief for interest payments are likely to slow the growth in the mortgaged buy-to-let sector. This is likely to provide some comfort to younger generations of aspiring homeowners, though it could reduce some of the choices for those tenants stuck in the private rented sector.

Together with caps on housing benefits and the prospects of medium term interest rate rises, this will also put a squeeze on highly leveraged buy-to-let investors in lower value markets.

This may encourage banks to put greater emphasis on first-time buyer and home mover lending, though any impact is likely to be gradual given that the changes will be phased in. Further, the capacity for increased lending in these sectors will be capped by the regulatory provisions of the mortgage market review.

Together these measures are likely to heighten the emphasis on Help to Buy to boost access to home ownership and, importantly, increasing levels of housebuilding in the UK.


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  1. I think the commentators above put too much emphasis on the effects of ‘downsizing’. The larger houses will eventually come to market, maybe just a few years later than previously expected. So it’s a matter of timing.
    OK in the meantime they may be ‘underused’ but the elderly residents may let some spare rooms for additional ‘Tax Free’ cash, now the limit is being raised! Thus providing a small increase in capacity in the rental market.
    We just need to build more properties!!!

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