CIOT/IFS debate: How is tax damaging the housing market and how can we fix it?

Speakers at the event on Wednesday 27 November 2024 discussed the various tax policies that affect property and home ownership, including incentives for landlords, renters and property owners, “distortionary” stamp duty land tax (SDLT) and the need for “radical” reform.

The debate was chaired by Helen Miller, Deputy Director of the Institute for Fiscal Studies, and featured speakers:

• Stuart Adam, Senior Economist, Institute for Fiscal Studies
• Meera Chindooroy, Deputy Director, Campaigns, Public Affairs and Policy, National Residential Landlords Association
• John Powlton, Head of Investment Management Tax, M&G, and member of the British Property Federation Tax Committee
• Josh Ryan-Collins, Professor of Economics and Finance, UCL Institute for Innovation and Public Purpose, and author of ‘The demand for housing as an investment: Drivers, outcomes and policy interventions to enhance housing affordability in the UK’ (Oct 24)

The challenges

Stuart Adam said the biggest problem in the housing market is that “we simply don’t have enough houses in the places where people want to live”, while Josh Ryan-Collins explored the structural drivers for the property market and warned about supply issues in relation to “genuinely affordable” houses.

Stuart acknowledged the problems of misallocation of housing, with smaller households “knocking around” in big houses, but Josh said the biggest misallocation is of capital. “All that allocation does is inflate house prices and drives inaffordability and inequality,” he added.

Josh also warned that government house building plans will use up the UK’s entire carbon budget, leaving none for other sectors, and urged a focus on tackling under occupation rather than building new homes.

Meera Chindooroy explored who landlords are, highlighting that more than two-fifths own just one rental property and many maintain these as an investment for retirement, as opposed to being “tycoons”. Meera pointed to the level of demand for private rented sector (PRS) property, saying it can be difficult for those looking to move from rental to ownership due to the amount of income they need.

Tax impact

Stuart said tax is important in the allocation of houses and who lives where. Given the lack of supply, he said, it is important to make effective use of the existing housing stock we have. He highlighted that the 25% single person discount on council tax encourages single-adult households to live in bigger houses than they would otherwise choose.

Stuart said the “obvious” impact of tax on property is with SDLT, which discourages transactions and means many properties are not owned by those who value them most. “Stamp duty should just not be part of the tax system,” he added.

Stuart said that while tax can affect the supply of property for housing rather than commercial use, such as the expenses of building homes and council tax being typically lower than business rates, the effects are reasonably small as supply “does not respond much to financial incentives”.

Josh said incentives such as tax reliefs and the promise of investment gains on buying property have succeeded in pricing houses beyond the reach of most young people and have left a third of homes underoccupied. The whole system is now extraordinarily biased towards home ownership,” he added, as the tax burden for owners is much lower than for renters.

Josh agreed that SDLT was a distortionary tax and said an annual property tax would “release a lot of this under-occupied housing”. He said many investors consider UK property good long-term prospects and “aren’t that responsive to small changes in tax”.

Meera said a “stagnation” of the rental sector coincided with tax changes from 2015 and demand is currently massively outstripping supply, which is the biggest issue for NRLA members. She added that changes to mortgage interest relief continue to have a big impact, and that landlord confidence fell after mortgage interest restrictions, then again after the mini budget in 2022. The result of this is landlords looking to decrease their portfolios.

Meera added that high rates of SDLT discourage selling, meaning landlords are “hanging on to properties for longer”.

John Powlton explored whether tax harms the housing market, opening his remarks by saying that he had asked an AI chatbot that question, to which it replied: “It depends.” The chatbot followed this up with three pages of text!

John said that the investor base for residential developments is mainly made up of long-term institutional capital, such as pension funds, who want long-term stability, and tax is just one consideration when these firms are looking to invest. However, he warned this investment has been undermined by tax changes affecting housing in almost every year since 2013.

“The problem is the constant tinkering,” John said. “Each time you do that you change the investment proposition.” He added this means investors will look elsewhere, and that without the catalyst of institutional capital lots of homes would not exist.

He said that tax policies used for particular purposes can accidentally affect other areas including housing. For example, scrapping multiple dwelling relief was a response to abuse of the system, but also had the side effect of affecting institutional investment. He suggested other ways could have been found to stop the abuse without scrapping the relief.

He said taxes on owner occupation are much lower than on other forms of wealth, adding that the tax system needs “fundamental” reform.

Potential solutions

Asked what we should change about to the role of tax in housing allocation, Stuart said: “Quite a lot.” Alongside abolishing SDLT and the single person discount for council tax, he suggested removing most of the features introduced to the system in the last decade and introducing a “rate of return allowance” for landlords.

Josh said the advent of the buy-to-let market did push up prices, and that that market is biased towards those who already have wealth. The key, he said, is more social, affordable housing “at rents that are aligned to people’s incomes”. He said this was common in the post-war period but prices have increased since then.

Polling shows people would overwhelmingly prefer to own rather than rent their home. Shouldn’t the government use the tax system more to support this, an audience member wondered. Stuart responded that, if you asked them, most people would prefer to drive Ferraris rather than Fiats, but this doesn’t mean you should subsidise people to own Ferraris and tax owners of Fiats more.

An estate agent in the audience agreed with Josh that too much capital is being invested in housing that should be going into businesses and other sectors. He expressed support for the abolition of SDLT and suggested a modest property tax instead. Another audience member called the market “dysfunctional” due to the lack of social housing being built, while another asked how the tax system can address house prices being “out of whack” with incomes.

John said builders claim that financially it is “dramatically worse” to refurbish old housing than build new ones and there needs to be incentives for refurbishment. If you genuinely want to change behaviour you have to be really bold, he added, telling the audience that changes to capital allowances had not been big enough to influence any of his company’s fund managers.

Asked in separate questions about the future of private residence relief and capital gains tax, Stuart said he would not abolish either, but would introduce indexation of gains. “I don’t think that tax policy can do an awful lot,” he said. “The issue with housing being so unaffordable is that we don’t have enough of it and tax on its own is not the way to (address) that. Where tax does have an impact is making use of the property we’ve got.”

Josh added that a proportional property tax would result in a lower tax burden for 70% of properties, better redistribution of wealth and a reduction in house prices. However, politically, this would too challenging for Labour, he warned. “It would solve a lot of the problems we’ve been talking about. However, the politics are extremely challenging on that.”

“I think there will be a tipping point where more radical change can happen,” he added.

Watch the full debate.