Landlords in the rental sector are set to face higher costs of operation from April this year, and it could be the case that high rental price rises are passed down to their tenants as a result, a report has warned.
In April this year, landlords are set to experience a change to mortgage tax relief, which will mean they can no longer deduct mortgage interest from their taxable income. And according to a report from Imperial College London, there are concerns that this, as well as the Stamp Duty levy added to the market last year, will see higher costs passed down to tenants.
The report said that private sector tenants in the UK could potentially see a rise of between 20 and 30 per cent in terms of what they are asked to pay as landlords try to recoup their losses in tax terms.
David Miles, professor of financial economics at Imperial College London, said this comes from a series of calculations that look at the need for a higher rate of yields for landlords in order to make as much as they were before tax changes came into play.
The changes would mean that the average landlord would need a higher rate of yield amounting to 6.1 per cent to simply make sure their profits are in line with where they were before the government implemented its new rules.
"Of course not all rents would go up this much. Some buy-to-let properties are bought with cash or owned by basic rate tax payers, and for these landlords it is only the stamp duty change that would require higher rents. And part of the adjustment to the tax changes might come through lower house prices. But given the size of the private rented sector one should expect most of the adjustment to come through higher rents rather than lower house prices," Mr Miles added.
However, overall he also said that the government should be looking to halt the tax changes because they are not fair to those operating in the rental sector.
"Rather than being a move towards neutrality, as was claimed, they in fact represent a further penalty against private provision of rented properties by potential suppliers who cannot, or chose not to, invest via a corporate entity," he said.