UK tax break pits landlords against first-time home buyers

London

AFTER five years spent making it easier for first-time home buyers to compete with investors, the UK government has changed tack.

All buyers, including landlords, will benefit from the government's decision last week, which was to raise the threshold at which sales tax on homes is paid to £500,000 (S$876,748) until the end of March 2021.

That reduces a key advantage for first-time buyers, and raises the prospect of cash-rich investors snapping up properties and squeezing many young people out of the market.

For Sarah Smart, a 23-year-old youth worker, extending the tax break to landlords does not make sense. She is trying to get a mortgage to buy a £200,000 home in Bristol.

"I'm trying to cobble together a deposit on a small home, and that's really only possible because of a payout from a car accident I had," she said. "I don't feel like multi-millionaire landlords are the people the government should be prioritising right now."

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

Chancellor of the Exchequer Rishi Sunak announced the tax relief as part of a £30 billion plan to save jobs and inject confidence into the economy.

Lockdown measures imposed in late March to slow the coronavirus outbreak effectively shut down the housing market, and the government has been trying to accelerate its recovery.

The tax break marks a "pretty fundamental shift" in government policy, said Neal Hudson, founder of Residential Analysts.

"The government wants transactions happening regardless of who's doing them," he said. "We might be seeing a big shift, once the current economic hit has become clearer, which will likely lead to more people stuck in the private rental market."

The government remains committed to helping first-time buyers, who will continue to pay no sales tax on property worth as much as £300,000, even after the current temporary measure expires, a Treasury spokesperson said.

Mr Sunak's plan means that 90 per cent of buyers will not pay any sales tax on their homes. The tax relief will apply to landlords and second-home buyers, but a 3 per cent surcharge for additional property purchases will remain in place.

The opposition Labour Party criticised the tax cut as a giveaway to landlords and second-home owners, who it said stand to save as much as £1.3 billion. The Treasury has estimated the cost of the measure at £3.8 billion.

Investors poured cash into rental properties in the aftermath of the global financial crisis, driven by low interest rates and anaemic returns on other investments.

So-called buy-to-let lending to rental landlords surged, and house prices rose further out of reach for young people. In response, the government introduced a series of measures to tilt the market back in favour of first-time buyers.

The surcharge for landlords and second-home buyers came into effect in 2016, followed by a gradual roll-back of tax relief on mortgage interest payments.

First-time buyers benefitted from a reduction in sales tax for lower-cost homes. The government also extended a low-interest loan programme called Help to Buy with changes that focused it more specifically on debut buyers.

The government's new tax break reduces the headstart first-time buyers had enjoyed with the tax exemption on homes up to £300,000. Landlords, by contrast, began to pay the tax starting at £125,000, meaning they get a bigger benefit from Mr Sunak's plan.

A big obstacle for many first-time buyers has been the shortage of low-deposit mortgages. Many lenders curtailed loans made with a 10 per cent deposit to protect themselves if prices decrease.

HSBC Holdings, which still offers these mortgages, limits the number of loans it makes at this level.

"A small number of lenders cannot take all of the business at higher loan to values," a spokesperson said.

Since investors and landlords tend to have more cash available and do not need low-deposit mortgages, they may decide that this is the time to add a few properties to the portfolio, said Toby Bentley, a financial adviser at Lathe & Co. BLOOMBERG