Making money like a landlord

Inspired by Savills' findings on landlord capital gains last month, we decided to look at just what sort of money landlords in the UK are making – and how much we the taxpayer are helping them.

Introduction

As reported in the Guardian this morning, UK landlords make £77.7bn each year in rent and capital gains. This is more than Morocco’s GDP of £68.6bn (for a country of 33m people), making the industry the 61st largest economy in the world (UN 2013).

They are also subsidised to the tune of £26.7bn in tax breaks and housing benefit. That is higher than the £25bn of cuts that George Osborne claims are needed after the election. It is also more than our spending on the overseas aid budget of £10.3bn, job seekers allowance of £4.34bn, the Department for Culture, Media and Sport’s entire budget of £6.14bn, and the £1.13bn Affordable Homes Programme put together.

The cost of landlord subsidies to Britons is £1011 per household. That is the cost of a week’s holiday for four in Majorca, a 55” HD TV, or a Boardman Road Team Carbon bike.

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Capital gains

Savills estimate that landlords enjoyed £177bn in capital growth between 2009 and 2014, which equates to £35.4bn a year. The chargeable capital gains on residential property recorded by HMRC in 2011-12 (the most recent figures available) were a mere £3.05bn (from the sale of 55,000 properties worth £9.46bn).

Rent

Generation Rent estimates that landlords receive £42.3bn in rent annually, based on the 4.75m households renting privately in the UK and the closest we have to a national mean monthly private rent, which is the Valuation Office figure for England of £742 for 2013-14. The number of private renter households is based on the Office for National Statistics figure for 2013 of 26.4m households and the Family Resources Survey 2012-13 finding that 18% of the UK’s households rent privately.

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Subsidies

First, private sector landlords receive £9.3bn in housing benefit per year (DWP 2013/14).

Second, landlords can claim 10% of their rental income tax-free for wear and tear purposes without demonstrating that they have made any repairs. If we assume that they pay the higher 40% rate of income tax, that amounts to 4% of the £42.3bn, or £1.69bn.

Third, landlords can deduct the cost of mortgage interest from their income for tax purposes. On the basis that landlords have mortgages worth £332bn, and have a typical interest rate of 5%, they pay £16.58bn in interest per year. If tax were paid on this at the 40% higher rate, the Treasury would get £6.63bn per year.

Fourth, there are a number of ways that landlords can avoid paying tax on the whole capital gain, including letting relief of up to £40,000 and by living in the house before selling. Instead of selling, many landlords realise their capital gain with no tax liability by remortgaging. Between December 2013 and November 2014, 95,000 buy-to-let remortgage loans were advanced, worth £14bn (CML).

Discounting the £3.05bn that was taxed in 2011-12, we are left with an annual average of £32.3bn of capital gains that is not taxed. Taxed at the top rate of 28%, this income would bring in £9.06bn.

These four subsidies add up to £26.7bn per year. In addition, the government is providing equity finance worth £1bn to property developers to build homes for private rent. Landlords also don’t have to pay business rates. Even if they were to pay only £1000 in business rates for each property – the average retailer pays £12,750 – that would bring the exchequer £4.75bn. Finally, HM Revenue and Customs estimates that £550m in tax on rental income is evaded by landlords each year.

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Tax

Landlords do make a contribution to the exchequer. Assuming payment of the highest tax rate of 28%, tax on the £3.05bn of chargeable capital gains would have been £854m. And taking the £16.58bn of interest payments and £4.23bn of wear and tear allowance from the £42.3bn of rental income gives a taxable income of £21.5bn. Taxed at 40% and leaving out the £550m of evaded tax, that gives £8.05bn, or £8.9bn, including capital gains tax, in total. That still amounts to a net subsidy of £17.8bn from the taxpayer.

Proposal

During this age of austerity, landlords have made a colossal amount of money from capital gains and rents, and enjoyed generous subsidies while their tenants face stagnant wages and cuts to the welfare state. People who work for a living are funding through their taxes the lifestyles of people who can make a living simply because they own property and someone else doesn’t.

To redress the balance, the government can use the tax system to redress the balance and make sure landlords pay their fair share. While the value of the missing income and capital gains tax will fluctuate year by year, the annual outlay of £9.3bn in housing benefit shows no sign of going away.

To neutralise the subsidy effect of housing benefit on private landlords, Generation Rent proposes a landlord levy of 22% on all rental income, on top of the income tax landlords already pay. It would be enforced through a national register of landlords which would also levy penalties for failure to register.

The landlord tax would:

  • Raise an additional £9.31bn per year, assuming an industry turnover of £42.3bn
  • Fund the building of approximately 90,000 new council homes each year, which would ease the demand for private rented housing, lower rents and help reduce the UK’s housing benefit bill
  • Reduce the economic advantage that landlords have over would-be home owners in the property market
  • Reduce the burden of landlord benefits on the working public, and
  • Make it relatively harder to make a living by owning property than by working.

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Showing 21 reactions

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  • followed this page 2016-06-14 16:17:35 +0100
  • commented 2015-10-01 19:59:29 +0100
    Well here we go again. Dan Wilson Craw you’ve not had the courtesy to answer all my posts on your site but instead send me emails saying you’re too busy to do it but can we meet for coffee. Now you’ve deleted the posts.

    How much damage is Generation Rent happy to inflict on tenants just so that you keep yourself in a job? You’ve pushed for mortgage interest relief to be limited for BTL properties and it’s about to come to pass. Already landlords are serving eviction notices on their tenants so they can sell up and others are increasing rents. I’ll be doing both as soon as the law is passed and the first of my tenants to go will be a single mother of 5 on benefits. I don’t want to do it but the house will cost me a significant amount of money when the tax change is fully imposed. Stop spouting this rubbish and do proper stuff to help tenants!

    If you impose a surcharge on landlords like you’re suggesting what do you think is going to happen? Seriously what, tell me? More landlords quit, more tenants get evicted and the first ones to go are the HB tenants. Rents shoot up because there is less supply. And what happens to the poorest in the country Dan? They throw themselves at the councils, that’s what. But they’re going to get little help there.

    As of March this year there were 2,570 families with dependent children living in B&B accommodation (up from 630 in March 2010) and at the end of June there were 64,610 families in ‘temporary accommodation’. The tax change will exacerbate this terrible issue.

    How do you sleep at night campaigning for things that are going to hurt so many people? It’s shameful.
  • commented 2015-04-25 22:34:57 +0100
    It’s not just foreign investors inflating London residential property prices, it’s UK nationals holding and buying up property in offshore tax havens, investors transferring property at under value avoiding stamp duty/CGT and quite a few landlords not declaring all the rental incomes. With the undeclared tax monies they are buying more property, increasing prices and therefore freezing out our younger generations by monopolizing with higher prices and ever increasing rents.

    We need as government that will introduce a housing policy that benefits all of society not just a few.

    Increase tax for this sector to support house building and first time buyer schemes. This should also help values drop to a level that reflects the salaries of those who work hard and aspire to own their own home.

    All business should benefit the society in which it operates.

    A fair society becomes as healthy society!
  • commented 2015-02-11 15:03:18 +0000
    Putting aside the circular reference between Generation Rent and the Guardian quoting a figure of £77.7bn, this article is unbelievable. Why on earth should landlords pay tax on their costs? How is it a subsidy to not have to pay tax on costs? Do companies pay corporation tax on total revenue rather than their profit? Why should upkeep and interest on a mortgage not be considered costs? And including housing benefit?! I mean seriously? Housing benefit is a benefit to the tenant not the landlord. A high level glance over your flawed accounting reveals that that your “generous” £1011 subsidy per UK household is in reality zero.

    What is the aim of this article? To create landlords that don’t keep properties in good condition for their tenants since they have no wear and tear allowance? To stop people from being able to be landlords at all? Is the problem private landlords (rather than large corporations) making money from rent? People who have worked hard, making sacrifices to be able to afford a deposit and buy a property? Are these people such criminals?

    On one hand you’re claiming that landlords are being subsidised by housing benefit on the other you are commiserating that the tenant is suffering cuts to welfare. Many landlords actually work full time while owning a rented property and are subject to the same “stagnant wages” you talk about. They don’t go home and relax after work they deal with all the work associated with renting a property i.e. they have a second job and while the value of that work is not tax deductable it is if you pay someone else to do it?! Apparently a letting agents time is worth a lot more than mine.

    Claiming that landlords who abide by all the taxes imposed by HMRC do not pay their fair share of tax is completely unjustified. For the privilege of becoming a homeowner one has to pay tens of thousands of pounds in stamp duty. I pay income tax of 60% on all profits (thanks to a completely unjustifiable progressive tax system with a hump), most others like me will pay 40% since they are most likely higher rate tax payers. Then if you should ever sell your property one will have to pay upto 28% capital gains tax on the increase in value, if there is one. In calculating your capital gain HMRC assumes a linear gain over time so even if your property didn’t gain value at all while you were not living there you still have to pay tax. If your property is empty while you waiting or preparing it for being rented you have to pay the full council tax bill on it, there is no discount at all despite the fact that you are not actually using any services provided by the council. And don’t forget all the VAT you pay on furnishing and upkeep. In my book that’s your fair share and then some.

    You concentrate on capital gain and completely ignore the risks associated with buying property like the fact that prices can actually go down as well as up. If prices go down and you lose money on the property, HMRC does not let you offset the loss against other gains. This is not the nice deal you get if you’re a large corporation. HMRC are happy to take their share of the profit but not of the risk.

    You want to add a flat 22% tax on all rental income. Some people like myself don’t even have a 22% return on their rental income after expenses and tax. Should it cost me money to rent my flat? Perhaps you would prefer if I left it empty? Perhaps you think that only people who can afford to leave their properties empty should be allowed to own more than one home? Where did 22% come from? You need to have some concept of how much a landlord actually makes (after expenses) renting their property before you can even begin to come up with a figure and if I think you were being fair you might realise that there are many landlords out there paying a lot of tax, working hard to provide a decent home not just for themselves but for their families and someone else’s family. These people don’t deserve to be tarnished with your tax dodging label. Your idea of a 22% tax on total revenue would send most businesses into liquidation and certainly not allow any new ones to get off the ground.

    Generation rent should be concentrating on the real reasons why so many people have to rent and can’t afford to buy. It is not landlords. It’s increasing house prices due to foreign investment which is left unchecked by the government. It’s the lack of investment in building affordable housing in line with increasing demand. It’s help to buy schemes which ensure people can buy beyond their means, keeping prices artificially high and pushing them up further. It’s the lack of investment in education, innovation and new technology and an over dependence on home ownership to drive growth in our economy. Don’t make landlords the scapegoat.
  • commented 2015-02-11 11:50:40 +0000
    Oh no, yet another generalisation. I inherited a property from my single, no children sister who paid full tax and NI throughout her working life. I personally fully renovated a run down property at my own expense (no tax relief and full council tax after 6 months). It’s in the North East so no capital gain so far and it’s now let to non housing benefit tenants at a fair rent increasing at far less than inflation. There’s no element of fair wear and tear on an unfurnished property other than the normal running costs which is a no better far deal than most businesses enjoy. My family have worked hard and long for the relatively little we have accumulated and we don’t take kindly to this sort of stuff, it’s really quite insulting and totally inaccurate and unjustified – if you get your way, the house will be sold and there will be no rental !!!
  • commented 2015-02-11 00:03:25 +0000
    There are also several misconceptions, notably on CGT. Ordinary landlord, unlike MPs have not been able to flip properties. CGT can re rolled over in the case of holiday lets.

    The allowance for wear and tear is ONLY on furnished properties. I should not be forgotten that the figure, as ever, from the Treasury is on the mean side. Everything wears out much more quickly and more work is caused by tenants. Carpets have to be placed about every 10 years, gas and electric stoves ditto, and one is lucky to get 5 years out of electrical appliances. Then there is idiotic behaviour. As an owner I have never had blocked drainage from a washbasin, or bath, or wc, nor broken a shower head – in my last house I stayed over 30 years. Tenants are continually creating blockages or behaving in a stupid fashion, like the ones who told me there was an electrical fault as the lights had gone out – they had replace any light bulbs! Or the ones who complained that the very robust shower fitting had come down – they used it rather than the conveniently provided rails to pull themselves out of the bath. Basically, if letting, equip the interior like a battleship.

    Although reclaimable from security deposits one never gets one’s money back. recently I had a carpet with an iron mark on it -we supply ironing boards on request. I recovered the cost of re-carpeting but nothing like m time and travel, and of course, the delays in letting until the place was ship-shape.

    Where the article does not take into account is the cost of the landlord’s time, nor void periods, nor dud tenants.

    Of course, properly handled it is a good business some 3/4 of my pension before costs comes from letting, but 1/2 after costs.If annuities were at a reasonable level it would pay hands down not to have the roperty but to have extra pension. However, property in the UK is a good lng term hold; in the 1970s it preserved us from the ravages of inflation. The return is decent, but to criticise landlords in such an imbalanced way does not help anyone, least of all the tenants.
  • commented 2015-02-10 23:40:27 +0000
    This is a very partial account.
    Some landlords do take people on housing benefit. This is NOT a subsidy to the landlord but to the tenant. I had an HB tenant for a decade and it was the devils own job to get a rent increase: when the tenant left I was able to add £100 pcm to the rent. So if housing benefit is to be taking into account the subsidies paid by landlords should be taken into account.

    The alternative is council housing which was ruinously expensive to maintain. Private letting saves councils maintaining their own property maintenance, and housing stock. The losses here were horrendous with, especially London boroughs having no idea of what the actually owned, and, amid shortages, numerous dwellings standing empty for years, even decades. Landlords do not lie empty properties.

    As far as tax relief on loans is concerned this is standard business practice as are reliefs on capital gains tax.

    Business rates are irrelevant as under the usual contract the tenants are responsible for the council tax: if a government wishes to overtax tenants that is down o it, but it would hardly help the tenants.

    Most landlords are decent honest people seeking an alternative to the pension system which was a colossal con trick. Calls for more regulation will achieve nothing. We already have gas certificates every year, where gas is supplied, but rogue landlords, the same as rogues in general in any sphere of activity, do not heed regulations. The people who are the worst are hd landlords in blocks of flats, and residents associations which try to save money by false economies on maintenance.

    This whole issue is far more complicated than this article makes out. The state imply cannot afford to replace private landlords, reversion to council houses would be a disaster, as would be penalising landlords since that wold simply increase rents.

    We should be proud, as a nation, of having such good housing stock, and such a healthy and efficient property market.
  • commented 2015-02-10 22:39:39 +0000
    Anonymous, Landlords tend to realise capital gain untaxed by either MP-style CGT flipping or by never actually selling and remortgaging to release capital and grow their empire.
  • commented 2015-02-10 22:37:58 +0000
    Vlad… (where do i start?!)

    We deliberately didn’t talk about net tax contributions or landlord profits/margins. Our argument is not that your profits are too high but that the cost of capital is so low that it is driving up property prices. This is driving the capture of your consumers and that is unbearable. Unethical even.

    If the cost of capital for private landlords rises, then home ownership and investment in social housing becomes easier. And 75% of renters would rather be in one or the other rather than in the PRS.
  • commented 2015-02-10 22:34:06 +0000
    “Evil” landlord, you make me feel like my mere 40" TV is positively parsimonious.
  • commented 2015-02-10 22:32:05 +0000
    Esther, Actually, fiddling with the general tax code would be more fiddly than a new tax in this case, because that would have unintended consequences for all homeowners.

    22% tax wouldn’t discourage landlords, it would lower house prices, making investing in becoming a landlord cheaper. It would also make investing in social housing cheaper.
  • commented 2015-02-10 22:28:09 +0000
    Hi Ben, actually the economics doesn’t work that way. Basically, price isn’t related to costs, it’s a function of supply and demand. Landlords are already getting the market price out of you. You don’t for example see landlords dropping the rents massively after they pay off their mortgages.

    However, the captured renter (can’t afford to buy, can’t get into social housing) makes landlording an attractive investment, so there’s lots of investor demand for property, which drives up house and land prices, exacerbating the capture.

    We propose taxing rents at a level where the previous year’s PRS housing benefit is recouped, AND using that money only to build social housing. This year that would be £9bn, which would build 90,000 new homes. The effect would be:
    a) making landlording less attractive an investment, therefore bringing down house prices
    b) funding shed loads of new social housing, reducing demand in the PRS, therefore bringing down market rents.

    So a 22% tax on rents would bring down your rent, not raise it!

    (Gotta love economics)

    Alex
  • commented 2015-02-10 21:45:51 +0000
    “To neutralise the subsidy effect of housing benefit on private landlords, Generation Rent proposes a landlord levy of 22% on all rental income”

    Renter here. I suppose you’d rather my landlord compensated for that 22% by bumping my rent?
  • commented 2015-02-10 16:51:16 +0000
    Would it be possible to include average figures per landlord/tenant than as a whole? An industry turnover of £42.3bn is colossal but how does that compare with the amount of money each tenant is paying and each landlord is receiving?

    Interestingly, the £1011 profit per year is only £84.25 a month – a lot of money to a tenant but given how many landlords complain about how tough life is renting to the lower orders, is that actually worth the hassle for less than a week’s rent?
  • commented 2015-02-10 14:09:21 +0000
    I am quite disappointed with this article. It is hyperbolic and provoking in the manner of a Daily Mail rant; somewhat ironic given the opposing political views of this paper to Generation Rent.

    I would assume that the £9.3bn in housing benefit received is due to the government not building enough council houses. What if they stopped paying housing benefit to private landlords – where would people receiving housing benefit live? In the council houses that don’t exist?

    Vlad Imp makes a good point regarding the furnished property wear and tear allowance. It doesn’t come close to covering the capital outlay of having to replace furniture every 5 years (or less, with some tenants). And what tenants struggling with money can spend £2/3 grand on furniture every 5 years or so?

    I am from generation rent, I am a 28 year old with a fairly good income, yet I would struggle to buy with the money I earn. I think that the private rental market should definitely have more controls to stop rogue landlords ripping off their tenants and playing on the lack of housing supply to increase rents to improbable proportions. HOWEVER, a 22% tax would only discourage decent landlords which are much needed. If there were less landlords, there would be even less supply of houses, more competition for private rents, and therefore EVEN HIGHER rents than there are now.

    I know a couple of landlords, and those that I know worked hard to earn their savings which they invested into property. They invested into property because their money was not safe in the bank, and was not safe in the stock market – both of these uncertainties were caused by government policies and a lack of regulation. So to keep their money safe, which people are entitled to try and do, they put it into property. For most good landlords that don’t cheat the system, that spend money keeping their properties in good repair and that generally play by the rules, the margins are low. It’s a safety mechanism, not a money spinner.

    Yes, maybe look at the policies regarding capital gains and deduction of mortgage costs from income, but a flat rate tax would cause more problems that it would solve. I would take this article far more seriously if there was even a suggestion of a well thought out solution, rather than a naive and simplistic “tax them all” stance which would cause more harm than good.
  • commented 2015-02-10 12:21:04 +0000
    A good article ruined by over exaggeration and mistaken assumptions.
    In no particular order
    1 Only furnished properties qualify for the 10% wear and tear allowance – and trust me you wouldn’t make a profit or even cover the costs of repairing/replacing furnishings for just 10% or rather the 4% that a tax deduction when paying 40% tax gets you
    2 Taking 2009 to 2013/4 to judge average capital gains may give a gain – I bet taking 2007 to 2013/4 would probably have generated a loss – gain is not an automatic (possible exception of London)
    3 Conflating London experience into the general experience leads to very misleading mean figures – mean rents outside Greater London/South East will be MUCH lower, as would the capital gains
    4 Housing subsidies are no longer paid to the landlord, which is why fewer and fewer landlords will accept tenants on benefits – the article should develop the argument that housing benefit inflates rents in the rental market (and explain how) rather that saying it is a direct subsidy of landlords
    5 No government in history has ever allowed income from a particular source to be applied to the sector it came from – I don’t see the £3bn from landlord capital gains tax being spent on housing now – do you (the figure quoted is £1.13bn). Look at what happens with National Insurance contributions
    6 Outside of London I don’t believe many landlords make anything like to profits claimed here and imposing a one size fits all solution (22% charge on top of tax) would either see all rents increase or being being removed from the available rental stock – not what the authors want
  • commented 2015-02-10 10:21:15 +0000
    Of course, let’s not forget the biggest contribution to the landlord — in my 14 years of being a landlord, I have found that tenants almost without exception want to live somewhere they cannot afford, and then they still get the 55" tv, holidays not just in Majorca but the USA, whinge they need a reduction in the rent and then immediately get a Sky subscription, put their kids into private schools, drive status cars, bring in pets contrary to contract — none of which we, the landlords, have ever done — all the while having every little issue with the house dealt with by someone else (me!) so they don’t have to dirty their manicured hands by doing a little bit of DIY (or even cleaning or gardening when they finally leave). As a result of not living within their means, they can never afford to buy, meaning they will always be tenants. Perhaps they should be grateful someone else has worked so hard and saved to allow them to live for a short time pretending to be successful — or perhaps they should be forced to live in the hovels they could actually afford if they were forced to look after themselves and maybe they would learn to save. As a final insult, when they do deign to respond to emails, it’s always “from my iPhone” … another luxury item which we the landlords have never been able to justify due to the price. I started by saying “let’s not forget the biggest contribution to the landlord …” that comes from moronic tenants who through their inability to control their finances create their own subclass of eternal tenants who just moan about how hard life has been to them.
  • commented 2015-02-10 10:01:19 +0000
    Hi Anthony. This landlord makes a fair point and as the example explains, when profit and loss is calculated the margins are often finer than people expect. Without knowing the landlord’s specific circumstances we won’t know what (if any) their prospect of capital appreciation is. But either way, capital appreciation will only be realised if the landlord sells the property, and makes no difference to their balance in the meantime. Hope that helps.
  • followed this page 2015-02-10 08:53:45 +0000
  • commented 2015-02-09 13:03:38 +0000
    Hi Anthony. The landlord forgot to mention what is probably about a 10% capital gain, making it an £11k return on £25k investment, not £1k.

    They always forget the capital gain!
  • commented 2015-02-09 11:50:33 +0000
    I retweeted you tweet and got the following comment back – would be interested in your response :

    There’s articles online, then there’s the real world. The reality is… You buy a house for 100k as a buy to let. Putting down 25k as deposit leaves you with a 75k interest only mortgage costing about £300 a month. The tenant is entitled to 450 pcm housing benefit, which sometimes gets used for food, holidays, cars etc anything rather than rent. So, provided the landlord gets every penny due, they make 1800 gross profit for the year, take out the cost of landlords insurance, gas safety checks, cleaning between tenants, maintenance etc, the landlord will see about 1000 a year (before tax) that’s pretty measly for risking £25,000 of their hard earned cash, not to mention the risks that come from mortgages themselves.