David Alexander comment: Tartan tax on landlords will harm rental sector

Understandably, most public and media concentration on the Scottish Government's Budget statement last week focused on income tax.

Additional tax on new buy-to-let purchases will exacerbate the housing problem, says Alexander. Picture: Contributed
Additional tax on new buy-to-let purchases will exacerbate the housing problem, says Alexander. Picture: Contributed

Firstly, because Scottish-specific income tax is still a new phenomenon and that alone adds interest. Secondly, because finance minister Derek Mackay effectively further heightened the tax burden on higher earners in Scotland (compared to England) by refusing to increase the threshold at which earners became liable to pay more. As a consequence, little attention was given to the government’s decision to increase the burden on private landlords by upping Land and Building Transaction Tax (LBTT) on second properties from 3 per cent to 4 per cent.

A rise of 1 per cent may not seem such a big deal, but considering the figures on which these percentages are based, it results in a substantial extra cost for new or existing landlords extending their portfolio.

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Take this typical buy-to-let example: a two-bedroom city flat in a popular location costing £350,000. LBTT on that is £8,350. Presuming the Budget is eventually passed by Parliament, the additional “second home” charge will rise to £14,000 (i.e. 4 per cent), equating to a total tax bill of £22,350.

According to Mr Mackay the reason for an increased tax on second and subsequent homes is to help first-time buyers. But, is there not something incongruous about helping one sector of society by penalising another? If first-time buyers are the only ones to reap an advantage from this change then it might be just about acceptable. However, many owner-occupiers competing with landlords for popular flats are second-time buyers with some level of equity behind them.

But the biggest issue I have with the new charge is that politicians are becoming increasingly shrill about the rising cost of private sector rents. This is simply a result of the law of supply and demand: if there are more tenants than there are properties, rents go up; if the opposite is the case, rents go down. Why, then, is the government instigating legislation that is likely to reduce the supply of rented property – and consequently increase rents?

Too many politicians view the private rented sector through the prism of – as they see it – greedy landlords exploiting the need for rented accommodation to make vast profits. As someone at the coal-face of the market-led part of the sector, this, I can assure them, is simply not true.

Less attention is given to the fact that the sector fulfils a vast, and growing, social need, the reasons for which include: mortgage deposits required by lenders being outwith the reach of many potential borrowers; a deficit of public sector housing; and, as a result of immigration, a rise in the adult population of several million in a few short years without the corresponding housing infrastructure.

Diminishing the supply by applying additional tax on new buy-to-let purchases will exacerbate rather than relieve this situation.

A few weeks ago this column focussed on the “accidental landlord”, a term used to describe home-owners who, from time to time, let out their main homes as a result of working abroad for long periods. Ten years ago the financial crash led to the “reluctant landlord” – owner-occupiers who had let out their homes after failing to find a buyer. Now we are seeing the emergence of the “boomerang landlord”, which refers to those who, having been hammered by various tax increases, now wish to sell up but are continuing to let out because they cannot secure a good enough price.

To some extent this could be a silver lining in depressed local markets as it will help maintain the rental supply. However, in buoyant locations (e.g. Edinburgh) landlords are most likely to achieve their asking prices, leading to a reduction in the rental supply. And it’s in the parts of the country experiencing economic and population growth where a good supply of market-led rental property is most in need.

- David Alexander is MD of DJ Alexander