From Rent to Own How to Restore Home Ownership by Turning Private Tenants Into Owners

From Rent to Own How to restore home ownership by turning private tenants into owners

By Alex Morton About the CPS The Centre for Policy Studies is the home of the next generation of conservative thinking. Its mission is to develop policies that widen enterprise, ownership and opportunity, with a particular focus on its core priorities of housing, tax, business and welfare.

Founded in 1974 by Sir Keith Joseph and Margaret Thatcher, it is primarily responsible for developing a host of successful policies, including the raising of the personal allowance, the Enterprise Allowance, the ISA, transferable pensions, synthetic phonics, free ports and the bulk of the Thatcher reform agenda. About the Author Alex Morton is Head of Policy at the Centre for Policy Studies. He was previously a Director at Field Consulting, but before that was responsible for housing and planning in the No 10 Policy Unit under David Cameron, including working on key policies in the 2015 manifesto. He was previously Head of Housing at Policy Exchange.

cps.org.uk From Rent to Own Contents

Executive Summary

1. Why We Need to Turn Renters into Owners 8

2. Help to Own – The Policy 14

3. Help to Own – The Numbers 21

4. Help for Tenants, Help for Landlords 34

5. Conclusion 47

Appendix 48

cps.org.uk From Rent to Own Executive Summary

The housing crisis is one mortgage eligibility in the wake of the of the great public policy financial crisis, and the boom in asset prices (and in particular property prices), challenges of our age – to means many renters have higher incomes the point where the Prime than those buying, but are locked out of the Minister has called it her market as they cannot afford a deposit.

‘personal mission’ to reverse Theresa May and David Cameron’s the fall in home ownership, Governments have attempted to redress which is condemning the balance, for example via increased ‘Generation Rent’ to a less charges on buy-to-let landlords in terms of mortgage interest and stamp duty. Some stable, less happy and less are now calling for landlords to be punished prosperous future. further, describing them as a new breed of rentiers. But it is not only unfair to attack To tackle this problem, Britain certainly people who have made perfectly rational needs to build more homes – but the investment decisions, but misguided. problem is not just about supply, but For all the talk of ‘fat cat landlords’, most distribution. Britain is often portrayed as a see only a moderate return on their country of high home ownership. In fact, investment – two-thirds have a yield of across the EU28, we have the fourth lowest 5% or less, in return for an uncertain and rate. In recent decades, owner-occupation fluctuating income that can be put at risk rates have plummeted – especially among by unreasonable tenants. the young and those on average incomes, falling from two-thirds for the average Back in the 1980s, Margaret Thatcher’s earner aged 25-34 in 1995-6 to just a Government – inspired by the work of the quarter today. In short, we do not just need Centre for Policy Studies and others – to build more houses, but create more delivered mass ownership to council house homeowners. tenants via the Right to Buy. Yet today, the pattern of ownership has changed: the rise The state should, therefore, support of buy-to-let means that there are more ownership where possible. Yet in recent frustrated would-be homeowners in the decades, the state has instead made private rental sector than in social housing. it harder. The fall in owner-occupation was accelerated by a series of decisions If we are to restore mass home ownership, by Tony Blair and Gordon Brown’s we therefore need – alongside measures Governments: scrapping pension dividend for those who rent from the state – a way to relief and allowing interest deductibility incentivise landlords to sell and help private for landlords but not owners, and pushing renters to buy, to turn Generation Rent into buy-to-let. In addition, the tightening of Generation Own.

cps.org.uk 4 From Rent to Own THE CORE IDEA – CAPITAL GAINS order to provide the strongest possible TAX REBATES TO MOVE PRIVATE incentive to sell. In order to ensure high RENTERS INTO OWNERSHIP take-up, we propose that the scheme operate for a single year, from 2020/1, to We propose a scheme called Help to give people time to save for their share Own. This would turn the Capital Gains of the deposits. And in order to ensure Tax payable by a landlord on sale of a fairness, the amount that any tenant or rented home into a rebate shared between landlord could receive per property would landlord and tenant (or tenants). The former be capped at £35,000. would get a powerful incentive to sell. The latter would get substantial help towards A crucial element of our proposal is that a 10% deposit so that they can purchase it would be offered, first and foremost, to the home – either outright or via shared sitting tenants – as defined at the point at ownership. which the scheme was announced, in order to prevent landlords from turfing people out There are obviously many different ways of their homes to make way for their own of structuring such a scheme. You need family or friends. If the tenant or tenants to ensure that landlords have a sufficient did not want to take part, they would be incentive to sell, and that tenants receive free to nominate another first-time buyer. If enough help to be able to afford to buy. they did not, the landlord would be free to You need to ensure that property price strike a deal with any other first-time buyer appreciation has been significant enough – potentially with priority given to those to generate the sums necessary to make whose own landlords are reluctant to sell, such a rebate attractive. And you need to who would also be placed first in the queue work out how to make such a system work for shared ownership schemes. for all landlords and tenants – not least by offering further help to those would-be We also suggest an online exchange buyers whose landlords refuse to sell. system under which tenants who do not want to buy the specific home they are In an early draft of this paper, we calculated renting could either swap directly with that a 25%/75% split of the rebate between another tenant that they know, or find landlord and tenant would provide enough a more suitable property via an online to pay for a 7% deposit for the tenant if they marketplace. contributed the remaining 3%. Following consultation with stakeholders, we have As a package, this policy would have the adjusted our proposal to a 33%/66% split: following benefits: landlords would receive a third of the CGT rebate, with tenants getting up to 66% For tenants this would be a fantastic of the remainder up to a limit of 6.66% offer. They could put in £1 in savings and of the property’s value, as long as they end up with £3 in total in order to move contributed 3.33%. This is a similar split into ownership. This would mean, for an to the original Right to Buy scheme in the average UK property, that they would put in 1980s and gives tenants a 10% deposit so roughly £7,000 to receive a £14,000 top- they can move into ownership. up – enough for a 10% stake. Those who could not afford the whole property (for We also suggest, for landlords who only example those living in London) would be own one property, that their rebate is able to buy the majority of it under a shared topped up with a flat figure of £3,000 in ownership system.

cps.org.uk 5 From Rent to Own A fair deal for landlords: For an average A fair scheme for all: We do not believe property, the taxable gain in value is now it would be fair to simply give tenants £87,263. A single landlord would get a CGT two thirds of whatever CGT their landlord rebate of around £7,000, compared with an happens to be liable for. You could end original tax bill of £21,000 or so - or closer up with one tenant receiving £100, and to £10,000 if the suggested £3,000 top-up another on the same street in an identical were applied. A landlord selling five such property receiving £10,000. This would properties would get a CGT rebate of nearly quickly discredit any scheme. The support £40,000 on a tax bill of just under £120,000†. for each tenant has to be enough to Landlords would also avoid many of the provide a substantial contribution towards costs associated with selling a home, such the deposit. Under our proposal every as estate agent fees, which for an average tenant would simply receive a £2 top-up property would be over £4,000, and the for every £1 they put in, until they reach costs of a void period (since surveys show an overall deposit of 10%. The various landlords usually prefer to sell an empty caps we propose for high-value, high- property). gain properties would allow cross-subsidy for tenants where properties have not Promotion of shared ownership: By capping appreciated enough in value to deliver the value of the rebate to both tenants the 6.66% required, ensuring fairness. and landlords at £35,000 per property, And those whose landlords do not want and reducing the relief for those with to sell would be offered first pick of other large property portfolios, we would raise ownership schemes. between £1 and £2.5 billion. This could be put towards a significant shared ownership Promoting owner-occupation: At the heart scheme for those tenants who would like of this scheme is a desire to change the to take part in the Help to Own scheme but housing mix by replacing renters with whose landlord does not want to – helping owners. It would therefore only be available between 120,000 and 300,000 more people to tenants who do not own property into ownership. elsewhere. And while people could sell their properties on after purchase, covenants No cost to Government: Far from costing would be applied to ensure that any money to Government, this policy would be homes transferred would remain in owner- revenue-neutral – even without the caps. occupation for at least a decade. Those The CGT to pay for the policy would come who used this scheme to make a quick from transactions that would otherwise buck would also be denied access to future barely exist: currently, just 2% or so of home ownership schemes, such as shared landlords sell up each year, raising around ownership or Help to Buy. This is about £1.5 billion a year. Furthermore, any losses helping people get a long-term place on to the Treasury – real or hypothetical – will the housing ladder, not make a quick profit. be offset by the savings in housing benefit from reducing the numbers of renters, both in terms of immediate costs and the longer- term burden of subsidising pensioners who have never been able to afford their own home.

† Calculated to include the Annual Exempt Amount for a single taxpayer of £11,700. cps.org.uk 6 From Rent to Own SHOWING IT WORKS • The areas with the highest gains are the most valuable, meaning the £35,000 There is no point proposing such a caps may actually raise substantially scheme without also showing that it makes more than the estimate we have (which financial sense. For this scheme to work, assumes all properties have risen by we need house price appreciation within the same amount rather than the most the private rented sector to have reached valuable ones rising the most). the point where 66% of CGT liabilities relief is generally enough to provide a 6.66% THE POWER OF OWNERSHIP deposit. In other words, the capital gain has to be enough that the rebate can support There will be those who argue that home tenants into ownership. ownership does not matter – or that this is simply a handout to young people who We calculate the necessary price should save for their own deposits as their appreciation across the sector at between parents did. 60% and 65%. CPS researchers therefore carried out three separate modelling But those arguments do not hold water. exercises, all of which suggested that Polling by the Centre for Policy Studies capital gains are higher than this: shows that making housing more affordable is the number one way in which young • An estimate using the growth of the PRS people think government could make their and house price data lives better – and they overwhelmingly want • An estimate using private landlord survey that to be done by making houses cheaper data and house price data to own, because they overwhelmingly want • An estimate using capital gains receipts to own rather than rent. data And it is not just the surge in house prices The average rate of appreciation in the that has pushed home ownership out of sector from three separate estimates is their reach. The changes under Labour more than 70% - meaning that there is a described above have represented a clear buffer between what we need and cumulative £220 billion shove towards buy- the appreciation seen. The addition of the to-let and away from first-time buyers. It is £35k caps further lowers the necessary surely time to put the balance right. Wanting threshold. to own your own home is the very definition of the right thing. It is the foundation of a In addition, there are two reasons to think good society. It gives people more control that this policy would raise much more of their lives, and of their futures. We need than it costs: a home ownership revolution – in which we hope this policy can be the first step. • The scheme is biased toward higher value properties – the ones most likely to be put forward are those with high CGT liabilities, which provide greater revenue.

cps.org.uk 7 From Rent to Own 1. Why We Need to Turn Renters into Owners

HOME OWNERSHIP IS IN DECLINE The second, which this report is designed The housing crisis is arguably the single to address, is the distribution of the housing greatest social policy challenge that Britain stock, and the way that the state – in faces. The Prime Minister has said that it is particular the Labour governments between her ‘personal mission’ to reverse the decline 1997 and 2010 – has moved away from in home ownership and bring housing within supporting home ownership. reach of ‘Generation Rent’, which has been locked out of the property market by the Since 1997, the number of households rapid increase in house prices.1 renting in the private sector has risen substantially from 2.1 million to 4.7 million 3 Since the mid-1990s, house prices have now. These contain around nine million 4 risen by 160% in real terms, while young working-age adults (and around 870,000 5 people’s incomes have grown by just 23%. retired adults). Almost all of these This has meant that the ratio of median renters are living in properties owned by house prices to median income for 25- individuals, rather than being part of a 34 year olds has more doubled over that long-term corporate scheme: there are 2.5 period, from four to eight. The consequence million buy-to-let landlords, with the mean 6 has been a collapse in home ownership number of properties owned running at 1.8. among the young. Twenty years ago, two thirds of middle-income 25- to 34-year-olds WHY HOME OWNERSHIP MATTERS owned their own home. Today, that figure is We know that the vast majority of current just a quarter.2 renters want to own. Only half of renters say they are happy with their standard of living At root, there are two problems here. The compared to three quarters of owners.7 first is the supply of housing, and the fact Polling shows that ownership gives you that we have, for decades, failed to build a greater sense of freedom and control enough properties to keep pace with over your own life, and helps you feel more demand. This is an issue that the Centre for settled – and that these non-financial Policy Studies has published much work on elements are actually more important than in the past, and will again in future. the financial benefits.

1 ‘Thousands have saved money already thanks to Government’s stamp duty cut’, Downing Street Press Release, January 2018 2 ‘The decline of homeownership among young adults’, J. Cribb, A. Hood, J. Hoyle, IFS, February 2018 3 English Housing Survey Headline Report, 2016-17, Annex Table 1.1, MHCLG 4 People in households by housing tenure and combined economic activity status of household members: Table 1, ONS, August 2018 5 Calculated based on 8.9 million working age private renters and 8.9% of private renters being over 65, as shown in Table FA3101 (S418): Demographic and economic characteristics of social and privately renting households, 2016-17, MHCLG 6 ‘Number of buy-to-let investors in the UK hits record 2.5 million high’, Property Funds World, April 2018 7 ‘Homeowners are happier than renters with their standard of living’, YouGov, August 2017 cps.org.uk 8 From Rent to Own In a survey by YouGov for the Council of The need and desire for ownership, in Mortgage Lenders, respondents were other words, is not a British peculiarity, but asked about what they perceived to be a universal human impulse that has been the main benefits of home ownership. The thwarted for many young people, who most common choice was the freedom to cannot own, and feel they will never be ‘do what you want’, while ‘an investment’ able to. Polling carried out by YouGov for came bottom of the list.8 This can perhaps the Centre for Policy Studies earlier this explain why owning is also linked to year found that almost one in five 18- to greater wellbeing and life satisfaction. 24-year-olds thought it would be at least According to the English Housing Survey, two decades before they could own their those who own their home outright have own home, and 8% thought they would an average life satisfaction score of 8 never be able to afford it. The affordability points compared to 7.4 points for private of housing was also their top priority for renters.9 government, chosen by 41% as the most immediate way in which the state could Academic research has also consistently improve their own lives: even among the In a survey by YouGov for the Council of Mortgage Lenders, respondents were asked about pointed to a positive link between home 25-34 age group, only the cost of living what they perceived to be the main benefits of home ownersscored higher. And overwhelmingly,hip. The most common choice they ownership and participation in community 9 organisations, politicalwas the freedom to ‘do what you want’, while ‘an investment’ came bottom of the list. engagement, and wanted the state to prioritise making it This social capital in general.can perhaps 10 Ownership, explain why in owning is easier also linked for people to greater to afford wellbeing to and buy life a home, satisfaction. short, speaks to a According to the English Housing Survey, thosefundamental human rather than who own their home outright have an average reducing the cost or increasing instinct – and is a life satisfaction score of 8 points compared to 7.4 points for key part of a happy and the security of renting.private renters.15 10 secure society. Academic research has also consistently pointed to a positive link between home ownership Unsurprisingly, the upshot of all this is that and participation in community organisathat manytions, young political people engagement, feel they and no social longer capital in Unfortunately, it is now a myth11 that the UK is a high ownershipgeneral. society. Ownership The UK has, in short, speaks to a fundamental human instinct have a stake in society. Telling them– and is thata key part of the fourth lowest ratea happy and secure of home ownershipsociety. they should learn to love renting instead is patronising and wrong – particularly when across the EU28 andUnfortunately, it is now a myth that the UK is a high ownership society a lower rate than . The UK has the fourth non-European nations like Australia, the many of those lecturing them do so from lowest rate of home ownership across the EU28 and a lower rate than non-European nations USA, and Canada. their owner-occupied homes. like Australia, the USA, and Canada. 11 TableTable 1 1:: Home ownership rates in advanced economies Home ownership rates in advanced economies12

Home ownership rate (latest Country/Area available data) Norway 82.6 Spain 77.8 European Union (average) 69.2 2 Canada1 67.8 3 Australia1 67.0 France 64.9 4 United States1 64.2 United Kingdom 63.4 Germany 51.7

The need and desire for ownership, in other words, is not a British peculiarity, but a universal 8 ‘Home ownershiphuman impulse that has been thwarted for many young people, who cannot own, and feel or bust? Consumer research into tenure aspirations’, CML, October 2016 9 English Housingthey will never be able to. Survey Headline Report, 2016-17 Polling carried out by YouGov for the Centre for Policy Studies Annex Table 1.22, MHCLG 10 For a summary of research findings in this area see: ‘Reexamining the Social Benefits of Homeownership after the Housingearlier this year Crisis’, W. Rohe, found that almost one in fiveM. Lindblad, Joint Center for Housing 18- Studies,to 24-year Harvard-olds thought it would be at least University, August 2013 11 Figures for EU/EEAtwo countriesdecades before (including they could own their own home, UK) taken from latest available Eurostatand 8% thought they data: Distribution of population would never be by tenure status,able type to of afford household it. T andhe affordability income group - of EU-SILC housing survey, was 2018 also their top priority for government, 12 Housing in Canada:chosen Key by 41% results fromas the most immediate way in w the 2016 Census’, Statistics Canadahich the state could improve their own lives:, October 2017 13 ‘Housing Occupancy and Costs, 2015-16’, Australian Bureau of Statistics, October 2017 14 ‘Quarterly Residential9 ‘Home ownership or bust? Consumer research into tenure aspirations’ Vacancies and Homeownership, Second Quarter 2018’, Table 4, , U.S.CML, CensusOctober 2016 Bureau, July 2018 15 ‘New Blue: Ideas10 English Housing Survey Headline Report, 2016 for a New Generation’, pp16-18, Centre for Policy-17 Annex Table 1.22, Studies, May 2018MHCLG 11 For a summary of research findings in this area see: 'Reexamining the Social Benefits of Homeownership cps.org.uk after the Housing Crisis', W. Rohe, M. Lindblad, 9 Joint Center for Housing Studies, Harvard University,From Rent to Own August 2013 12 Figures for EU/EEA countries (including UK) taken from latest available Eurostat data: Distribution of population by tenure status, type of household and income group - EU-SILC survey, 2018 13 Housing in Canada: Key results from the 2016 Census’, Statistics Canada, October 2017 14 ‘Housing Occupancy and Costs, 2015-16’, Australian Bureau of Statistics, October 2017 15 ‘Quarterly Residential Vacancies and Homeownership, Second Quarter 2018’, Table 4, U.S. Census Bureau, July 2018

9 HOW BLAIR AND BROWN and pushed savers to become buy-to-let landlords. Lower interest rates since 2008, MADE THINGS WORSE and easier credit thanks to monetary The first buy-to-let (BTL) mortgage was stimulus and support for bank lending, only created in 1996. Its rapid rise is compounded this by making it cheaper partly a function of higher house prices, and easier to invest in property relative to as well as a financial environment in other assets and hurting savers who tried which those with assets sought out to invest elsewhere, while also freezing investments offering decent returns. out those who were owner-occupiers with But government action made a bad small deposits.19 situation worse. Between 1997 and 2010, buy-to-let was made progressively more In short, while talking a great deal about attractive compared to ownership, and the need to support the many, Labour more attractive compared to saving ended up creating a situation where and investing in businesses or other ownership was targeted at the few. productive activity. The Cameron Government did try to rein • Abolition of Mortgage Interest Relief in the growth of buy-to-let. In 2015, for At Source (MIRAS). This was cut in the example, it announced that landlords first New Labour Budget and finally would only be able to deduct finance abolished in full in 1999, the two moves costs at the basic income tax rate of 20%. together worth around £2.3 billion a This means landlords paying at the 40% or year (costing a cumulative total of 45% rate will shortly see a major increase £61.9 billion to owner-occupiers, in in their tax liability. The Government 16 non-inflation adjusted terms). Most estimates that around one in five landlords damagingly, this created an imbalance will lose out from this20 while a Council of in the treatment between BTL landlords Mortgage Lenders (CML) survey put this 17 and owner-occupiers with a mortgage. at one in four.21 (It is important to notice BTL landlords obtained relief on the that this does not mean that only one in interest costs of purchasing properties, five or one in four landlords are higher whereas owner-occupiers did not. rate taxpayers: if the landlord owns the property without a mortgage, this measure • Abolition of pension fund dividend tax will not affect them). relief. This cost pension pots between 1997/8 and 2017/8 a colossal £157 billion Yet while this might slow the growth of (in non-inflation adjusted terms), and buy-to-let, it does not shift the dial back substantially discouraged investment in toward ownership. Low returns elsewhere private pensions by removing the relief mean buy-to-let remains a popular form of 18 available on dividend income. investment, with around 73,000 new buy- to-let loans issued in the 2017-18 financial Taken together, the effect of the abolition year, worth almost £10.5 billion (though of MIRAS and pension fund dividend balanced by some landlords exiting the tax relief was a £220 billion shift in market).22 incentives that disadvantaged owners

16 Policy Measures Database, Tax; All Measures, OBR 17 Policy Measures Database, Tax; All Measures, OBR 18 Policy Measures Database, Tax; All Measures, OBR 19 MLAR Statistics: Detailed Tables, Table 1.22, FCA 20 ‘Restricting finance cost relief for individual landlords’,HMRC , February 2017 21 ‘The profile of UK private landlords’, K. Scanlon, C. Whitehead,CML , December 2016 22 ‘Mortgage Trends Update, March 2016’, Mortgage Trends (Data), UK Finance, May 2016 cps.org.uk 10 From Rent to Own BUY-TO-LET HAS CONTRIBUTED create two million new owner-occupied TO HOUSE PRICE INFLATION households.26 The goal was to reduce the levels of renting, particularly buy-to-let The substantial rise in house prices over renting, and instead support ownership. the last few decades has had a negative To do this, a series of measures were impact on those looking to own. But it has implemented: encouraged buy-to-let investors because it acts as a signal that prices are likely to • A 3% stamp duty (SDLT) surcharge for continue rising, particularly as they can those buying additional properties, which leverage their ever-increasing equity in one raised £1.9 billion last year.27 property to purchase another. • The changes to mortgage interest relief Without the impact of the buy-to-let mentioned above, which when fully boom on house price inflation, many operational would save around £700 more people could have been able to million a year.28 purchase their first home over the last decade. One government study in 2008 • Requiring audited receipts from landlords estimated that buy-to-let demand had in line with other sectors, rather than just increased house prices by 7% relative to deducting a wear and tear allowance, where they would otherwise have been.23 worth around £200 million a year.29 As the ONS’s Economic and Labour Market Review stated as far back as 2009: ‘New The Prudential Regulation Authority, buy-to-let investor demand has offset the supported privately by the Treasury, also effects of falling first time buyer numbers introduced new underwriting requirements on housing demand, which also prevents in 2017 to tighten the rules on lending to affordability constraints from influencing some buy-to-let borrowers, with the aim of prices.’24 Like immigration, lack of supply or reducing lending to this sector.30 The level low interest rates, buy-to-let is not the silver of relief being taken away is limited in that bullet driving house prices higher – but it roughly 60% of landlord purchases are now is an unhelpful additional factor. (It is worth made in cash (though often from money is pointing out that recent polling by ComRes recycled from other property sales).31 for the Centre for Policy Studies found that, by a margin of 63% to 19%, Britons now Despite all this, however, there is still a think house prices in their area are too high thriving buy-to-let market – and it is hard to – rising to 79% vs 9% in London.)25 see what more can or should legitimately BUY-TO-LET REMAINS POPULAR be done to push buy-to-let landlords to sell in a punitive fashion. The result of – AND LEGITIMATE Government fiscal and monetary policy, The 2015 Conservative manifesto included even if pushed by the Bank of England a pledge to build a million extra homes and under direction, has been to hammer

23 ‘Buy-to-let mortgage lending and the impact on UK house prices: a technical report’, R. Taylor, NHPAU, February 2008 24 ‘Recent developments in the UK housing market’, G. Chamberlain, p35, Economic and Labour Market Review, August 2009 25 ‘CPS Housing Poll, September 2018’ 26 The Conservative Party Manifesto 2015 27 Annual Stamp Tax Statistics, 2017-18, Table 3b, HMRC, September 2018 28 Policy Measures Database, Tax; All Measures, OBR 29 Policy Measures Database, Tax; All Measures, OBR 30 Underwriting Standards for Buy-to-Let Mortgage Contracts, PRA, September 2016 31 Monthly Lettings Index January 2017, Countrywide, February 2017 cps.org.uk 11 From Rent to Own savers, including those who simply want a The figure for landlords obtained in the modest return. The reason so many people CML survey is broken down in more detail have become landlords is not because they in the table below. It shows that some 33% want to deny homes to the next generation, of landlords have yields worth 3% or less, but because there is a real shortage of 34% have net yields worth 4-5%, 16% have alternative investments that can provide yields at 6-7% and 16% have yields worth a reasonable income for those who have more than 8%. worked hard and saved. It is important to note that for many, BUY-TO-LET LANDLORDS particularly smaller landlords, this yield ARE NOT THE ‘FAT CATS’ is likely to be an overestimate as many OF CARICATURE landlords set the costs of their time at zero. Yields also fluctuate over time. For example, Contrary to media caricatures, most if you own one property and it sits vacant, landlords get only moderate returns. The or you are unlucky enough to end up with average net yield, according to a survey by a problem tenant, you might go from a the CML, is between 3% and 5%.32 A much comfortable 5% to a zero or even negative lower 2.6% annual income-only yield was yield, on top of the stress this would bring. reported by Investment Property Databank (IPD) for institutional investors in UK end up with a problem tenant, you might go from a comfortable 5% to a zero or even negative residential property in 2015.33 yield, on top of the stress this would bring.

Net Yield Proportion of Net Yield Proportion of landlords landlords 0% or less 7% 3% or less 33% 1% 4% 2% 7% 3% 15% 4% 16% 4-5% 34% 5% 18% 6% 10% 6-7% 16% 7% 6% 8% 6% 8%+ 16% 9% 1% 10% or more 9% (Totals may not sum due to rounding)

Most renters can afford mortgages The cost of renting and owner-occupation are broadly the same. Many of those who are currently tenants could afford to own with no real increase in their housing costs. This has in Deleted: these renters part been the reason behind the Government’s Help to Buy policy. Deleted: The problem for those renters is that without the ability to access family wealth or equity, Deleted: - while j they are unable to purchase a home with a reasonable deposit, which would allow them to Deleted: ahead

32start to pay down a mortgage and build up equity. ‘The profile of UK private landlords’, K. Scanlon, C. Whitehead,CML , December 2016 Deleted: of 33 ‘The profile of UK private landlords’, p38, K. Scanlon, C. Whitehead,CML , December 2016 For example, affordability of homes has fallen for most households as interest rates have Deleted: those with a capital and interest cps.org.ukfallen. Just before the financial crisis, the cost of the typical12 repayment mortgage From Rentfor a median to Own Deleted: the UK’s median earner would have been close to 25% of their income. By 2017, this would have been well Deleted: , under 20%.35 Deleted: by 2017 Deleted: This is also shown by those who are moving onto The problem is the deposits – which are excluding even many high-income households from the housing ladder rd th ownership. The 3 and 4 decile of income for renting households have an average income Deleted: and the fact that th th of £587 and £728 a week, while for home buyers the 7 and 8 deciles have an average Deleted: renting income of £577 and £722. What this means is that the richer renting households have the Deleted: are excluded 36 same income as the poorer home-buying households. Deleted: What distinguishes those who are locked out of ownership is not the income that they earn Deleted: but their access to a deposit, which often comes through family money and wealth. Those Deleted: understandably who are being denied access to ownership are therefore even more frustrated, since their Deleted: it future is being determined not by what they earn or how hard they save – since amassing a Deleted: is not Deleted: you

Deleted: you 35 Table ML2 first-time buyers, new mortgages and affordability, UK Finance, UK Median as a % of income 36 Author’s calculation drawing on Family Resources Survey 2016-17, DWP. Income net of income related Deleted: to save benefits (notably Housing Benefits). Deleted: ’

MOST RENTERS CAN access to ownership are therefore even AFFORD MORTGAGES more frustrated, since their future is being determined not by what they earn or The costs of renting and owner-occupation how hard they save – since amassing a are broadly the same. Many of those who substantial deposit while renting is nearly are currently tenants could afford to own impossible – but whether or not your with no real increase in their housing costs. parents have enough property equity that This has in part been the reason behind the they can gift you a deposit. Government’s Help to Buy policy.

The problem for those renters is that A RADICAL NEW APPROACH without the ability to access family wealth or IS NEEDED equity, they are unable to purchase a home Over the last two decades, the UK has with a reasonable deposit, which would strongly distorted the housing market. Much allow them to start to pay down a mortgage of this is down to longer-term causes such and build up equity. as lower interest rates, limited housing supply, tax and other changes that pushed For example, affordability of homes has people towards buy-to-let and away from fallen for most households as interest rates investment in the wider economy. This has have fallen. Just before the financial crisis, left young people locked out of ownership. the cost of the typical repayment mortgage for a median earner would have been close Levels of home ownership need to to 25% of their income. By 2017, this would substantially increase. This means that have been well under 20%.34 we need to persuade landlords to sell up – given the slow number of new-builds The problem is the deposits – which being created compared to the existing are excluding even many high-income stock. After all, even if this country only built households from ownership. The 3rd and homes for ownership, and built 250,000 4th decile of income for renting households homes each year, it would take 20 years to have an average income of £587 and £728 match the size of the existing private rented a week, while for home buyers the 7th and sector’s nearly five million homes. 8th deciles have an average income of £577 and £722. What this means is that the richer In the long run, it is absolutely necessary renting households have the same income to increase the level of housebuilding in as the poorer home-buying households.35 this country and return monetary policy to normality. Without this, there is no way that What distinguishes those who are locked house prices in the long run will gradually out of ownership is not the income that fall in real terms. But given the scale of the they earn but their access to a deposit, housing crisis, we also need to do whatever which often comes through family money we can to help people move from renting to and wealth. Those who are being denied owning, and give them more control of their lives and their futures.

34 First-time buyers, lending and affordability, Table ML2, UK Finance, August 2017 35 Author’s calculation drawing on Family Resources Survey 2016-17, DWP. Income net of income related benefits (notably Housing Benefits). cps.org.uk 13 From Rent to Own 2. Help to Own – The Policy

SHARING CAPITAL GAINS TO However, our research suggests that the HELP GET TENANTS ON THE following design offers the best trade-off HOUSING LADDER between incentivising landlords and helping tenants: As set out in the previous chapter, the British economy has incentivised buy-to-let • Divide the CGT relief so that 33% goes and discouraged ownership. This is not the to the landlord, and 66% to the tenant or fault of individual landlords, but a political tenants. class that has made it too hard for people to get on to the property ladder. We need to find a way to turn tenants into owners. • For the tenant this would be capped at 6.66% of the property value, with the tenant contributing the remaining 3.33%, Existing efforts to discourage buy-to- and any remaining CGT surplus going let landlords give them little incentive to to the Treasury. This support would be actually sell up – and do nothing to make equalised among tenants participating it easier for tenants and other first-time in the scheme. (For properties with buyers to buy the properties coming onto multiple tenants, ownership could the market. either be divided equally among those participating, or in proportion to rental Currently, a major issue is that landlords payments.) will not want to sell as it will force them to realise capital gains in order to transfer • For smaller landlords who only own one their money to another asset, even if that property, we could potentially top up the asset gives them a good return. Therefore, landlord share with a flat £3,000 rebate we propose that: per property. Landlords should be given the chance to • Cap the total relief per property for sell their property to the sitting tenant (or either tenant or landlord at £35,000, with another first-time buyer nominated by the the remainder being redistributed or tenant, or failing that a first-time buyer of retained by the Treasury. their choice). The landlord would receive a tax break on the Capital Gains Tax and a further share of the Capital Gains Tax would • Implement this as a time-limited one- go to the tenant, to act as a contribution year offer, with tenants registering towards their deposit. interest in 2019/20 for transactions to take place in the financial year 2020/21. There are many potential designs for this system, and complexities which will be addressed in the course of this report.

cps.org.uk 14 From Rent to Own At a stroke, this could offer 4.7 million you over the higher rate tax threshold then households the chance to own their home, you pay 28% on any capital gains. If your with a 10% deposit if they contribute just capital gains and income takes you over 3.33% of the property’s value. If just one the threshold (e.g. your income is £30,000, in ten landlords and tenants took it up, it but your capital gains are £30,000, so you would mean nearly 500,000 homes moving start off below the higher rate but move from renting to ownership and likely more above it), you pay 18% on the share below than a million new homeowners. This would the higher rate threshold and 28% on the be nearly three times more than the entire share above it. number of homes supported through the Help to Buy Equity Loan Scheme in its first Landlords with reasonably sized capital five years, and roughly twice the number gains and even an average income quickly supported by both Help to Buy Equity Loan move from 0% to 28% on each £1 of capital Scheme and Mortgage Guarantee schemes gain that they make. For example, if you – without having the negative impact in sold two £100,0000 properties in one year, terms of raising prices.36 and had no other income, you would pay capital gains on an income of £100,000 HOW CAPITAL GAINS TAX WORKS that year, minus the AEA amount, and at the two rates of 18% and 28%. Smaller Scheme and Mortgage Guarantee schemes – without having the negative impact in terms of Deleted: on To understand38 this policy in more detail, landlords therefore tend to try to dispose of raising prices. Deleted: If only a quarter of tenants and landlords took this it is necessary to explain the current CGT any property that generatesup it would mean nearly 1.2 million tenants becoming capital gains owners, more than the entire first decade of the Right to 39 system.How Capital Gains Tax The rates works for 2018/9 are set out receipts over a seriesBuy .of This has years, the potential to facilitate home ownership rather than below.37 in a single year, to maximiseon a huge scale and be the equivalent the benefit of a new Right to Buy. To understand this policy in more detail, it is necessary to explain the current CGT system. Deleted: Current 40 The rates for 2018/9 are set out below. of the Annual ExemptDeleted: Amount capital gains taxation and limit Capital Gains Tax rate exposure to the higher taxcapital gains tax bands. Capital Gains Tax rate Deleted: Deleted: Capital gains tax Gains Rate paid on gains £0 - £11,700 0% A survey by Countrywide shows the average landlord in 2017 sold their property for Gains within basic rate 18% income tax limit. £87,263 more than they paid for it. This Above higher rate income 28% equates to a 54% gain on their initial tax threshold £46,351 investment.38 Few, however, do sell up, so

The first £11,700 is termed the Annual Exempt Amount (AEA), which an individual canthis figure ismake a skewed representation of the Thewithout paying any tax. first £11,700 isAbove this, termedCapital Gains Tax the Annual is based on your income thalevels t year, minus of capital gain.Deleted: Many capital gains tax landlords choose Exemptany relevant expenses and tax reliefs Amount (AEA), which. If your capital gains and income for a year an individual not to sellare above their property as they generate a £11,700 but underneath the current higher tax rate threshold (this is the 40% rate), you pay substantial liability in terms of CGT – and the can18% on any capital gains. make without payingWhere your capital gains and income for a year push you over the any tax. Above this,higher rate tax threshold then you pay 28% on any capital gains. Capital Gains Tax is based on your If your capital gains and higher the level of capital gain, the stronger incomeincome takes you over the threshold that year, minus any (e.g. relevant your income is £30,000, but your capital gains are the incentive just to hold onto it. expenses£30,000, so you start off below the higher rate but move above it and tax reliefs. If your capital ), you pay 18% on the share below the higher rate threshold and 28% on the share above it. gains and income for a year are above All this means that capital gains from Landlords with reasonably sized capital gains and even an average income quickly move from £11,700 but underneath the current higher the buy-to-let boom Deleted:are coming into the 0% to 28% on each £1 of capital gain that they make. For example, if you sold two £100,0000 Formatted: Space After: 6 pt taxproperties in one year, rate thresholdand had no other income, (this is the 40% rate),you would pay capital gains on an income you Treasury very slowly. In 2014-15, there were Deleted: ... [19] payof £100,000 that year, minus the AEA amount, and at t 18% on any capital gains. Where yourhe two rates of 18% and 28%. 102,000 salesSmaller of residentialDeleted: both making a taxable gain of £50,000, properties from capitallandlords therefore gains andtend to try to dispose of any property that generates capital gains receipts income for a year push the pool of 4.7 million households – over a series of years, rather than in a single year, to maximise the benefit of the Annual Exempt Amount and limit exposure to the higher tax bands. A survey by Countrywide shows the average landlord in 2017 sold their property for £87,263 more than they paid for it. This equates to a 54% gain on their initial investment.41 Few, 36however , do sell up, so this figure is a skewed representation of the levels of capital gain.Equity Loan helped 169,102 homes: Help to Buy (Equity Loan scheme) and Help to Buy: NewBuy statistics: Data to 31 Many landlords Marchchoose not to sell their 2018, England, MHCLG property, August 2018as they generate a substantial liability in Mortgage Guarantee helped 104,763 homes: Help to Buy: mortgage guarantee scheme Quarterly Statistics, HMT, September 2017 37 Capital Gains Tax, Gov.uk 38 38 Equity Loan help ‘Whated 169,102 homes next for buy-to-let?’,: Help to Buy (Equity Loan scheme) and Help to Buy: NewBuy statistics: Countrywide, Spring 2018 Data to 31 March 2018, England, MHCLG, August 2018 cps.org.ukMortgage Guarantee helped 104,763 homes: Help to Buy: mortgage guarantee scheme Quarterly Statistics, From Rent to Own HMT, September 2017 15 40 Capital Gains Tax, Gov.uk 41 ‘What next for buy-to-let?’, Countrywide, Spring 2018

16 terms of CGT – and the higher the level of capital gain, the stronger the incentive just to hold Deleted: Capital Gains Tax onto it. Deleted: (CGT) terms of CGT – and the higher the level of capital gain, the stronger the incentive just to hold Deleted: Capital Gains Tax All this means that capital gains from the buy-to-let boom are coming into the Treasury very Deleted: T onto it. Deleted: (CGT) slowly. In 2014-15, there were 102,000 sales of residential properties from the pool of 4.7 39 amillion householdsAll t saleshis means rate of justthat 2.2%. –capital gains from the buy a sales rate of just 2.2%. HMRC recorded 42-to HMRC recorded that £6.4 billion of chargeable Mortgage-let boom are coming Lenders, is betweeninto the £60,000Treasury very Deleted: T that £6.4 billion of chargeable capital gains and £70,000.41 This means any capital capital slowly. gains In 2014 were -15, there were 102,000 sales of residential properties from the pool of 4.7 made on these residential property sales.43 Given the rate of 18-28% weremillion households made on these –residential a sales rate of just 2.2%. property 42 HMRC recorded that £6.4 billion of chargeable gains above the annual exempt amount of payable on capital gains, this gives a range of between roughly £1.140 -£1.7 billion raised by sales. Given the rate of 18-28% payable on £11,700 would be43 paid at a 28% rate. Some capitalresidential property sales that year. To be cautious, we will assume revenue is towardcapital gains, gains this were gives made a range on these of between residential property smaller landlords sales. may Given have the lower rate incomes of 18s- 28% the roughlyupper end of this range at £1.5 billionpayable on capital gains, this gives a range of between roughly £1.1 £1.1-£1.7 billion raised by residential. closer to the national average-£1.7 billion raised by income propertyresidential property sales that year. To be cautious, we will assume revenue is toward sales that year. To be cautious, we of around £27,300,42 partly because this s the willFor many landlords, upper end of this range at £1.5 billion assume revenue is CGT is a fairly substantial disincentivetowards the upper. group are more to sell up likely to. beThe median average pensioners. The Deleted: current endlandlord of this’s rangeincome at, £1.5acc ording to a survey by the billion. gainsCouncil from ofrealising Mortgage this gainLenders of £87,263, is between £60,000 For many landlords, and £70,000.CGT is a fairly substantial disincentive44 This means any capital gainswill depend above the on to sell up the annual exempt amount of overall. The median average income of the Deleted: current For£11,700landlord many ’swould be paid at landlords, income, CGTaccording to a survey by the is a a 28% rate.fairly Some smaller landlords may have lower incomes closer individualCouncil sellingof Mortgage – as theL tablesenders below, is between 44 substantialto the national£60,000 and disincentive£70,000. average income of around £27,300, to This sell up.means The any capital gainsshow.45 partly because this group are more likely Yetabove the even for thoseannual exempt amount of on average median average landlord’s income, incomes, CGT is fairly extensive at nearly to be pensioners.£11,700 would be paid at The gains from a 28% rate.realising this gain of £87,263 Some smaller landlords may have lower incomes closer will depend on the overall accordingto the national to a survey average income of around £27,300, by the Council of £20,00045 partly because this group are more likely for an average gain. income of the individual selling – as the tables below show. Yet even for those on average Deleted: E incomes, CGT is fairly extensiveto be pensioners. The gains from at nearly £20,000 for an average gain. realising this gain of £87,263 will depend on the overall income of the individual selling Potential capital gain on average property– as the tables below show. (*) for landlord with £65,000 Yet even for those on ave income rage Deleted: E Potential capital gain on average propertyincomes, CGT is fairly extensive at nearly £20,000 for an average gain. (*) for landlord with £65,000 income Chargeable amount Rate payable Total paid Potential capital gain on average propertyAnnual Exempt £11,700 (*) for landlord with £60% 5,000 income£0 Amount Chargeable amount Rate payable Total paid Gains below £46,35Annual Exempt 0 £0£11,700 18%0% £0 higher rate Amount threshold Gains Gains below £46,35 above higher 0 £75,563£0 28%18% £21,158£0 rate thresholdhigher rate threshold Gains above higher £75,563 28%Total CGT Liability £21,158£21,158 rate threshold Potential capital gain on average property (*) for landlord with £27,300 incomeTotal CGT Liability £21,158 Potential capital gain on averageChargeable amount property (*) for Rate payable landlord with £27,300 incomeTotal paid Potential capital gain on average propertyAnnual Exempt £11,700 (*) for landlord with £27,300 income0% £0 Amount Chargeable amount Rate payable Total paid Gains below £46,35Annual Exempt 0 ££11,70019,050 18%0% ££03,429 higher Amountrate threshold Gains Gains below £46,35 above higher 0 £56,51319,050 28%18% £15,8243,429 rate thresholdhigher rate threshold Gains above higher £56,513 28%Total CGT Liability ££19,25315,824 (*) As noted this means a property rate threshold with a gain worth 54% or £87,263. Total CGT Liability £19,253 (*) As noted this means a property with a gain worth 54% or £87,263. (*) As noted this means a property with a gain worth 54% or £87,263. 42 42 Estimated number of taxpayer disposals, value of disposals, and chargeable gains by type of asset disposed of and length of period of ownership in 2014 to 2015, Table 14.6, HMRC, October 2017 43 43 42 42 Estimated number of taxpayer disposals, Estimated number of taxpayer disposals, value of disposals, and chargeable gains by type of asset value of disposals, and chargeable gains by type of asset disposed of and length of period of ownership in 2014 to 2015, Table 14.6, HMRC, October 2017 44disposed of and length of period of ownership in 2014 to 2015, Table 14.6, HMRC, October 2017 43 'The profile of UK private landlords'43 Estimated number of taxpayer disposals, , K. Scanlon, C. Whitehead, value of disposals, and chargeable gains by type of asset CML, December 2016 3945 Household disposable income and inequality in the UK: financial year ending 2017Estimated number of taxpayer disposals, value of disposals, and chargeable gains by type, ofONS asset, January 2018 disposed disposed of of and and length of period of ownership length of period of ownership in 2014 to in 2014 to 2015, 2015, Table 14.6, HMRCTable 14.6, , October 2017HMRC, October 2017 44 40 'The profile of UK private landlords'Estimated number of taxpayer disposals,, K. Scanlon, C. Whitehead, value of disposals, and chargeableCML, December 2016 gains by type of asset disposed 45 Household disposable income and inequality in the UK: financial year ending 2017of and length of period of ownership in 2014 to 2015, Table 14.6, HMRC, October 2017 , ONS, January 2018 17 41 ‘The profile of UK private landlords’, K. Scanlon, C. Whitehead,CML , December 2016 42 Household disposable income and inequality in the UK: financial year ending 2017,ONS , January 2018 17 cps.org.uk 16 From Rent to Own Obviously the greater the gain, the more further below – since households in owner will be paid at the 28% rate compared to – occupation would rely on savings or the the 18%, and the higher the income of the loan-based Support for Mortgage Interest landlord in any year, the greater the rate of system to cover mortgage costs, rather tax paid. than making new housing benefit claims.

A landlord with two or three properties HOW THIS POLICY SUPPORTS thinking of moving out of renting would LANDLORDS have a fairly hefty tax liability for doing so The Government is right to want to and is likely to prefer maintaining renting rebalance the property market toward instead. If they were selling a second or ownership. But it must not come only third property then their liability would be from attacks on those who have become even higher, as the first £11,700 would also landlords. To that end, the CGT relief for see them having to pay tax on this at a 28% landlords would have to be attractive rate, or around £3,000. enough for them to sell the property without taking out so much the tenant cannot afford CREATING AN INCENTIVE FOR to buy. LANDLORD TO SELL AND TENANT TO OWN – AT NO COST The Residential Landlords Association As discussed in part 1, the current returns (RLA) have previously suggested that available to landlords are not great. But in landlords be given a CGT reduction if they the absence of other investment options, sell to tenants who are first-time buyers. An and in the face of high CGT receipts, few amendment to this effect was briefly tabled landlords are selling up. to the Finance Bill in 2016.43 According to the RLA, 77% of landlords surveyed would By recycling the Capital Gains Tax receipt consider selling to their tenants if their CGT from landlords that do sell into supporting bill was waived, and two-thirds would be the tenant into ownership, and supporting more likely to sell to tenants if the CGT bill the landlord in selling their property, the was reduced.44 Government would be creating a large number of transactions where none existed Given this, we think that giving landlords before, and then taxing them – meaning a rebate worth 33% is the way forward in this policy would raise revenue that would order to encourage them to sell. This still otherwise not exist. leaves most of the CGT intact while giving a fairly strong incentive to sell. Indeed, this policy can be structured to ensure that the Treasury does not lose For some smaller landlords – those who out, via the various caps and thresholds only own a single property – we urge the set out below. Not only would there be a Government to consider topping this up with portion of revenue left for the Treasury, but a flat sum of £3,000. This is not a huge sum, because the number of transactions should and the cost would be limited given that only increase substantially, it should more than around 25% of properties would be covered.45 cover the predicted CGT receipts. On top But it could make a significant difference in of this, there would also be a saving in incentivising the landlord to sell. terms of housing benefit – as discussed

43 Consideration of Finance Bill (Report Stage), Amendment 143 (Kevin Hollinrake), House of Commons, August 2016 44 ‘Buy-to-let investors: ‘Let us off capital gains tax and we’ll sell to first-time buyers’’,The Telegraph, October 2015 45 ‘The profile of UK private landlords’, K. Scanlon, C. Whitehead,CML , December 2016 cps.org.uk 17 From Rent to Own Such a landlord, making an average gain of the Cambridge Centre for Housing and £87,263, with an average income of £27,300, Planning Research (CCHPR) found that would see a CGT rebate of £9,411 on the landlords cited the general difficulties average property, compared with a tax bill and hassle of selling a property as a key of £19,253. factor in dissuading them from selling (CGT liabilities were, obviously, another common If you had a landlord with five properties, complaint). who had an income of £65,000, they would see a CGT rebate of £39,234 on a tax bill of The CCHPR also found that the fact £118,892. properties had sitting tenants in situ can discourage sales. Landlords cited concerns In both cases, this is a substantial reduction such as that buyers may not want the risk of in their tax bill and could encourage them tenants not leaving when asked, and many to sell up. But if they did not want to sell up, agreed that ‘trying to market a property then that is their business – no one should with a tenant still there would reduce force them to dispose of their own property, their potential market’. As a result, many or punish them for owning it. landlords will only seek to sell a property after it has become vacant. This of course For many small landlords, their second means the landlord would end up losing home and the income from it is also a money in a void period. Selling to the sitting valuable hedge against the future – for tenant avoids such a void entirely.46 example in terms of paying for the costs of retirement and social care. This scheme would eliminate this and also estate agent fees – which range from 1-3% Yet it is also true that many landlords, of the property’s value once you add in faced with the shifting incentives described VAT, meaning a landlord selling an average above and the prospect of a Labour £200,000 property would make a £4,000 government promising rent controls and saving on a 2% cost. So as a landlord, if you other punishments, will be looking for an sold a typical property under this scheme, exit. The Help to Own scheme assists them you would gain around £10,000 in tax and with that – but we also suggest that the £4,000 in lower fees compared to a typical Government should, as outlined below, offer sale – a £14,000 saving for a typical first them alternative places to put the money property being sold, worth more than an they realise that offer not just a secure additional 15% in house price gains. income but act to promote home ownership more broadly. HOW THE POLICY SUPPORTS TENANTS TO BUY THEIR HOME SELLING TO A TENANT Under the Help to Own proposal, the HELPS LANDLORDS AVOID remaining 66.6% of the CGT receipt would OTHER COSTS go into equity for the sitting tenant worth up Another incentive for the landlord is that to 6.66% of the value of the property (with this scheme would limit some of the costs some caps as discussed below).47 To take and hassle involved in selling. There advantage of this offer, the tenants would would be no need for any marketing, have to contribute 3.33% of the equity of property viewings and so on. A survey by the value of the property, making it a 10%

46 ‘Landlord portfolio management - past and future ‘, pp11-14, A. Clarke and A. Heywood, Cambridge Centre for Housing and Planning Research, July 2017 47 Again, we are generally not going into the slightly more complex version where this is a small landlord and they obtain an additional £3,000 for the property. cps.org.uk 18 From Rent to Own equity stake and enabling them to obtain to help people to buy if they cannot cope a 90% LTV mortgage. This would maintain with ownership, end up falling behind on the link between effort and reward: the their mortgage payments and have the Government would not be handing away property repossessed. free houses, but bridging the deposit gap for those who had already started to save. Yet for those that can afford it, this transfer would allow these tenants to move into It is, after all, morally right that people ownership at a fraction of the normal cost. should contribute something to this – it is In 2016, there were 312,502 first-time buyer wrong for people to expect something for mortgages, of which 100,857 were at 90%+ nothing. Government should help those who and a further 141,938 at 85-90%. In short, help themselves – not least because those nearly five in six first time buyer mortgages who have bought a property having saved were at or near the 10% level, meaning that a deposit entirely by themselves will feel a 10% deposit should certainly be adequate very strongly that giving the deposit away for getting a mortgage. (As discussed later, entirely is wrong. This offer should also be the banks would also be able to recycle limited to those who do not already own a funds raised by sale of rented properties to property – it hardly seems fair for tenants to support new mortgages.) take advantage of tax relief aimed at getting people on to the property ladder, when they On an average UK property worth £228,384,48 already own property elsewhere. Help to Own would therefore enable people to move into ownership for a contribution In addition to this strong moral point, which of just £7,536 (assuming a deposit of 10% would be sufficient reason alone to require on a £228,384 property).49 This is even less a contribution, there is a practical angle than the £12,675 they would need if they as well. If those who are currently renting were buying the same property using a cannot save even a 3.33% contribution of Help to Buy equity loan, which requires a the property’s value toward the scheme, 5% deposit – and unlike Help to Buy, they it does signal that they might not be able would start with a 10% equity stake that was £228,384 property).52 This is even less than the £12,675 they would need if they were buying to budget effectively, or be the type of theirs permanently, not a 20% stake taken individual,the same property using a Help to Buy group or couple that most banksequity loan, which requires a 5% deposit by the Government they would become– and unlike wouldHelp to Buy be comfortable, they would lendingstart with to. It a 10% equity stake that is wrong liable forwas latertheir on. s permanently, not a 20% stake taken by the Government they would become liable for later on. Deleted: Government Transfer toTransfer to tenantstenants at different price levels at different price levels

Property Value Capital required Capital required Saving made without the scheme with the scheme (10% deposit) (3.33%) £100,000 £10,000 £3,330 £6,670 £228,384 (UK average) £22,838 £7,605 £15,233 £350,000 £35,000 £11,655 £23,345 £500,000 £50,000 £16,650 £33,350

There are very substantial transfers that would come about from this scheme – for example a £350,000 property would see a £23,345 transfer being made to tenants as part of a deposit, meaning that the tenant would only have to find £11,655. For the less affluent parts of the Deleted: a massive shift and one that would UK, where a reasonable property might be just £100,000, then this would allow people to 48move into ownership for just £3,330 UK House Price Index for June 2018, HM– Landa saving of £6,670. Registry, August 2018 49 UK House Price Index for June 2018, HM Land Registry, August 2018 There is an added incentive to tenants beyond the initial reliefs. The average repair bill for cps.org.uk From Rent to Own new homeowners is £5,750, according to the Royal Institute of Charter19 ed Surveyors.53 This is a substantial hidden cost – but it is one you are unlikely to pay if you have already been living in the property, with the landlord responsible for maintenance.

On top of this, tenants would also avoid the cost of removals that they would incur if they Deleted: were moving to a different property, which can average as much as £600-700.54 They would also not end up having to cover a void period at the end of tenancy, or rent a short-term property or live temporarily with friends before their new property was ready. Deleted: is

There will still be substantial legal fees, and the cost of surveys and valuation as discussed Deleted: later on – but even here the Government should seek to see if there are ways that it can Deleted: they reduce such costs (e.g. via a standardised valuation offer). This way of moving to ownership Deleted: down would clearly be the most cost-effective. As discussed further below, a key element here is that all tenants would receive this 6.66% through a mechanism of pooling and sharing the CGT receipts that are paid as part of this scheme. This would ensure that the system was fair to all taking part.

Right of first refusal to sitting tenants on the day this policy is announced

Since this offer would have to be made to one person, the most obvious candidate is the Deleted: of who would buy the property using the CGT sitting tenant. Otherwise it is hard to see how you would decide who is the most deserving discount Deleted: first Deleted: person 52 UK House Price Index for June 2018, HM Land Registry, August 2018 Deleted: current 53 RICS Home Surveys: A valuation is not a survey, RICS, April 2012 54 ‘Cost of Removals: The Average Fees for Removal Companies’, mybigmove.co.uk

There are very substantial transfers that RIGHT OF FIRST REFUSAL TO would come about from this scheme – for SITTING TENANTS ON THE DAY example a £350,000 property would see a THIS POLICY IS ANNOUNCED £23,345 transfer being made to tenants as Since this offer would have to be made to part of a deposit, meaning that the tenant one person, the most obvious candidate would only have to find £11,655. For the less is the sitting tenant. Otherwise it is hard to affluent parts of the UK, where a reasonable see how you would decide who is the most property might be just £100,000, then this deserving person – since multiple people would allow people to move into ownership might want to purchase the property and for just £3,330 – a saving of £6,670. obtain any support available. It would also result in tenants being turfed out of their There is an added incentive to tenants properties, creating much resentment. beyond the initial reliefs. The average repair bill for new homeowners is £5,750, Consider the repercussions if one in 10 according to the Royal Institute of landlords decided to take this up but not Chartered Surveyors.50 This is a substantial sell to the sitting tenants, instead evicting hidden cost – but it is one you are unlikely them to make way for a different purchaser. to pay if you have already been living in the This would mean evicting 470,000 property, with the landlord responsible for households – 1.2 million people, given maintenance. a household average size of 2.5.52 This would turn a popular policy into one On top of this, tenants would also avoid the with substantial problems – and create cost of removals that they would incur if they a large group of those who were not just were moving to a different property, which denied the chance to purchase their can average as much as £600-700.51 They current home, but forced out in order would also not end up having to cover a void for someone else to benefit. period at the end of tenancy, or rent a short- term property or live temporarily with friends Therefore, although we discuss possibilities before their new property was ready. of voluntary swaps between tenants, nomination of alternative first-time buyers, There would still be substantial legal fees, and other measures, the starting point has and the cost of surveys and valuation as to be that this is offered to sitting tenants discussed later on – but even here the first and we proceed on that basis. Government should seek to see if there are ways that it could reduce such costs (e.g. Once this policy is announced, landlords via a standardised valuation offer). This way might try to evict tenants and replace them of moving to ownership would clearly be the with others – most of all friends and family most cost-effective. members. So the ‘winner’ would have to be the sitting tenant on the day that the As discussed further below, a key element policy is announced – or even several days here is that all tenants would receive this before. For example, if this announcement 6.66% through a mechanism of pooling and was made in the Budget, it should be the sharing the CGT receipts that are paid as sitting tenants on the day of the Budget part of this scheme. This would ensure that itself, even if they then move on, who the system was fair to all taking part. receives the first right of refusal.

50 RICS Home Surveys: A valuation is not a survey, RICS, April 2012 51 ‘Cost of Removals: The Average Fees for Removal Companies’, mybigmove.co.uk 52 Tenure trends and cross tenure analysis, Table FA1211 (S109): Number of people living in household by tenure, 2016-17 (English Housing Survey), MHCLG, July 2018 cps.org.uk 20 From Rent to Own 3. Help to Own – The Numbers

3. Help to Own – TheTo show that NumbersHelp to Own is a genuinely realistic policy, we need to show that it can break Deleted: help set this out further and even – meaning that a 66% CGT relief has to be sufficient to create 6.66% in equity for the Deleted: this 3. Help to Own – The Numbers sitting tenant. Deleted: Help to Own To show that Help to Own is a genuinely Fortunately,This does not have to be the case across all properties, because the system the amount on which 18% could and should Deleted: transfer some CGT relief from properties with very high gains to those with less. But the Deleted: , To show that Help to Own is a genuinely realistic policyCGT, we need to show that is chargeable is it limited,can break becauseDeleted: the help set this out further and realistic policy, we need to show that it can average increase in value has to be sufficient that 66% of the CGT payable gives a 6.66% equity Deleted: meaning even – meaning that a 66% CGT relief has to be sufficient to create 6.66% in equity for the Deleted: this break even – meaning that a 66% CGT maximumshare for tenants to gain a deposit this covers is the. (We have first calculated this on a UK£58,051: the -wide basis, although as Deleted: sitting tenant. Help to relief has to be sufficient to create 6.66% in combinationhousing and planning of the are higher devolved rate it would threshold also Deleted: be possible, of as discussed below, for the Deleted: which had not Own equity forThis does not have to be the case across all properties, because the system the sitting tenant. 46,351scheme to be introduced in England only.) and the Annualcould and shou Exemptld AllowanceDeleted: of Deleted: , transfer some CGT relief from properties with very high £11,700.Levels of appreciation gains to those Anythingwith less will obviously above . thatBut the differ depending on the levels of will be chargedDeleted: CGT relief. With 33% Deleted: The l average increase in value has to be sufficient that 66% of the CGT payable gives a going to the landlord, the remaining 6.66% equity 66% relief is either worthDeleted: meaning 12% (for those paying CGT at from This does not have to be the case across on 28%. As any capital gain goes above Deleted: share for tenants to gain a deposit. (We have calculated this on a UK18%) or 18.5% (from -wide basis, although as those paying the usual 28% rateDeleted:) of the increase in value . all properties, because the system could this level the average CGT rises toward 28% housing and planning are devolved it would also be possible, as discussed below, for the Deleted: which had not (thoughAt 12%, each 1% increase in value never reaching it).means 0.1 As a reminder,2% in equity is created for tenants. At 18.5%, Deleted: and shouldscheme to be introduced in England only.) transfer some CGT relief from each 1% increase in value means 0.185% in equity is created.Deleted: Deleted: the relief means properties with very high gains to those with even an individual on a fairly low income of Levels of appreciation will obviously differ depending on the levels of CGT relief. With 33% Deleted: The l less. But the average increase in value has £20,000Fortunately, reachesthe amount on the which 18% CGT is chargeable is limited28% threshold fairly , because the maximum Deleted: going to the landlord, the remaining 66% relief is either worth 12% (for those paying CGT at Deleted: from this covers is the first £58,051: the combination of the higher rate threshold of 46,351 and Deleted: – to be sufficient18%) or 18.5 % (from that 66%those paying the usual of the CGT payable28% rate) of the increase in valuequickly and starts paying. a rate across the the Annual Exempt Allowance of £11,700. Anything above that will be charged on 28%. As Deleted: – gives a 6.66% equity share for tenants to whole gain well above 18%, as the table any capital gain goes above this level the average CGT rises toward 28% (though never Deleted: % gain a deposit.At 12%, e ach 1% increase in value (We have calculated means 0.1this 2% in equity belowreaching it).is created sets As a re out. for tenantsminder, even . At an individual on a fairly18.5%, Deleted: low income of £20,000 reach es the on a UK-wideeach 1% increase in value means 0. basis, although as housing185% in equity is created.28% threshold fairly quickly and start s paying a rate across the whole gain well above 18%Deleted: the relief means , as Individualthe table below sets out. with income of £20,000 CGT and planningFortunately, are the amount ondevolved it would which 18% CGT is chargeable is limited also , because the maximum Deleted: liabilityIndividual with income of £20,000 on different levelsCGT liability on different of capital gain levels of capital gain be possible,this covers is as discussed the first £58,051 below,: the combination of the higher rate threshold of for the 46,351 and Deleted: – schemethe Annual Exempt Allowance of to be introduced in England£11,700. Anything above that will be charged on 28%. As only.) Capital gain Income + Capital CGT liability as %Deleted: – Gain any capital gain goes above this level the average CGT rises toward 28% (though never Deleted: % Levels ofreaching it). appreciation As a re willminder, even obviouslyan individual on a fairly differ £25,000 low income of £20,000 reach £45,000 es the 5.3% depending28% threshold fairly quickly and start on the levels of CGT relief. Withs paying a rate across the whole gain well above 18% £50,000 £70,000 , as 11.6% the table below sets out. £100,000 £120,000 18.4% 33% going to the landlord, the remaining 66% £200,000 £220,000 22.8% relief is Individual with income of £20,000 either worth 12% (for those payingCGT liability on different levels of capital gain CGT at 18%) or 18.5% (from those paying the The level of appreciation necessary to provide a 6.66% stake where the landlord earned Capital gain Income + Capital CGT liability as %The level of appreciation necessary to usual 28% rate) of the increase in value. £20,000 a year is set out below. The table makes provision for the Annual Exempt Allowance. Deleted: below – as the property rises in value, the level of Gain provide a 6.66% stake where the landlord appreciation falls as set out below Illustrative levels of appreciation needed with landlord earning £20,000 a year below £25,000 £45,000 5.3% earned £20,000 a year is set out below. Deleted: At 12%, each 1% increase in value means Table with illustrative £50,000 £70,000 11.6% Original Value Property value 6.66% equity Appreciation % appreciation Deleted: 0.12% in equity is created for tenants. At The table makes provision for the Annual £100,000 £120,000 18.4% now stake from start from start 18.5%, each 1% increase in value means Exempt Allowance. necessary necessary £200,000 £220,000 22.8% 0.185% in equity is created.

The level of appreciation necessary to provide a 6.66% stake where the landlord earned 23

£20,000 a year is set out below. The table makes provision for the Annual Exempt Allowance. Deleted: below – as the property rises in value, the level of appreciation falls as set out below Illustrative levels of appreciation needed with landlord earning £20,000 a year Illustrative levels of appreciation needed with landlord earning £20,000 a year Deleted: below Original Value Property value 6.66% equity Appreciation % appreciation Deleted: Table with illustrative now stake from start from start necessary necessary £43,532 £100,000 £6,600 £56,468 130%

£108,175 £200,000 £13,200 £91,825 85% 23 £172,818 £300,000 £19,800 £127,182 74% £237,461 £400,000 £26,400 £162,539 68%

If the rebate to the tenant was accruing at the 18.5% rate (ie if the CGT payable was at 28%, Deleted: , the higher rate), the necessary increase in value from the starting value would be 54%. Again, cps.org.ukadjusting for the £11,700 annual exempt amount the proportion21 ate increase would be slightly From Rent to Own higher, though it would again fall as a percentage as the value of the property rose – for example it would fall to 61% in terms of a £200,000 property (which is still over 10% below the average value property in the country).

Illustrative levels of appreciation needed if 28% CGT rate is chargeable Deleted: Table showing illustrative Original price Property value 6.66% equity Capital gain % appreciation stake needed from start necessary

£64,643 £100,000 £6,600 £35,357 54%

£129,286 £200,000 £13,200 £70,714 54%

£193,929 £300,000 £19,800 £106,071 54%

£258,571 £400,000 £26,400 £141,429 54%

Appreciation needed if 28% CGT charged and annual exempt amount applies Deleted: Table showing appreciation Original Property value 6.66% equity stake Capital gain % Price needed Appreciation from start necessary

£54,967 £100,000 £6,600 £47,057 82%

£121,633 £200,000 £13,200 £82,414 64%

£188,300 £300,000 £19,800 £117,771 59%

£254,967 £400,000 £26,400 £153,129 57% Deleted: This is because Deleted: the base line is 54% if the whole gain pays tax at 28% with no annual exempt amount and from there it From these calculations, the level of appreciation across all properties, on average, necessary needs to be adjusted up – but not too much. The reason any to pay for a typical 6.66% equity stake would be around 60% to 65%. This is towards the low upward adjustment should be moderate is end of the figures above because there are two good reasons to think that the vast majority Deleted: ly of gains will be taxed at the 28% rate. First, the Council of Mortgage Lenders’ surveys of Deleted: the landlords show an average income of £60,000 to £70,000. This is well above the 28% Deleted: CML Deleted: ed

£43,532 £100,000 £6,600 £56,468 130% £108,175 £200,000 £13,200 £91,825 85% £43,532 £100,000 £6,600 £56,468 130% If the rebate£172,818 to the tenant£300,000 was accruing £19,800 at higher, £127,182 though it 74% would again fall as a the 18.5% rate£108,175 (ie if the CGT£200,000 payable was £13,200 percentage £91,825 as the 85% value of the property £237,461 £400,000 £26,400 £162,539 68% at 28%, the £172,818higher rate), the£300,000 necessary £19,800 rose £127,182 – for example 74% it would fall to 61% in increase in £237,461value from the£400,000 starting value £26,400 terms £162,539 of a £200,000 68% property (which is still If the rebate to the tenant was accruing at the 18.5% rate (ie if the CGT payable was at 28%, Deleted: , would be 54%.the higher rate), Again, adjustingthe necessary for increase in value from the starting value would be over 10% below the average54%. valueAgain, property the £11,700adjusting for the £11,700 annual exempt If the annualrebate to the tenant exempt amountwas the accru ing amountat the 18.5 the proportionin% rate the (country).ie if the CGT payable wate increase would be slightly as at 28%, Deleted: , proportionatehigher, though it would again fall asthe higher rate), increase wouldthe necessary be slightlyincrease in value from the starting value would be a percentage as the value of the property rose54%. Again, – for example itadjusting for the £11,700 annual exempt would fall to 61% in terms of a £200,000 property (which is still over 10% below amount the proportionate increase would be slightly the average value property in the countryhigher, though it would again fall as a percentage as). the value of the property rose – for example it would fall to 61% in terms of a £200,000 property (which is still over 10% below the average value property in the countryIllustrative levels of appreciation needed levels of appreciationif 28% )needed. CGT rate if 28%is chargeable CGT rate is chargeable Deleted: Table showing illustrative Original price Property value 6.66% equity Capital gain % appreciation Illustrative levels of appreciation needed if 28% CGT rate is chargeable Deleted: Table showing illustrative stake needed from start Original price Property value 6.66% equity Capital gain necessary% appreciation stake needed from start £64,643 £100,000 £6,600 £35,357 necessary 54%

£64,643£129,286 £100,000£200,000 £6,600 £13,200 £35,357£70,714 54%

£129,286£193,929 £200,000£300,000 £13,200£19,800 £70,714£106,071 54%

£193,929£258,571 £300,000£400,000 £19,800£26,400 £106,071£141,429 54%

£258,571 £400,000 £26,400 £141,429 54% Appreciation needed if 28% CGT charged and annual exempt amount applies Deleted: Table showing appreciation

Original Property value 6.66% equity stake Capital gain % Appreciation needed if 28% CGT charged and annual exempt amount applies needed if 28% CGT charged and annual exempt amount applies Deleted: Table showing appreciation Price needed Appreciation Original Property value 6.66% equity stake Capital gain from start % Price needed necessaryAppreciation from start £54,967 £100,000 £6,600 £47,057 necessary 82%

£54,967£121,633 £100,000£200,000 £6,600 £13,200 £47,057£82,414 8264%

£121,633£188,300 £200,000£300,000 £13,200£19,800 £82,414£117,771 6594%

£188,300£254,967 £300,000£400,000 £19,800£26,400 £117,771£153,129 5957% Deleted: This is because £254,967 £400,000 £26,400 £153,129 57% Deleted: the base line is 54% if the whole gain pays tax at Deleted:28% with no annual exempt amount and from there it This is because From these calculations, the level of appreciation across all properties, on average, necessary needs to be adjusted up – but not too much. The reason any the base line is 54% if the whole gain pays tax at Deleted:upward adjustment should be moderate is to pay for a typical 6.66% equity stake would be around 60% to 65%. This is towards the low 28% with no annual exempt amount and from there it end of the figures above because From these calculations, the level of appreciation across all properties, there are two good reasons to think that the vast majority on average, necessary Deleted:needs to be adjusted up ly – but not too much. The reason any upward adjustment should be moderate is From theseof gains will be taxed at the 28% rate. to pay for a typical calculations, the6.66 level% equity stake would be around of First, the Council of Mortgage Lenders’ the Council60% to 65% of . MortgageThis is towards the low Lenders’surveys of surveysDeleted: the Deleted: ly appreciationlandlords end of the figures above because across show all properties,an average income on there are two good reasons to think that the vast majority of £60,000 to of £70,000. landlords This show is well an above average the income 28% ofDeleted: CML of gains will be taxed at the 28% rate. First, the Council of Mortgage Lenders’ surveys of Deleted: the average, necessary to pay for a typical £60,000 to £70,000. This is well above theDeleted: ed landlords show an average income of £60,000 to £70,000. This is well above the 28% Deleted: CML 24 6.66% equity stake would be around 60% 28% threshold of £46,351 and so all gainsDeleted: ed to 65%. This is towards the low end of the would be at the 28% rate. Even those 24 figures above because there are two good paying 18% are likely to only pay this on a reasons to think that the vast majority of fairly small part of any gain. gains will be taxed at the 28% rate. First,

cps.org.uk 22 From Rent to Own Second, most properties will be part of £30,326 for Property A once you adjust a portfolio of properties, so the annual for the annual exempt allowance. They exempt allowance would only apply to one. receive 33% relief as a landlord, worth Around 40% of all private rental properties £10,108. The remaining CGT, worth £20,216 are part of a portfolio of five or more is given to the tenant – but they only properties, with fewer than 30% owned needs £13,333 for their 6.66% equity stake, as single units.53 Since the annual exempt so the remaining £6,883 is recycled into amount is only applicable on the first the national scheme as discussed below. £11,700, this will only cover part of the first property sold. It is possible for spouses to EXAMPLE B both use their exempt allowance, including transferring it from one partner to another Landlord B bought Property B in 2007 (say if two properties were being sold, or for £150,000. It has since risen in value to one property that was owned jointly), but £231,700. Landlord B is only selling one as discussed later, this would not make a property and earns £20,000, so factoring huge difference for most rental portfolios. in his £11,700 annual exempt amount, he pays CGT on £70,000. The first £26,351 is Our calculations show that, to make the paid at 18% with the remaining £43,549 scheme work, the necessary average paid at 28%, giving a total tax bill of appreciation is between 60% and 65% £16,936 (£4,743 + £12,193). The landlord as a lower and higher estimate. Yet the receives a £5,645 tax incentive for selling distribution of this gain is almost equally to the tenant, and £11,291 goes to the important. The higher the value of the tenant. This does not quite reach the properties, the lower the gain needed £15,447 required for a 6.66% equity stake, to create enough CGT value. And it is so the remaining £4,156 needs to be easier to recycle gains if it is higher value cross-subsidised, via the surpluses from properties have increased the most in more lucrative sales such as Examples A price, because any surplus that is created or C. will be able to fund multiple lower-value properties. Fortunately, it is the case EXAMPLE C that the areas with the most expensive Landlord C bought Property C in London properties tend to have seen the largest in 2005 for £200,000, and it has since gains. risen in value to £500,000, giving a gain Some examples showing how Help to Own of £300,000. The landlord only has one would work in practice property but is a higher rate taxpayer, so she would normally pay 28% CGT on all EXAMPLE A gains after her annual exempt amount is used up, giving a tax bill of £70,724. She Landlord A bought Property A in 1999 could therefore receive a tax incentive for £80,000. It has since risen in value of £23,551 to sell to her tenant, and the by 150% to £200,000, a gain of £120,000. £33,000 she pays in CGT to the tenant Landlord A owns three properties, all means that even after all this, there is a bought at around the same time with surplus of £13,448 to redistribute back into similar increases in value and is selling the scheme. them all, so any CGT from this sale under this scheme will be paid at the rate of 28%, meaning a Capital Gains Tax bill of

53 ‘The profile of UK private landlords’, K. Scanlon, C. Whitehead,CML , December 2016 cps.org.uk 23 From Rent to Own Landlord C bought Property C in London in 2005 for £200,000, and it has since risen in value Deleted: to £500,000, giving a gain of £300,000. The landlord only has one property but is a higher rate Deleted: p taxpayer, so she would normally pay 28% CGT on all gains after her annual exempt amount is used up, giving a tax bill of £70,724. She could therefore receive a tax incentive of £23,551 to sell to her tenant, and the £33,000 she pays in CGT to the tenant means that even after all Deleted: still this, there is a surplus of £13,448 to redistribute back into the scheme.

EXAMPLE Final sale Capital CGT rate due CGT payable CGT tax Equity for 6.66% 6.66% value gain relief to tenant deposit equity landlord needed surplus/ shortfall

Property A £200,000 £120,000 28% £30,326 £10,108 £20,108 £13,333 +£6,883

Property B £231,700 £81,700 18% after AEA £16,936 £5,645 £11,291 £15,447 -£4,156

Property C £500,000 £300,000 28% after AEA £70,724 £23,551 £33,000 £33,000 +£13,448

What about any other reliefs? WHAT ABOUT ANY OTHER billion capital gains bill estimated earlier, The main other relief in the system is the Primary Residence Relief. This is available to people Private RELIEFS? this is around 6%. This relief is alsoDeleted: likely who lived in a property before they rented it out and reduces the amount of chargeable gain it to predominantly benefit those landlordsDeleted: The mainfor the time it was someone’s main home, and the last other relief in the system is the 18 months they owned the home. This Deleted: eighteen Privateallows them to c Residence laim the lesser of up to £40,000 in chargeable relief or the increase in the Relief. This is available with only one property (making up 28% 55 to peoplevalue of the property during the time they lived there. who lived in a property before of properties) in lower-value areas where properties have not increased in they rentedIn other words it out, if you lived in a property which went up and reduces the amount by £100,000 while you lived there, Deleted: So price very much. This is likely to only be of chargeableyou could reduce gainthe amount for the timethat itCGT was levied on by £40,000. It is important to note that was Deleted: still only someone’sthis is not a reduction in your CGT bill main home, and the last, but 18 in the amount betweenof gain that 5%you pay CGT on and 10% of– so if all properties. monthsyou claimed the maximum of £40,000 in relief, you would see your CGT bill fall by they owned the home. Some £11,200 if your whole bill was based on 28%, and by £7,200 if paid at 18% (which would be less than Since these are among thethe few properties landlords can also qualify for Letting Relief, Help to Own scheme offers to an average landlord selling just one property at the average that the Help to Own scheme doesDeleted: not this which allows them to claim the lesser of capital gain made). work well for, we would simply suggest up to £40,000 in chargeable relief or the This relief is therefore very small overall in the context of capital gains on rental properties that those who would take– advantage increase in the value of the property during when the time that you could claim was reduced from 36 months to just 18 monthsof it do not also gain ,from it cost the PrivateDeleted: this the time they lived there. 57 the Government only £100 million. In the context of Residencethe £1.5 billion Relief. capital This gains would bill notDeleted: really around estimated earlier, this is around 6%. This relief is also likely to predominantly benefit those Deleted: a In other words, if you lived in a property reduce58 the numbers applying for Help to landlords with only one property (making up 28% of properties) in lower-value areas where Deleted: whichproperties have not increased went up by £100,000 whilein pr youice very much. This is likely to only be between 5% and Own, since the reliefs to most landlords lived 10% of all properties.there, you could reduce the amount would be much more generous and the group of landlords who are least likely to that CGTSince these are was leviedamong the few on by £40,000.properties that It is the Help to Own scheme does not work well Deleted: take part in it are those who benefit the importantfor, we would simply to note that suggest this is that those who would take advantage of not a reduction it do not also gain from Deleted: this most from the Private Residence Relief in your CGT bill, but in the amount of gain Deleted: require 57 that you Policy Measures Database pay CGT on – so, Tax; All Measures, row 1059, if you claimed OBR already. Deleted: this scheme 58 the maximum 'The profile of UK private landlords' of £40,000 in relief,, p19, K. Scanlon, C. Whitehead, you would CML, December 2016 It could be argued that curbs to these see your CGT bill fall by £11,200 if your 26 reliefs would increase the incentive for whole bill was based on 28%, and by £7,200 landlords to use Help to Own, but in reality if paid at 18% (which would be less than the any such reform would be unfair unless it Help to Own scheme offers to an average was grandfathered to protect those who landlord selling just one property at the have invested in good faith. Exempting average capital gain made). existing landlords from any such changes This relief is therefore very small overall would in turn simply make the reforms in the context of capital gains on rental redundant, as Help to Own would only properties – when the time that you could apply to current landlords.For these claim was reduced from 36 months to just reasons we do not recommend abolishing 18 months, it cost the Government only the PRR scheme. £100 million.54 In the context of the £1.5

54 Policy Measures Database, Tax; All Measures, row 1059, OBR 55 ‘The profile of UK private landlords’, p19, K. Scanlon, C. Whitehead, CML, December 2016 cps.org.uk 24 From Rent to Own NATIONALLY, THERE HAS properties might churn – so properties BEEN ENOUGH CAPITAL entering the sector are cancelled out by APPRECIATION FOR HELP ones leaving the sector, which leaves the TO OWN TO WORK total size the same). This gives a figure for The first challenge in making the numbers appreciation across the sector of 79.8%. stack up is estimating the necessary Method 2: Landlord flow, via CML level of house price inflation in the private rented sector. The second is calculating Using CML data on when landlords whether that level has been reached. acquired their first property, we worked out appreciation weighted to the number In the section above, we showed that of landlords acquiring in each period. the level of appreciation that we have to We were cautious and assumed that any reach is 60-65%. To test this, we created data over 20 years old was just 21 years three separate methodologies to estimate old. Doing this, we came to an average the value of the country’s private rented appreciation across the sector of 66.3%. housing stock and the gain in value that has accrued – and hence the CGT levels Method 3: Asset disposals, via HMRC that would be generated from the sale to tenants. More detail is provided in the This uses HMRC data on the value and appendix, given this is a crucial part of this volume of asset disposals and Capital report. However, the key point is that the Gains Tax payments, broken down by appreciation is above what is needed. asset type and length of time for which the asset was held. Using the most recent Method 1: Private rented sector growth, year and taking the class ‘UK & foreign via ONS residential/land’ and assets held for between 15 and 20 years, the average This uses data from the ONS to show how chargeable gain was 42%. This means many private rented properties the sector the property had appreciated by 72.4% expanded by each year, and works out compared with its purchase price. the weighted growth of this. We calculated the proportion of properties each year Methods 1 and 3 are UK-wide and Method accounted for in the ONS data as a share 2 is based on England only. However, of the total PRS in 2016/7. We then adjusted the key point is that all three methods for the fact that some properties were have fairly similar outcomes – despite purchased before 1991 by excluding them using different data sets, they all come (whichthere is wouldalso a reasonable buffer make this a conservativeso that even if our outestimate is too low, the scheme would above the 60%-65% that we estimate Deleted: It estimate,still pay for itself. but is probably(And as discussed below a sensible , regional isvariations and necessary if tenantsour proposed cap system are to receive a Deleted: has compensation for the fact that some create an even more comfortable buffer.) The capital veryappreciatio generousn 6.66%is therefore equity sufficient for stake and Deleted: as well this scheme to work. Deleted: higher range MethodologiesMethodologies and and levels of levels ofappreciation appreciation Deleted: as well Deleted: the Appreciation Method Appreciation Deleted: range of this appreciation also works in such a ... [23] Method 1: Flow of Private Renters 79.8% Deleted: national appreciation is more than sufficient for ... [24] Method 2: CML 2016 survey of landlords 66.3% Deleted: Method 3: HMRC Capital Gains Tax analysis 72.4% Deleted: therefore Deleted: capital gains tax Average 72.8% Deleted: over that decade

Moved (insertion) [4] Recycling value so all tenants receive a fair offer rather than a random reward Deleted: I cps.org.ukWhile the average capital appreciation available for landlords will have to be around 25 From60 Rent% toto Own Deleted: C 65% for Help to Own to work, capital appreciation will inevitably vary wildly from property to Deleted: apital Gains property and from landlord portfolio to landlord portfolio. Deleted: any t While we are confident the level of aggregate appreciation is sufficient given the three Deleted: methodologies above, this obviously will not be the case for all individual properties. For a Deleted: support property bought 10 years ago in the North East, where house prices have actually fallen on Deleted: In o average by 6.1% in that period, Help to Own is very unlikely to work.59 Similarly, a property Deleted: , bought in London in 2015 will not have seen sufficient appreciation, given prices in the capital Deleted: you have only risen by around 15% in the last three years.60 It is clear that in these areas a 6.66% Deleted: someone whose stake will not be covered by recycling the CGT receipts available. Deleted: had sold If you were to just implement a version of this policy where you just recycled the CGT to sitting Deleted: tenants without any means to equalise support, then Help to Own would become not just Deleted: exit UK investments unfair but unpopular. Two tenants, in two identical properties, on the same street, could end Deleted: and where up with massively different amounts. One might have a landlord who barely made any capital Deleted: was gains and was selling primarily in order to move their money out of the UK before a Deleted: , hypothetical Corbyn Government. In that case, the rebate would be worth perhaps a few Deleted: and i thousand pounds. In another, you might have a landlord who bought years ago, meaning the Deleted: someone where they were receiving tenant gets tens of thousands of pounds. This scale of unfairness is likely to weaken support Deleted: where the landlord bought years ago for the policy – and can be avoided through careful thought. Deleted: and The solution is a pooling and sharing mechanism, under which properties that generate Deleted: Since not all properties will generate sufficient ... [25] ‘surplus’ receipts see them recycled to support other buyers. Deleted: – Deleted: as set out earlier, some This might raise doubts about affordability: what if the only properties put forward are those Deleted: will which fail to meet the threshold? But the financial underpinning of this scheme is Deleted: that Deleted: can be 59 Based on average North East price for May 2008 and May 2018, see UK House Price Index, Figure 5, ONS, Deleted: , as the earlier examples above showed, where May 2018 ... [26] 60 Based on average London price for May 2015 and May 2018, see UK House Price Index, Figure 5, ONS, May Deleted: It would be fairly simple to simply pool the surplus ... [27] 2018 Deleted: T

28 landlords a substantial rebate. In the first gains and was selling primarily in order to and third cases, there is also a reasonable move their money out of the UK before a buffer so that even if our estimate is hypothetical Corbyn Government. In that too low, the scheme would still pay for case, the rebate would be worth perhaps itself. (And as discussed below, regional a few thousand pounds. In another, variations and our proposed cap system you might have a landlord who bought create an even more comfortable buffer.) years ago, meaning the tenant gets tens The capital appreciation is therefore of thousands of pounds. This scale of sufficient for this scheme to work. unfairness is likely to weaken support for the policy – and can be avoided through RECYCLING VALUE SO ALL careful thought. TENANTS RECEIVE A FAIR OFFER RATHER THAN A The solution is a pooling and sharing RANDOM REWARD mechanism, under which properties that While the average capital appreciation generate ‘surplus’ receipts see them available for landlords will have to be recycled to support other buyers. around 60% to 65% for Help to Own to work, capital appreciation will inevitably This might raise doubts about affordability: vary wildly from property to property and what if the only properties put forward are from landlord portfolio to landlord portfolio. those which fail to meet the threshold? But the financial underpinning of this While we are confident the level of scheme is strengthened by the built-in aggregate appreciation is sufficient bias towards high-value properties, the given the three methodologies above, associated incentives for the landlord, and this obviously will not be the case for the caps set out below. all individual properties. For a property bought 10 years ago in the North East, HELP TO OWN ENCOURAGES where house prices have actually fallen SALE OF HIGH VALUE on average by 6.1% in that period, Help to PROPERTIES Own is very unlikely to work.56 Similarly, a An obvious point about this policy is that property bought in London in 2015 will not those landlords taking advantage of the have seen sufficient appreciation, given offer are more likely to be in high-value prices in the capital have only risen by areas or own high-value properties. If a around 15% in the last three years.57 It is single owner landlord has a £350,000 clear that in these areas a 6.66% stake property which has seen capital gains will not be covered by recycling the CGT (net of allowances) worth £200,000 and receipts available. so has a tax liability of £56,000, then this gives a relief of around £21,700 (33% plus If you were to implement a version of this a flat £3,000) and an estate agent fee policy where you just recycled the CGT saving of £7,000. A £120,000 property with to sitting tenants without any means to capital gain of £60,000 has a tax liability equalise support, then Help to Own would of £16,800, a relief of £8,600, and estate become not just unfair but unpopular. Two agent fee saving of £2,400. Clearly, the tenants, in two identical properties, on the incentive to sell is greater for the first same street, could end up with massively property than the second. different amounts. One might have a landlord who barely made any capital

56 Based on average North East price for May 2008 and May 2018, see UK House Price Index, Figure 5, ONS, May 2018 57 Based on average London price for May 2015 and May 2018, see UK House Price Index, Figure 5, ONS, May 2018 cps.org.uk 26 From Rent to Own The objection might be that the Treasury in higher-value areas: expensive houses is thereby missing out on more revenue. in expensive areas have risen in price the But the bias towards high-value property most quickly. As the table below shows, inherent in this policy means that the London has seen the largest appreciation, properties involved are more likely to followed by the wider South-East; less be those where – due to the caps and expensive areas of Scotland and the North thresholds suggested below – there will East have seen the smallest.58 be more money to cross-subsidise other transactions, while returning cash to the This means that our estimate earlier of Treasury. national appreciation across the private rented sector is almost certainly an This balance of properties matters because underestimate, because areas with the a bias towards higher value areas is more highest level of appreciation are those likely to make the scheme work. If house with the largest absolute capital gains, prices have increased by more in higher- which would be available in many cases to value areas, it will mean more people be recycled across the country. paying at the 28% CGT rate, more people receiving the maximum available incentive, Furthermore, while most of our and more money being available for cross- calculations have been made on a UK- subsidy. If the market has been stronger wide basis, it is worth pointing out that in low-value areas, then the reverse is true: housing is a devolved issue. However, national price appreciation might exceed these house price variations mean that if the 60-65% threshold, but the lower value the devolved administrations in Scotland, of the properties being put forward for sale Wales and Northern Ireland resisted means the Treasury will lose out. the introduction of Help to Buy in their areas, it would make the scheme even Fortunately, the data is very clear that more affordable in England – and more regional appreciation has been focused attractive to the Treasury.

Regional appreciation 1993 - 2017 Comment [JH1]: Should we put this into descending order? 600%

500%

400%

300%

200%

100%

Capping the scheme to ensure revenue and fairness Deleted: How this would encourage landlords to sell... [29]

The sections above all show that levels of capital appreciation, and hence CGT, are more than Deleted: three methodologies enough to ensure that this policy pays for itself. However, we wish to make sure that the policy actually raises funding for the Government. In addition, there is an element of fairness. 58 HouseWhile Price Index, the Government UK and regional should quarterly help series those - all who properties, want Regional to become Quarterly owners, Indices this (Post should 1973), be Nationwide proportionate, rather than excessive. cps.org.uk From Rent to Own To achieve both of these goals, we propose a series of interventions to make sure that the 27 scheme is both affordable and fair in terms of the offers to different tenants and landlords. Therefore, we propose three caps to help ensure that this scheme should raise revenue:

A. Capping the value of the support to the tenant B. Capping the value of the relief for the landlord C. Reducing landlord relief for large property portfolios Deleted: empires

A. Capping the value of the support for the tenant

Two rich individuals renting a £1 million flat in Islington will almost certainly be able to afford Deleted: would a property without a £66,000 contribution toward their deposit from Help to Own – even if they cannot afford to buy their current home.

We propose that, to share the gains of the scheme more widely and fairly, the value of the Deleted: Therefore stake transferred to the tenant or tenants should be capped at £35,000. This means for Deleted: This means that above £525,000, the value of the example, a £600,000 property with three people living in it would see a cap of £35,000, 6.66% equity would begin to fall as a percentage of the property. Given that the average house price in London is meaning an equity stake of 5.8% rather than 6.66% being offered to the tenants. The tenants now at over £473,000,62 a uniform national cap should not would have to contribute at least 3.33%, as with other homes, in order to take advantage of be lower than £525,000, as this would reduce the incentive a large portion of the tenants in the London PRS have for this discount, meaning an £18,000 contribution as a group (£6,000 each). However, while they taking advantage of this scheme. would be gaining a lower percentage of the equity, they would be gaining a very high level of rebate in absolute terms.

CAPPING THE SCHEME TO to the tenants. The tenants would have to ENSURE REVENUE AND contribute at least 3.33%, as with other FAIRNESS homes, in order to take advantage of this discount, meaning an £18,000 contribution The sections above all show that levels as a group (£6,000 each). However, while of capital appreciation, and hence CGT, they would be gaining a lower percentage are more than enough to ensure that this of the equity, they would be gaining a very policy pays for itself. However, we wish to high level of rebate in absolute terms. make sure that the policy actually raises funding for the Government. In addition, Using data on the distribution of house there is an element of fairness. While prices in the UK from the Land Registry,59 the Government should help those who and assuming that house price distribution want to become owners, this should be is identical to that in the private rented proportionate, rather than excessive. sector (which is not ideal, but should give us a broad idea), we can work out how To achieve both of these goals, we much this saves. propose a series of interventions to make sure that the scheme is both affordable The distribution of house prices is broken and fair in terms of the offers to different up into categories such as £500k-£600k, tenants and landlords. Therefore, we so in order to simplify, central figures have propose three caps to help ensure that been used for each category (i.e. for the this scheme should raise revenue: category £500k-600k, the central figure is £550k). A. Capping the value of the support to the tenant We estimated the savings of the cap B. Capping the value of the relief for the for a single house at each price level landlord (with £100,000 intervals), then used C. Reducing landlord relief for large the distribution data to multiply this property portfolios figure by the number of houses in each price category. By summing up all the categories, we therefore calculated an A. Capping the value of the support for the overall cost saving. tenant Savings from the cap were calculated Two rich individuals renting a £1 million flat under the following two scenarios: in Islington will almost certainly be able to afford a property without a £66,000 Scenario 1) If 10% of the PRS is sold, the contribution toward their deposit from cap saves £624 million. Help to Own – even if they cannot afford to buy their current home. Scenario 2) If 25% of the PRS is sold the cap, saves £1.56 billion. We propose that, to share the gains of the scheme more widely and fairly, the value This cap means any tenant renting a of the stake transferred to the tenant or property worth more than £525,000 would tenants should be capped at £35,000. This not obtain the same percentage level of means for example, a £600,000 property equity others might – but they would gain with three people living in it would see a more in absolute terms, up to the value of cap of £35,000, meaning an equity stake the cap. Such tenants could also opt to of 5.8% rather than 6.66% being offered trade properties (see below). Alternatively,

59 UK House Price Index (UK HPI) annual review 2016, HM Land Registry, February 2017 cps.org.uk 28 From Rent to Own they could remain renters and pass up changes and a future Government that is the opportunity to buy. Or, as is discussed more hostile to buy-to-let. later on, if they could not purchase an outright stake, they could purchase a 51% Again, we can make a rough estimate of stake in the property – which would allow the overall savings from this second cap – them to gain up to £35,000 in equity and essentially using the same methodology. so benefit in that manner. This gives the following savings:

B. Capping the value of the relief for the Scenario 1) If 10% of the PRS is sold, the landlord cap saves £54 million.

The same £35,000 cap should apply for Scenario 2) If 25% of the PRS is sold, the landlords – with relief capped at this rate cap saves £135.3 million. on a per property basis. In order for the It is important to note this is a cap on each £35,000 limit to be breached a house property, not the overall portfolio. would have to have seen a capital gain worth £376,344. This level of absolute gain It could be argued that this £35,000 cap is very unlikely on properties worth less should be lower – but this is likely to be than £1 million – in other words, on 98.5% self-defeating. Consider the case of a of homes.60 So we can assume that at property worth £1,000,000 now after a most 1.5% of houses will see the landlord’s capital gain of £500,000. The landlord CGT relief capped, since even properties would gain £35,000, as would the worth more than £1 million may not have tenant. But the CGT available would be seen a taxable gain of £376,000 or more. £140,000, meaning that even after these Most landlords will therefore be eligible for two sums were paid, the receipts would full CGT relief, and even those which ‘only’ contribute £70,000 to the overall scheme. receive £35,000 will be obtaining a fairly We want people whose properties have large sum. appreciated in this way to be part of the scheme – in order to cross-subsidise This should still, however, create savings other properties and also to pay for a for cross-subsidy, or receipts for the potential shared ownership scheme for Treasury. To take an example, consider those whose landlords do not want to sell, a house now worth £2 million that has as discussed later. We also want to make increased in value by 42%, or £840,000 sure that the incentive to sell is significant (not an unlikely scenario in much of enough that landlords are not tempted London and the South-East). Normally, to keep hold of their properties in the the landlord would pay 28% CGT worth expectation of further house price inflation £235,200 (we assume, fairly reasonably, increasing the value of their asset. that the owner of such a property is a higher rate taxpayer). C. Reducing landlord relief for large property portfolios The full landlord relief of 33% would be worth £77,550 to the landlord, and so Where a landlord has a very large property capping the relief at £35,000 will therefore empire, relief should be capped. While it save £42,550 in this example. But £35,000 is relatively rare, there are some landlords is still a very attractive level of saving – who claim close to 1,000 properties. For particularly given landlords’ concerns this group of landlords, the gain from the about low yields, possible future tax proposed relief will be colossal in absolute

60 UK House Price Index (UK HPI) annual review 2016, HM Land Registry, February 2017 cps.org.uk 29 From Rent to Own terms – a landlord of 500 properties that need to give them as extensive a relief is have each appreciated on average by just reduced. This will also reduce the cost of £50,000 would save £2.3 million under this policy to the Government. Help to Own. An alternative approach would be a Given the general principle of sliding scale based on the absolute proportionality, we suggest that, for value of CGT rather than the number of landlords who own 10 or more properties, properties. However, as discussed earlier, the proposed 33% CGT relief should fall there is a strong regional bias in rates of to 25%. For those owning 26 or more, this capital appreciation. We want and need should fall to 20%. those who own high value properties with substantial capital appreciation to This would still mean fairly large savings sell them. Therefore, basing rates on the for those choosing to sell their properties number of properties is more likely to on – in the case of the landlord owning encourage those with a smaller number of 500 properties above, they would still save high value properties to dispose of them, £1,400,000 in capital gains. In addition, particularly those in London and the South landlords who own large property empires East. It is thus desirable to sacrifice an would find it much harder to dispose of element of equity in order to ensure the their properties one by one in order to cost-efficiency of the scheme. benefit from the Annual Exempt Allowance and 18% relief rate, and so the practical

ProposedProposed tapering of CGT relief (slab structure) tapering of CGT relief (slab structure) Number of properties Relief for the landlord Effective CGT rate being sold (versus 28% rate) 1-9 33% 18.5 10-25 25% 21 26+ 20% 22.4

How this might work in practice HOW THIS MIGHT WORK tax to pay. However, the tapering of relief INExample A PRACTICE means this is slightly reduced to £56,000 Landlord A, who is a higher rate taxpayer, owns 11 properties and decides to take advantage – which is still an adequate incentive to Example A of the scheme and sell them all to the current sell, tenants. but diverts The overall the remaining gain from £18,000 all of the towards topping up equity stakes for Landlordproperties totals £811,700. Once the Annual Exempt Amount is applied, this A, who is a higher rate taxpayer, leaves £800,000 tenants of other properties. ownson which to pay 11 propertiesCapital Gains Tax and decides to . The level of CGT is therefore £224,000. If the usual 33% take Deleted: Capital Gains Tax advantageCGT relief had been available, this would have meant a £74,000 or so reduction in the tax to of the scheme and sell them Example B all to the current tenants. The overall gain pay. However, the tapering of relief means this is slightly reduced to £56,000 – which is still Deleted: which from all of the properties totals £811,700. Landlord B has a large property portfolio an adequate incentive to sell, but diverts the remaining £18,000 towards topping up equity Deleted: - Once the Annual Exempt Amount is of 60 properties and decides to sell stakes for tenants of other properties. applied, this leaves £800,000 on which to these under the scheme. The overall gain Deleted: ut pay Capital Gains Tax. The level of CGT is totals £3,011,700. Once the Annual Exempt Deleted: ing Example B therefore £224,000. If the usual 33% CGT Amount is applied, tax is due on the Deleted: going reliefLandlord B has a large property portfolio of 60 properties and decides to sell these under the had been available, this would have remaining £3 million. The full rate of 33% Deleted: the wider scheme and meant a £74,000 or so reduction in the relief would have given Landlord B a tax scheme. The overall gain totals £3,011,700. Once the Annual Exempt Amount is applied, tax Deleted: the is due on the remaining £3 million. The full rate of 33% relief would have given Landlord B a tax break of £1,000,000. However, the tapering of relief means the 20% CGT relief rate is applied, reducing this to £800,000. This would save £200,000 to contribute to the wider Deleted: just cps.org.uk 30 From Rent to Own scheme. Deleted:

An estimate of how much this cap saves in total Deleted: limiting this for large property empires To estimate how much money this might save, the following method was used. Data on the 65 number of properties in portfolios was taken from the MHCLG Private Landlords Survey. Deleted: . This breaks down the distribution of properties by the proportion of landlords that own a certain number. The categories are: 1, 2-4, 5-9, 10-24, 25-100, and 100+. For each of the categories a central number was chosen, for example 7.5 for the 5-9 category, giving a rough estimate of the average size of the portfolio of a landlord in that category. (One important thing to note here is that more than 95% of landlords own fewer than 5 properties, meaning this cap will affect less than 5% of landlords.) Using the latest available income tax data from 2013/14 on the number of landlords, and adjusting for subsequent growth in the private rented sector, we estimated how many Deleted: PRS landlords will be impacted by the cap and by how much. The figures this produces are as follows:

65 Private Landlords Survey, DCLG, October 2011

33 break of £280,000. However, the tapering Using the latest available income tax data of relief means the 20% CGT relief rate is from 2013/14 on the number of landlords, applied, reducing this to £240,000 This and adjusting for subsequent growth in would save £40,000 to contribute to the the private rented sector, we estimated wider scheme. how many landlords will be impacted by the cap and by how much. The figures this An estimate of how much this cap saves in produces are as follows: total Scenario 1) If 10% of the PRS is sold, the To estimate how much money this might cap saves £358 million. save, the following method was used. Data on the number of properties in portfolios Scenario 2) If 25% of the PRS is sold, the was taken from the MHCLG Private cap saves £894 million. Landlords Survey.61 This breaks down the distribution of properties by the proportion OVERALL SAVINGS FROM of landlords that own a certain number. THE CAPS TheScenario 1) categoriesIf 10% of the PRS is soldare: 1, 2-4, 5-9, 10-24, 25-, the cap savesSo we have£358 three million caps. in place. We can 100, and 100+. estimate how much the caps on tenant Scenario 2) If 25% of the PRS is sold, the cap savesequity, £landlord894 million. relief, and landlord relief For each of the categories a central for large property empires would save by number was chosen, for example 7.5 for adding together the savings under the two theOverall savings from the caps 5-9 category, giving a rough estimate scenarios, as the table below does. Under of the average size of the portfolio of a Scenario 1, where 10% of the PRS is sold, landlordSo we have in that three category. caps (One in place. importantWe can estimate total savings how from much the caps the caps raise just on over tena nt equity, thinglandlord relief, and landlord relief for large property empires would save by adding together to note here is that more than 95% £1 billion. Under Scenario 2, where 25% ofthe savings under the landlords own fewer thantwo 5 scenariosproperties,, as the table below does. of the PRS is sold, the Under figureS cenario 1is over £2.5, where 10% meaning this cap will affect less than 5% billion. Obviously, if Help to Own is more ofof the PRS is sold, total savings from the caps landlords.) successfulraise just ov than this,er the£1 billion. Under savings will be Scenario 2, where 25% of the PRS is sold, the figure is over commensurately£2.5 billion. Obviously, if Help to Own is more greater. successful than this, the savings will be commensurately greater.

ValueValue of the caps of the caps in in totaltotal

Limit on scheme 10% TAKE-UP 25% TAKE-UP Deleted: SALE Deleted: SALE Tenant value of property £624 million £1.56 billion

Landlord value of property £54 million £135 million

Large landlords reduced rate £358 million £894 billion

Total £1.036 billion £2.589 billion

The savings here are substantial. And these caps also have another benefit, which is that they Deleted: T reduce the level of house price appreciation necessary to make Help to Own work – so either they would raise significant receipts, assuming that the properties taking part have appreciation over the 60-65% we discussed earlier as necessary (which seems likely), or if this Deleted: - 61 Private Landlords Survey, DCLG, October 2011 fails, the caps would help ensure that the scheme is cost-neutral. Deleted: - cps.org.uk 31 From Rent to Own Taking the average house price for May 2018 of £228,384 and assuming this is typical of the Deleted: private rented sector, the average tax relief for tenants will be £14,953.26 for the 6.66% Comment [AM2]: JETHRO I’VE CHANGED AVERAGE PRICE AND THIS SECTION ALSO NEEDS TO BE RECALCULATED… equity stake. Taking the overall savings of the three caps, and dividing this by the number of PRS properties in the PRS, you get an average saving per property of £2,321.53. This reduces the Deleted: average cost of 6.66% equity to £12,631.73. Deleted: means that on average Deleted: 7 To offer a very crude estimate, once you factor in the architecture of the CGT system, the Deleted: 7 capital appreciation necessary falls by around 10% (for full details, please see Appendix). And Formatted: Space After: 8 pt even this assumes that landlords own one property each, when in reality the figures suggest Comment [AM3]: JETHRO TO CHECK they own on average 1.8.66 This means that the Annual Exempt Allowance will not apply to every property which is sold, which will increase the amount of CGT raised from the scheme, and mean a lower baseline level of appreciation. Adjusting for this results in an approximate figure of 55% in capital appreciation when the caps don’t apply, and 45% when they do. In

66 'Number of Landlords in the UK Hits Record High of 2.5m', R. Jinks, Landlord News, April 2018

34 The savings here are substantial. And HOUSING BENEFIT – A these caps also have another benefit, FURTHER SAVING FOR which is that they reduce the level of GOVERNMENT house price appreciation necessary On our earlier estimate, the total raised in to make Help to Own work – so either Capital Gains Tax by the sale of residential they would raise significant receipts, property was estimated to be around assuming that the properties taking part £1.5 billion a year. Clearly, in the year that have appreciation over the 60-65% we this policy is enacted (if implemented, as discussed earlier as necessary (which suggested, via a limited-time offer), the seems likely), or help ensure that the cap system means that there would be a scheme is cost-neutral. significant short-term increase in receipts. Taking the average house price for May In the medium term, it could be argued, 2018 of £228,384 and assuming this is the Government will be losing out on the typical of the private rented sector, the hypothetical CGT that might have been average deposit support for the tenant will earned on these properties – although be £14,953.26 for the 6.66% equity stake. £1.5 billion a year is a very small sum in a Taking the overall savings of the three world where the Government is likely to caps, and dividing this by the number of spend £812 billion in 2018/9.63 properties in the PRS, you get an average saving per property of £2,321.53. This However, there is a countervailing reduces the average cost of 6.66% equity advantage: a major reduction in renting to £12,631.73. and a major increase in the proportion owning their home should generate further To offer a very crude estimate, once savings for the Exchequer, which should you factor in the architecture of the help counterbalance any lost revenue. CGT system, the capital appreciation necessary falls by around 10% (for full Currently, around 1.271 million households details, please see Appendix). And even are private renters in receipt of housing this assumes that landlords own one benefit. This works out at around one in property each, when in reality the figures four of those who are currently renting suggest they own on average 1.8.62 This privately. The mean annual benefit means that the Annual Exempt Allowance received is £5,822, or £111.97 per week.64 will not apply to every property which is This gives an annual total of £7.4 billion. sold, which will increase the amount of CGT raised from the scheme, and mean Those on housing benefit would not a lower baseline level of appreciation. normally be expected to be in a position Adjusting for this results in an approximate to take out a mortgage, as to qualify for figure of 55% in capital appreciation when the benefit your savings must not exceed the caps don’t apply, and 45% when they £16,000. Yet under Help to Own, only a do. In other words, the caps reduce the 3.33% deposit needs to be provided risk to the Treasury involved in Help to by the tenant, meaning housing benefit Own from already minimal levels. tenants with relatively modest savings may be able to become owners.

62 ‘Number of Landlords in the UK Hits Record High of 2.5m’, R. Jinks, Landlord News, April 2018 63 ‘The Estimates process and 2017-18 Main Estimates’, L. Honeysett, P. Brien, House of Commons Library, June 2017 64 Housing Benefit caseload statistics, Table 4, DWP, August 2018 cps.org.uk 32 From Rent to Own The £16,000 savings limit would be or just under £400 million, because the enough to cover 3.33% of a property worth stream of receipts decreased, then this more than half a million pounds, far more scheme might actually save money. Even than is likely to be needed; a £250,000 if you assumed that bringing forward sales property (a fairly expensive one in most reduced the impact particularly sharply of the country), could be purchased with in the next few years – a 15% take-up rate just £8,250 of savings, comfortably within among landlords, which cut the rate of CGT this saving limit. The Government could receipts by 45% in the following five years – also publicise to renting households who the annual loss would only be £700 million, are alarmed about potential mortgage which could be more than balanced by costs that there is a loan-based scheme, savings in housing benefit claims. In other Support for Mortgage Interest (SMI), words, the revenue per houshold lost or available – which has the advantage of gained by the Treasury is likely to total a few being cost-neutral to Government. hundred pounds each on average, spread out over a decade or so. It may seem strange to argue that many of those receiving benefits can afford to own And of course, in the very long term, homes. But it is not only the very poorest in the absence of policies to promote who claim housing benefit. Much of the home ownership, housing benefit will bill is down to ‘churn’, as people who have spiral out of control. Those who urge the average incomes but lose work end up Government to build more council houses claiming benefits. rather than focusing on home ownership often forget that people overwhelmingly In 2014, the distribution of housing benefit want to be homeowners rather than was such that around £4 billion of the £17.1 tenants of the state – and invariably forget billion in housing subsidies recorded via that if home ownership collapses, we an ONS survey was spent on those not on will spend billions on supporting private the bottom two deciles of income.65 If one renters when they retire. in four of this group moved out of claiming benefits, this would save up to £1 billion Assuming that each private renter lives for (depending on how the split between 10 years after retirement, being supported social and private tenants breaks down). by the state, it would cost £58,000 at current rates. Therefore a cost of a few Given that CGT receipts are likely to thousand pounds spent now would be be reduced by Help to Own but hardly offset more than 10 times over in the future eliminated, especially if it is offered on a if it moves an additional household into time-limited basis, this may well equal any home ownership. lost receipts. If CGT receipts fell by 25%,

65 Effects of Taxes and Benefits on Household Income, Financial Year Ending 2017, Table 23, ONS, June 2018 cps.org.uk 33 From Rent to Own 4. Help for Tenants, Help for Landlords

The Help to Own scheme would represent, However, this headline figure is misleading. and hopefully produce, a significant change First, where a buy-to-let landlord is selling to Britain’s housing market. (Or England’s, and they already have a mortgage, one if the devolved administrations reject the mortgage is being destroyed, and another policy.) As such, it will inevitably involve created, limiting the increase in lending. significant complexities, and invite criticism. In this concluding chapter, we have Second, where the sale of a buy-to-let attempted to address the most obvious property generates revenue, this revenue objections, and spell out further advantages needs somewhere to go. We strongly suggest of the scheme. that landlords are given the option to recycle the money raised by the sale of properties WILL THERE BE ENOUGH into lending to support those purchasing MORTGAGE CREDIT AVAILABLE? other properties, perhaps with a specific five- AND MIGHT THIS STOKE year fixed rate, giving certainty to both sides. ANOTHER BORROWING BOOM? This would allow those who sold the One potential issue with this proposal is the properties to receive a steady income level of mortgages available for those who stream over the next five years, locking in want to buy outright – particularly if this certainty (probably somewhere between the scheme is very popular. Total new mortgage current 2.6% return for long-term institutional lending made in 2017 was £263.1 billion,66 investors and the 3% return on shared and for first-time buyers £54.9 billion.67 ownership discussed immediately below). If this proposal was taken up by 25% of renters, all purchasing an average property For tenants moving into ownership, such on a 90% LTV mortgage, the total size of certainty is likely to be attractive: a shorter- the mortgages required would be £225.9 term mortgage might be slightly cheaper, billion.68 This could increase net lending but it would mean that they could plan – which might encourage banks to raise ahead for five years. interest rates for mortgages, or alternatively could lead them to issue very high levels of new debt, which is also unwelcome.69 When we factor in the stress and effort of having to manage a property and liaise with tenants and letting agents, plus the

66 Mortgage Lenders and Administrators Statistics - 2017 Q4, MLAR Statistics, Summary Table 1, Bank of England, March 2018 67 Mortgage Lenders and Administrators Statistics - 2017 Q4, MLAR Statistics, Summary Table 1, Bank of England, March 2018 68 Based on 4.7m privately renting households, with 25% being 1.175 million households, and an average property price £213,618 (Nationwide), and a 90% LTC mortgage per renter: £192,256.2. This gives total size of mortgages required = £192,256.2 *2.35 million households. 69 Since credit does not require prior saving – which anyone who grasps the core of modern finance knows. cps.org.uk 34 From Rent to Own costs of covering maintenance and so by ComRes found that 78% of private on, a guaranteed return in the form of renters would choose shared ownership mortgage interest as set out above could over renting if the cost each month was the be an attractive alternative investment same (which for most it is – as discussed for landlords, particularly as this is less earlier, the largest problem for many is politically volatile than staying a landlord. obtaining the deposit needed to move into ownership, and renters often have higher WHAT ABOUT THOSE TENANTS earnings than those who own a home).70 WHO CAN’T AFFORD THE WHOLE PROPERTY? Shared ownership tends to be the same As discussed right at the start of this paper, or lower cost than renting in part because most people can afford to purchase their day to day maintenance is taken on by the property. But for some areas – particularly tenant, and under Help to Own when you London, where rents are out of line with move to shared ownership, you would get house prices – this may not be the case. a major stake in equity at a substantial In addition, there will be would-be owners discount – which you would not be paying who are unable to borrow a sufficiently high rent or having to borrow a mortgage multiple of its income. against.

This is particularly true in more expensive Because a tenant would still see a 10% properties. A couple with a household equity stake put down (or £35,000 income of £60,000, living in a London equivalent), there would still be a major property worth £400,000, would probably equity gain for the tenants, who would not be able to purchase it outright even then need a mortgage on just 40% of the under this scheme, because even with property (if they decided to go with a 50.1% a £40,000 deposit, they would require a stake) and then pay the typical shared £360,000 mortgage – more than six times ownership level of rent on the remainder. A their income and so more than the five typical rent is calculated on around 3% of times their income a bank might lend, even the capital value of the property you don’t the mortgage costs were the same as or own, so if the share you don’t own is worth lower than the rent they had been paying. £150,000 you pay around £4,500 a year in rent, which is fairly affordable. (This also For the purposes of Help to Own, one generates a 3% return for whoever owns solution is to let people swap with other the remainder of the property, as discussed tenants’, as discussed below – particularly if above.) they would like to purchase a different home. For an average property priced at £228,384, An alternative, if the tenant likes their a couple with a £40,000 income could current property, is to opt for shared purchase via shared ownership quite ownership, a form of affordable housing comfortably. After subtracting the 10% whereby the tenant owns part of the that they now own via Help to Own, the property and pays rent on the rest, which remainder would be £205,545, leaving a remains owned by another party. This would mortgage on 40% of the property worth enable them to purchase a 50.1% stake in £91,353. If the couple secured a mortgage the value of the property. at a 2% interest rate this would be £492 a month or £5,904 a year. The rent paid Giving people a stake via shared ownership would be 3% of the value of the remaining would be very attractive to renters. Polling half of the property, which is £114,192, giving

70 Shared Ownership Poll – Survey of Private Renters, Table 7, ComRes, September 2017 cps.org.uk 35 From Rent to Own annual rent of £3,425. This would mean they would have built an equity stake worth could own a majority stake in their home £140,000 including the initial 10%. for £9,329 a year, which would come in at under 25% of their income – well under This system will be particularly attractive for the general benchmark of 35% for housing younger people, who are likely to see their affordability. incomes rise, as they will easily be able to staircase up their ownership level. It also Alternatively, on a £400,000 property, even helps ensure that they start building equity a couple with a £60,000 income would, as earlier in their life. But even if someone discussed, struggle to obtain a mortgage could not staircase easily, they will have on the whole amount. However, a 50.1% greater rights over the property, means stake in the property, after subtracting the they do not have to rely on a landlord for £40,000 stake they own, would amount to repairs, and will have at least a share of the a much more realistic £160,000 mortgage, property where none existed before. with rent paid on the remaining £200,000. This would work out, under a 2% interest HOW CAN WE MAKE THIS rate, at just £9,708 a year, or £759 a month, SHARED OWNERSHIP SIMPLER? which when combined with 3% rent on the To speed adoption, Government should unowned share of £6,000 a year, or £500 create a standard set of terms for those a month, would mean they could own a purchasing their home in this way, so that if majority stake in their home for £1,309 a a property enters shared ownership the rent month, or £15,708 – a fairly affordable level payable would be set at 3% of the capital at just 25% of their income. value and linked to CPI for at least the next 10 years, to give people the confidence that Even if interest rates rise, this arrangement they would be treated fairly. is clearly not just affordable but also preferable to the many who are currently Under this scheme there should be a clear renting, as they will gain more and more of set of responsibilities and rights for owners the equity over years. as well, particularly around the right of shared owners to decorate their property For example, a couple or friends with an and responsibility for basic maintenance. income of £60,000 club together for a This will help ensure such a scheme is a 50.1% stake in a £600,000 property. After success for all parties. you subtract the £60,000 stake they own outright, the mortgage required would The minimum stake possible should be amount to £240,000. At a 3% interest rate, considered as part of this. We would argue this would cost £1,331 in monthly payments that it should be set at 50.1% so that the and £15,972 annually. When combined with property is predominantly owned by the 3% rent on the unowned share of £9,000 tenant – but the Government may decide a year, or £750 a month, this would mean differently. Some tenants might want a a couple on £60,000 could own a majority higher share of the property (e.g. 60% or stake in their home for £2,181 a month, or 70%) – and the Government should decide £26,172 a year. This is a significant yet still how far it should give flexibility to those manageable 43% share of their income – purchasing. and unlikely to be more than the current rent. It would also mean they were paying down their mortgage – after 10 years they would have paid off over £100,000 and

cps.org.uk 36 From Rent to Own WHAT IF MY LANDLORD This intention was followed up by the shared DOESN’T WANT TO SELL? ownership and affordable homes program 2016-2021, with the Government reiterating There will be some cases – probably many its support of shared ownership in the cases – where a landlord does not want to Housing White Paper 2017, announcing a sell even though the tenant or tenants want desire for institutional investors to invest, to buy. That is perfectly within their rights. even asking for suggestions as to how to expand the sector.72 However, as set out in the previous chapter, the cap system is likely to generate Yet despite the progress that has been significant extra money, estimated at £1 made, it is clear there is further to go and that billion to £2.5 billion. Such additional money the private sector holds largely untapped raised could be put into a national pot for to potential. There are currently various private support shared ownership – allowing those sector providers that are expanding shared who want to purchase the property they are ownership provision, often working with Homes renting, but whose landlord does not want England, and this money could be channelled to sell, to use that scheme instead. on a competitive basis toward these providers as well as housing associations. Private sector shared ownership schemes have the potential to offer large volumes of The incentives and rewards involved might affordable housing stock, ideally suited to not be as large as received by tenants first-time buyers. With eligibility restrictions under Help to Own. But they would be having been lifted for shared ownership much, much better than nothing. Shared schemes at large, the Government has ownership is also much cheaper than the been a proponent of private shared other forms of affordable housing, as the ownership schemes in recent years, with table below shows. This grant figure might George Osborne announcing support for be an overestimate, since the 2011-15 grant 135,000 such cases in the Spending Review used to support affordable home ownership and Autumn Statement 2015.71 went to housing associations, which cross- subsidised other activity, particularly sub- market rent, from sale of shared ownership.

Average 2011-15 funding per home by Homes & Communities Agency by Area73

Affordable Home Ratio of AR to AHO HCA Operating Area Affordable Rent Ownership (*) homes

East and South East £16,798 £5,124 3.278 Midlands £20,536 £8,757 2.345 North East, Y & H £19,620 £11,467 1.711 North West £20,001 £12,489 1.601 South and South West £17,261 £8,103 2.130 TOTAL £18,788 £7,871 2.387 * in practice shared ownership Deletd: if for example If we assume that grant required per affordable home is about 10% higher than in the 2011- Deleted: Government put in 15 period (so around £8,500), this means that the £1 billion to £2.5 billion raised by the Deleted: from the money surplus CGT available would help an extra 120,000 to 300,000 households into home Deleted: as grant for affordable home ownership, this 71 Spending Review and Autumn Statement 2015, HMT, November 2015 ownership. 72 ‘FixingThis should hopefully cover our Broken Housing Market’, MHCLGmany if not all of , February 2017 those who want to purchase and Deleted: come forward to investigate this73 2011-15 Affordable Homes Programme but are not able to do so because their landlord will not sell. Summary, HCA, latest approved offers as of September 2014 Deleted: all Deleted: This scheme This cps.org.ukscheme also has the benefit of potentially replacing the 37 current Help to Buy Equity Loan, From Rent to Own which is scheduled to expire in 2020. There is now a general consensus that Help to Buy has Deleted: , which consensus rightly sees over time as moving from helpful support to largely inflating land prices, moved from helpful market support to largely serving to inflate land prices. But there is a should clearly end. need to ensure that sales rates do not collapse – particularly given the Letwin Review’s Deleted: nature analysis about the crucial relationship between sales rates and build-out rates. If from 2020- Deleted: of 21, developers knew that they could offer shared ownership to this large pool of purchasers, Deleted: they would accelerate development over 2019-20, helping the Government towards Deleted: 2 delivering more homes. Deleted: c Deleted: move

But where would landlords put their money after selling? Deleted: A shared ownership offer to landlords as well – a solid 3% return on investment The shared ownership offer above is not just advantageous for the tenant. The creation of a Deleted: This large number of shared ownership properties would create an attractive and inflation-linked Deleted: guaranteed product with a 3% + CPI rental return. We suggest that this product should not be made Deleted: T available to the market but to the landlords who are being encouraged to sell under Help to Deleted: this policy Own. Deleted: I In particular, it should be focused on smaller landlords who participate in this scheme, Deleted: particularly perhaps via a cap of 100% on the receipts from the first property, but 50% from a second and Deleted: with subsequent properties. So if a landlord sold a £400,000 property they would not only benefit Deleted: of their total sales proceeds from CGT relief, but know that they could put the money into a Government-supported Deleted: they shared ownership scheme that offered a 3% + CPI linked return for the next 10 years. Deleted: would Given that 34% of landlords are making a yield of 3% or less, and another 34% are making a Deleted: you yield of between 4-5%, in return for having to deal with the stress and risk of a property Deleted: this (including voids, maintenance, tenant risk and so on), such an offer should be a fairly Deleted: gave attractive proposition. As noted, one survey found that the institutional return on rents Deleted: you (which is likely to include time of maintaining and supporting tenants) is just 2.6%, so a rise Deleted: This would mean that landlords taking part in this to 3% would actually be an increase in landlord returns. scheme would see a solid return. Deleted: for around two-thirds of landlords 41 If we assume that the grant required per So if a landlord sold a £400,000 property affordable home is about 10% higher than they would not only benefit from CGT relief, in the 2011-15 period (so around £8,500), but know that they could put the money into this means that the £1 billion to £2.5 billion a Government-supported shared ownership raised by the surplus CGT available would scheme that offered a 3% + CPI linked help an extra 120,000 to 300,000 households return for the next 10 years. into home ownership. This should hopefully cover many if not all of those who want to Given that 34% of landlords are making a purchase and come forward to investigate yield of 3% or less, and another 34% are Help to Own but are not able to take part making a yield of between 4-5%, in return because their landlord will not sell. for having to deal with the stress and risk of a property (including voids, maintenance, This scheme also has the benefit of tenant risk and so on), such an offer should potentially replacing the current Help to Buy be a fairly attractive proposition. As noted, Equity Loan, which is scheduled to expire one survey found that the institutional return in 2020. There is now a general consensus on rents (which is likely to include time of that Help to Buy has moved from helpful maintaining and supporting tenants) is just market support to largely serving to 2.6%, so a rise to 3% would actually be an inflate land prices. But there is a need to increase in landlord returns. ensure that sales rates do not collapse – particularly given the Letwin Review’s The attractiveness of this offer is even analysis about the crucial relationship higher given the political pressures growing between sales rates and build-out rates. If in this area, the general desire to reduce from 2020-21, developers knew that they house price inflation, and the risk of a could offer shared ownership to this large hostile and anti-landlord Government in the pool of purchasers, they would accelerate future. development over 2019-20, helping the Government towards delivering more WOULDN’T THIS CANNIBALISE homes. FUTURE TAX RECEIPTS? This depends on two points: BUT WHERE WOULD LANDLORDS PUT THEIR MONEY 1. The rate at which housing benefit is AFTER SELLING? reduced to make up for the capital gains The shared ownership offer above is not receipts. just advantageous for the tenant. The creation of a large number of shared 2. The ability to accurately forecast ownership properties would create an receipts over a very long timeframe, attractive and inflation-linked product with and the extent to which Government is a 3% + CPI rental return. We suggest that neutral about renting and owning. this product should not be made available to the market but to the landlords who are The first question has already been being encouraged to sell under Help to discussed, but it is worth pointing out Own. again that as a minimum, then a very large amount – if not all – of the Capital Gains In particular, it should be focused on Tax lost each year would be recouped smaller landlords who participate in this by lower housing benefit bills. Even if the scheme, perhaps via a cap of 100% on the Treasury only saved £1 billion in housing receipts from the first property, but 50% from a second and subsequent properties.

cps.org.uk 38 From Rent to Own benefit and lost the full £1.5 billion in annual Obviously, these properties are not equally CGT receipts, this would mean the annual distributed. For example, the Countrywide cost of moving hundreds of thousands of statistics suggest that as many as 30% of people into ownership was marginal. If, for landlords in the North East of England have example, one in ten landlords took this up, not made a capital gain on their property. and a million new owners were created, it would mean that the policy cost £500 for One option would be to take these each new home owner each year. properties out of Help to Own entirely. Yet that seems unfair – restricting the However, if the Government is genuinely opportunity to own to those in the richest committed to home ownership – and to part of the country. stable or marginally increasing nominal house prices over time – there will never In terms of the incentive that could be be a better time to implement this policy, offered, the determining factor is the given the scale of capital appreciation in property’s value. After all, it will be far the housing market and the state of interest costlier for the Government to support rates. a 6.66% deposit for a property worth £500,000 than one worth £100,000. In addition, this objection assumes that you are neutral about ownership and renting. We estimate that the average rental We are not. In addition, this argument takes property in the North East would be worth the current situation as ‘neutral’ when in fact around £100,000 given an average capital there has been a massive £220 billion shift gain for landlords in that region estimated in incentives that pushed investment into at £24,427, and the average percentage buy-to-let and away from home ownership. gain calculated at 33%.74 A few hundred million each year over a decade would be a tiny fraction of the We therefore propose a cap on such damage done. properties, worth perhaps £150,000, with tenants able to participate in the scheme as WHAT ABOUT WHERE normal and see their 3.33% equity topped PROPERTY VALUES HAVE up to 10%. This would cost the Government FALLEN? at most £9,900 for each property supported As mentioned above, not all properties will in this way. For landlords, the incentive have increased in value since being bought. would be, effectively, that they could Countrywide estate agents calculate that cut their losses, with access offered around 10% of rented properties will not to alternative investment schemes as have increased or have fallen in value. In outlined above which would guarantee these cases, there will be no incentive a moderate return. For those living in for the landlord to sell given there are no higher-value properties, the Government capital gains, and no rebate to be recycled should consider if there is another way into a deposit. that they can help these tenants to own – for example by prioritising them in the expansion of shared ownership.

74 ‘What next for buy-to-let?’, Countrywide, Spring 2018 cps.org.uk 39 From Rent to Own WHAT ABOUT STAMP DUTY? From the landlord perspective, there will of course be some cases in which the One obvious question about this scheme property is owned under a ‘joint tenancy’ is whether the transaction is liable to or ‘tenancy in common’ arrangement, with Stamp Duty Land Tax (SDLT). Obviously, it two or more parties owning a stake in the would be counter-productive to offer reliefs property. People may pool their capital with encouraging people into home ownership friends or business partners to purchase on the one hand, and charge them for the buy-to-let property and share the rental privilege on the other. income, or buy together as friends then move on, and keep the property as a Fortunately, the recent reforms to Stamp shared investment. Duty Land Tax (SDLT) for first-time buyers ensure that this is less of an issue. As In practice this is unlikely to have a mentioned above, Help to Own will only significant impact on take-up, as there be available to those who do not already does not appear much evidence that most own property. So there will be no need properties are jointly owned and it would for tenants to pay SDLT on anything worth probably be uncommon for one party to less than £300,000, and properties under hold out when the other wishes to sell. The £500,000 will be able to benefit from the only issue here would be around the CGT fact that SDLT is paid only on the portion receipts, which would be slightly lower due above £300,000. to each party benefitting from their own Annual Exempt Allowance. But overall, this The Government could also decide to should not be a major problem. reduce the cost of moving ownership still further by choosing to reduce or eliminate any SDLT payable under Help to Own. WHAT ABOUT PEOPLE WHO BUY THEIR PROPERTY THEN FLIP IT? One point that is worth making is that Under a basic tenant-and-landlord CGT currently, SDLT is double-charged on rebate, there is an obvious possibility that shared ownership properties: it is paid some people will take advantage of this on the cost of the whole property by the policy in order to make a quick buck, for body (such as a pension fund) which is example by buying then selling back to purchasing it, and then again when they sell their landlords, or becoming a landlord their share. This needs to be resolved in any themselves, or otherwise ‘flipping’ the asset. case, but this scheme would add urgency to this. The goal of this policy is not to see properties sold – it is to increase the WHAT ABOUT LANDLORDS number of homeowners. Therefore, we WHO DON’T OWN THE WHOLE propose that properties that move across PROPERTY? into ownership under this policy should have a covenant placed that they can only Throughout this report we have assumed be held by, and sold to, owner-occupiers, that an entire property is owned by the for at least 10 years. This would ensure that landlord in question – or at least they own these properties would remain available for it subject to a mortgage. We have also ownership in future rather than return to the assumed, again for the sake of simplicity, rental sector. that there is one tenant present – though the scheme works equally well if the Restricting those who use this scheme to property is divided between multiple having to stay in that property (as occurs renters. with Right to Buy) would be less sensible,

cps.org.uk 40 From Rent to Own given that often people will want to move, This is one reason why we at the CPS are and some people will find themselves undertaking separate work on increasing owning properties they had only envisaged the volume of housing transactions. In living in for a few years. It would not only be addition, the shared ownership scheme unhelpful, but might restrict take-up of the described above would significantly scheme. increase the number of transactions in the new-build sector in particular, an area the We also suggest that acceptance of the Letwin Review is heavily focused on. Help to Own offer should automatically disqualify the recipient from future WOULD THIS SCHEME INFLATE government assistance to get on the PRICES? housing ladder. In other words, if you take There is an obvious risk that this policy the additional 6.66% premium and then would simply inflate prices of the properties cash in the value, you will have made a bought, which would reduce the benefit quick buck – but you will then be unable to to those purchasing such properties. participate in Help to Buy, shared ownership Landlords would charge tenants a higher or any other policy initiative that relies on price because they would be obtaining a government subsidy, either alone or as part large deposit at a reduced rate. This could of a couple, for the rest of your lifetime. This inflate the value of the properties being is about a one-off opportunity for young bought to take out almost all the gain in people to get on the housing ladder for the equity. long term – not a short-term hand-out. While even this could arguably benefit WON’T THIS GUM UP THE WIDER tenants, since they would have the deposit HOUSING MARKET? and could purchase a home and start The announcement of this policy will almost paying off a mortgage, it is not what this certainly slow the housing market in the proposal aims at and would be excessively short term, because it will divert some generous to landlords. people from buying other properties to purchasing their current home. This will Fortunately, we can use the second-hand reduce demand temporarily. In addition, market to set the price of each property any landlord thinking of selling will hold off under this scheme. We suggest that the until this scheme is in place, as they would Royal Institute of Chartered Surveyors otherwise pay a CGT bill in full and estate would set a base price for each property agent fees they could otherwise save. It will sold under Help to Own, rather than asking further slow the wider housing market by tenants and landlords to negotiate a price. making it harder for housing chains to be This should be done with reference to the formed: the second-hand market will keep wider second-hand market locally, which moving, but at a slower pace. will continue to see transactions taking place – and should see prices remain fairly In terms of the impact on prices, this is stable while the Help to Own scheme is not necessarily a bad thing – most people operational. want house price to remain stable or fall. But in terms of transactions, there is a Given the volume of transactions we hope negative potential consequence. There is for, these valuations could be on a bulk a long-term correlation between housing basis and therefore at a fairly low fee (e.g. transactions and housing supply: when £200 or so). The landlord and tenant could the former slows, the latter tends to fall. then transact at this price, or, as discussed

cps.org.uk 41 From Rent to Own further, a tenant swap could occur. means that if operational issues arise at the start of the scheme, these can be ironed Fortunately, because both sides would out early on – particularly if tenants and benefit from the sale, both sides should landlords are permitted to register their be keen to undertake it, and to accept interest from March 2019 as proposed the price suggested – though they would earlier. of course be free to change their mind if the valuation differed sharply from their WHAT IF THE GOVERNMENT expectations. IS STILL WORRIED THAT THE POLICY WILL COST TOO MUCH? WHO WOULD DECIDE THE As set out in the previous section, there EXACT SALES DATE? is strong evidence this policy should Given continually changing prices in areas, generate money for Government. However, for example as transport connections, rather than implementing this at once, regeneration, new housing and other the Government could implement it in developments take place, the tenant and phases of three months. If after the first landlord would have to both agree on a three months it was found that the funding sale and valuation date within the one-year was not sufficient for the government to period proposed – from 2020-1. In many afford a 6.66% equity stake for tenants, cases, a tenant may want that sooner than then the scheme could be tweaked to the landlord, since they will be paying rent accommodate this. until they purchase. But forcing the landlord to sell early would be unreasonable, just If absolutely necessary, for example, the as forcing a tenant to buy sooner than they Government could offer a 5% equity stake can raise the 3.33% equity would be deeply to tenants and then a 5-year loan for the unfair. So a compromise where both are remaining 1.66%, or a 4.66% equity stake happy is necessary. with a 2% loan. The tenant would still contribute 3% equity themselves, so this Therefore, the landlord and tenant should will ensure tenants still receive a 10% equity agree a step-by-step process towards stake. If the tenant wanted, they could the final sale date. It may be that many contribute the remaining 1.66% directly, or landlords will choose the final date the Government could issue specific low- possible, ie the end of March 2021, to take interest bonds (e.g. NSI one-year bonds advantage of house price appreciation and are currently at 1.5%).75 This drop in the extract the maximum amount in rent before support for tenants would cut the cost to selling – but this is not a huge burden on Government by roughly a quarter. tenants. Tenants will still be obtaining 10% of the equity on that date, and they will also Although the government will still be be able to start planning and saving for how funding a 6.66% equity stake if tenants they might improve their property earlier on. takes up the offer, it will receive a steady Some landlords may also want to sell and flow of extra income each year for 5 years move on earlier – and if early indications as tenants pay back the loan. The average are that everyone will sell at once, measures house price is currently £228,384.76 So to stagger this could be devised. a 2% loan would be around £4,560. The cost of making 250,000, 500,0000 and The likelihood of a spike in sales towards 1,000,000 such loans against an average the end of the one-year offer period also

cps.org.uk 42 From Rent to Own Therefore, the landlord and tenant should agree a step-by-step process towards the final sale date. It may be that many landlords will choose the final date possible, ie the end of March 2021, to take advantage of house price appreciation and extract the maximum amount in rent before selling – but this is not a huge burden on tenants. Tenants will still be obtaining 10% of the equity on that date, and they will also be able to start planning and saving for how they might improve their property earlier on. Some landlords may also want to sell and move on earlier – and if early indications are that everyone will sell at once, measures to stagger this could be devised.

The likelihood of a spike in sales towards the end of the one-year offer period also means that Deleted: Such a spike toward the end if operational issues arise at the start of the scheme, these can be ironed out early on – Deleted: at the operation particularly if tenants and landlords are permitted to register their interest from March 2019 Deleted: can as proposed earlier. Deleted: – so the Government can plan ahead

What if the Government is still worried that the policy will cost too much? Deleted: might not be financially viable As set out in the previous section, there is strong evidence this policy should generate money for Government. However, rather than implementing this at once, the Government could Deleted: – if the rate of increase across all properties implement it in phases of three months. If after the first three months it was found that the involved is greater than the 60% to 65% we need funding was not sufficient for the government to afford a 6.66% equity stake for tenants, then the scheme could be tweaked to accommodate this. Deleted: can If absolutely necessary, for example, the Government could offer a 5% equity stake to tenants Deleted: down and then a 5-year loan for the remaining 1.66%, or a 4.66% equity stake with a 2% loan. The Deleted: g tenant would still contribute 3% equity themselves, so this will ensure tenants still receive a Deleted: other 2%. 10% equity stake. If the tenant wanted, they could contribute the remaining 1.66% directly, Deleted: 2 or the Government could issue specific low-interest bonds (e.g. NSI one-year bonds are Deleted: can 80 currently at 1.5%). This drop in the support for tenants would cut the cost to Government Deleted: then by roughly a quarter. Deleted: Although the government will still be funding a 6.66% equity stake if tenants takes up the Deleted: to lend to them. offer, it will receive a steady flow of extra income each year for 5 years as tenants pay back Deleted: 25 81 housethe priceloan. isThe average house price is currently £ below. Because this would borrowing,228,384. at So a 2% loan would be just over 0.5% of the totalaround Deleted: % be for£4, 560a specific. The cost of purpose,making secured250,000, 500,0000 and 1,000,000 such loans against an average against size of Government spending even at the Deleted: 2% 77 collateral,house price is below. this would not Because this would be for a be seen as a 1,000,000-loanspecific purpose, secured against collateral, mark. generalthis would not be seen as a general increase in borrowing increase in borrowing – and would – and would be negligible in the be negligible in the context of overall WHAT IF PEOPLE DON’T WANT context of overall borrowing, at just over 0.5% of the total size of Government spending even Deleted: , would be negligible – 82 at the 1,000,000-loan mark. Deleted: less How much would 2% loans cost in short term borrowing at an average UK house price? Deleted: than How much would 2% loans cost in short term borrowing at an average UK house price? Number of loans Total cost Deleted: C Deleted: (£ Billion) 250,000 £1.14bn 80 Government Growth Bonds, National Savings and Investments, July 2018 81 UK House Price Index for June 2018, HM Land Registry, August 2018 82 500,000 £2.28bn Total Managed Expenditure is currently around £791bn, see Public Finances Databank, Aggregates (£bn), OBR 1,000,000 £4.27bn 46

TOWhat if people don’t want to buy BUY THEIR CURRENT HOME?their current home? purchase their existing property. Allowing individuals to swap in this way would SomeSome people might not want to purchase their current home, while being keen on becoming people might not want to purchase improve outcomes for all concerned, theirhome currentowners in general. home, while beingIn addition, a tenant living in a more expensive property might not keen on Deleted: and without it, fewer tenants would take becomingwant shared homeowners ownership in general. and might In be prepared to trade with another tenant in a less advantage of this scheme than could be addition, a tenant living in a more expensive expensive property. In addition, some people might want to move for jobs, or move to a the case. propertydifferent area might not– since they only envisaged living in thewant shared ownership rental property for a short while. and might be prepared to trade with This could be arranged via online portals anotherTo this end, tenant inthe a lessHelp to Own expensive policy should allow property. tenants to trade the home that they are such as Zoopla and Rightmove, with a small In addition,living in with other tenants some people might –want if both parties agree to the swap. This should be possible by to fee paid for those who wish to swap, and the movecreating a for jobs, market or moveplace to a for tenants who are interested in purchasing a home, but different area are unable system providing a ‘tenant match’ service, – since they only envisaged living in the or do not want to purchase their existing property. takingAllowing individuals to swap in this way the relevant details, identifying rental property for a short while. would improve outcomes for all concerned, and suitable without matches, it, fewer and liaising tenants with would tenants take advantage of this scheme than could be the case.to facilitate swaps. There could also be a fee To this end, the Help to Own policy should (e.g. £500 or £1,000) for people who want to allowThis could be arranged via the online portals that exist such tenants to trade the home that they as Zoopla and Rightmove, with a swap their property – enough to discourage aresmall fee paid for those who wish to swap, and the system providing a ‘tenant match’ service, living in with other tenants – if both everyone simply doing this on a speculative parties agree to the swap. This should be taking the relevant details, identifying suitable matches, and liaising with tenants to facilitate basis and covering the cost of administering possible by creating a marketplace for swaps. There could also be a fee (e.g. £500 or £1,000) for people who want to swap their such trades. Deleted: substantial tenants who are interested in purchasing property – enough to discourage everyone simply doing this on a speculative basis and a home, but are unable or do not want to covering the cost of administering such trades.

75 Government Growth Bonds, National Savings and Investments, July 2018 76 UK House Price Index for June 2018, HM Land Registry, August 2018 77 Total Managed Expenditure is currently around £791bn, see Public Finances Databank, Aggregates (£bn), OBR cps.org.uk 43 From Rent to Own

47 Comment [AM4]: JAMES THIS NEEDS A ‘NO’ ON THE Tenant A (and their Tenant B (and their ARROW GOING FROM POINT 4 BACK TO POINT 2 – PLEASE landlord) registers landlord) registers INSERT interest with the interest with the scheme, providing scheme, providing details such as their details such as their income, savings, and income, savings, and desired area desired area

Tenants are placed on a ‘tenant match’ waiting list until a suitable swap is identified

Both tenants are contacted and provided with details

Are tenants A and B happy No to swap properties?

Yes

Tenants A and B purchase each other’s properties through the scheme from their respective landlords

What about social renters and those renting from friends/family? WHAT ABOUT SOCIAL RENTERS of fixed-term Right to Buy. (It also promised, AND THOSESocial renters w RENTINGould not be subject to FROM Help to Ownin 2015,, because the property is not to extend the Right to Buyliable for CGT to those FRIENDS/FAMILY?in the way that private rented properties are. livingHowever, there is already the Right to Buy for in properties owned by housing Deleted: We are however working on how we can help those living in council houses, even though it has been substantially wateassociations.) In other words,red down in recent the policy extend ownership to this group in a way that would be Social renters would not be subject to acceptable to tenants and, where applicable, housing described in this paper is necessary – but Help to Own,years because– and the Government the property ismade a manifesto pledge in 2017 to create a new generation of associations not sufficient. not liable fixedfor CGT-term Right to Buy. (It also promised, in 2015, to extend the Right to Buy to those living in the way that private rented propertiesin properties owned by housing associations are. However, there is .) In other words, the policy described in this There are separate issues for those who will already thepaper is necessary Right to Buy for– those but not sufficient. living in not be able to take advantage of this – those council houses, even though it has been who are renting with a friend who owns the48 substantially watered down in recent years property, or who are living with their parents – and the Government made a manifesto or other members of their family in order pledge in 2017 to create a new generation

cps.org.uk 44 From Rent to Own There are separate issues for those who will not be able to take advantage of this – those who are renting with a friend who owns the property, or who are living with their parents or other members of their family in order to save for a deposit. The Government should therefore to save forcontinue a deposit. to look The at Government ways to increase shared ownership THIS more IS GREAT widely, and FOR consider PRIVATE other should thereforepolicies, such as continuesupporting custom to look at ways-build to and self-RENTERSbuild, which can –often be much cheaper BUT DOES IT increase than buying traditionalshared ownership more new- build or secondwidely, and -hand homesREALLY, to support these groups. SOLVE THE WIDER consider Yet otherit is important to note that policies, such as supportingsince families tend to pool support for those who need to get HOUSING CRISIS? Deleted: I custom-buildon to the housing ladder, helping just and self-build, which can oftenone family member by using this scheme will have Deleted: as be much knockcheaper-on benefits. Research by Legal & General has found that this year, the Bank of Mum than buying traditional There is an overwhelming need to ensureDeleted: i and Dad is set to be the equivalent of a £5.7 billion mortgage lender, with 27% of all buyers new-build or second-hand homes, to that housing supply rises to – and, Deleted: part to receive help from friends or family in 2018, up from 25% in 2017.83 This means if one child support these groups. crucially, remains at – a level of around Deleted: of a family was living at home and one child is renting and can take advantage of Help to Own, the child Deleted: Own your Home that is renting will be helped onto the ladder and the family can fo250,000-300,000cus orits resources so homeson the a year for Yet it is important to note that since families remaining child. the foreseeable future. The Centre for tend to pool support for those who need to Policy Studies has already made many get on to the housing ladder, helping just Deleted: suggestions for how this might happen, andWould this unbalance the economy by encouraging price one familyThis is great for private member by using renters this scheme– but does it really solve the wider housing crisis will continue to do so. ? rises will have Thereknock-on is an overwhelming benefits. Researchneed to ensure that housing supply rises by to – and, crucially, remains Deleted: Would this unbalance the economy by encouraging price rises Legal & Generalat – a level of around 250,000 has found that this-300,000 or so homes a year for the foreseeable year, Without such action on housingfuture. The supply, Deleted: genuine the BankCentre for Policy Studies has already made many suggestions for of Mum and Dad is set to be the Help to Own how this might happen can only – in generational, and Deleted: to continue equivalentwill continue to do so of a £5.7 billion mortgage. lender, terms – be a temporary solution. with 27% Without of all buyerssuch action on housing supply, to receive help from Help to Own can only – in generational terms – be a friends ortemporary solution family in 2018, up. from 25% in But fortunately, this policy will at the very 78 2017. This means if one child is living at least not make things worse: not only does But fortunately, this policy will at the very least not make things work: not only does it create home and one child is renting and can take Deleted: more homeowners, which should be a crucial goal it create of national more policy, homeowners, but it does little which to should advantage of Help to Own, the child that is encourage price rises (unlike Help to Buy) and in fact it should encourage be a crucial goal ofhouse price nationalstability policy,. but it Deleted: not renting will be helped onto the ladder and does little to encourage price rises (unlike from a political angle and There is in fact strong evidence that people are supportive of stable house prices – and have Deleted: the family can focus its resources on the Help to Buy) and in fact it should encourage been for a long time now. This makes perfect sense. A stable housing market means you can Deleted: stable remaining child. house price stability. move easily, not worry about prices shooting up or collapsing, and if you want, move to a Deleted: prices larger home if your income grows (or downsize and release equity if you want to move to a smaller home). The polling data is clear. Table showing what people want in relation to house prices Table showing what people want in relation to house prices % that want prices to… Poll Fall Remain Stable Rise BBC-ICM (2008) 28 46 22 Propertywatch-ICM (2009) 30 34 32 NHF-YouGov (2010) 28 34 33 Shelter-Populus (2013) 29 42 28 83 'The Bank of Mum and Dad', Legal and General, 2018 AVERAGE 29 39 29 49

If anything, the public appear to have become more in favour of house price falls than stable house prices. Recent polling by ComRes for the Centre for Policy Studies found that, by a margin of 63% to 19%, Britons now think house prices in their area are too high – rising to 85 79% vs 9% in London. In another poll earlier this year, YouGov found that 49% of Britons – Deleted: - i just under half – would back the government attempting to bring down housing prices Deleted: a significantly in their local area, compared to 36% who would disapprove.86

This policy will mean that most people might have a foot on the property ladder, but this is Formatted: Space Before: 12 pt, After: 6 pt only likely to strengthen the desire for stable prices, since it is foolish to want prices to rise if Deleted: as the table below sets out, you want to trade up to a better house in due course. Deleted: Original Price By reducing the numbers who do not own property, and substantially reducing the number Appreciation Value 78 ‘The Bank of Mum and Dad’, Legal and General, 2018 Trade-up property value (£) of landlords, Help to Own would further reduce the numbers who want prices to rise or fall ... [39] Deleted: nothing cps.org.uk substantially – because the former would no longer 45 be desperate for house prices to fall Fromso Rent to Own current that they can buy, and the latter would no longer be relying on second homes as a source of Deleted: income or equity that could be further leveraged to expand investment portfolios. This Deleted: fall or encouragement of broadly stable nominal house prices – flat year after year – can only be a Deleted: because good thing. Deleted: they Deleted: to

Deleted: or be Deleted: housing

85 ‘CPS Housing Poll, September 2018’ 86 Housing Survey Results, YouGov, November 2017

There is in fact strong evidence that people This policy will mean that most people are supportive of stable house prices – and might have a foot on the property ladder, have been for a long time now. This makes but this is only likely to strengthen the perfect sense. A stable housing market desire for stable prices, since it is foolish to means you can move easily, not worry want prices to rise if you want to trade up to about prices shooting up or collapsing, and a better house in due course. if you want, move to a larger home if your income grows (or downsize and release By reducing the numbers who do not own equity if you want to move to a smaller property, and substantially reducing the home). The polling data is clear. number of landlords, Help to Own would further reduce the numbers who want If anything, the public appear to have prices to rise or fall substantially – because become more in favour of house price falls the former would no longer be desperate than stable house prices. Recent polling by for house prices to fall so that they can buy, ComRes for the Centre for Policy Studies and the latter would no longer be relying found that, by a margin of 63% to 19%, on second homes as a source of income Britons now think house prices in their or equity that could be further leveraged area are too high – rising to 79% vs 9% in to expand investment portfolios. This London.79 In another poll earlier this year, encouragement of broadly stable nominal YouGov found that 49% of Britons – just house prices – flat year after year – can under half – would back the government only be a good thing. attempting to bring down housing prices significantly in their local area, compared to 36% who would disapprove.80

79 ‘CPS Housing Poll, September 2018’ 80 Housing Survey Results, YouGov, November 2017 cps.org.uk 46 From Rent to Own 6. Conclusion

This paper has set out how to offer 4.7 Part of the desire to own property is that it million households, or 9 million working age gives individuals control over their lives – adults, the opportunity to buy their home – but extending it while undermining property or at the very least a stake in it. With nearly rights is a hollow victory. nine in 10 tenants saying that they would like to be homeowners, it is likely that a We believe that the Help to Own scheme huge number of those renting will want to is fair, necessary and thought-through. The take advantage of this scheme. cross-subsidy, caps and shared ownership elements treat tenants equitably rather than This paper has focused throughout on giving windfalls to some and nothing to incentives rather than punishments – giving others. landlords reasons to sell their homes to their tenants, rather than trying to force Without a scheme like this, the recent fall them into doing so. That is because we in home ownership will take a very long believe in rewarding people for doing the time to reverse and the resentment in our right thing. society will grow.

Ultimately, if people want to hold on to For too long those who have worked and property, the Government cannot stop done the right thing have been excluded them. Nor should Government want to from ownership, in large part due to ham- eliminate the private rented sector. It can fisted interventions by government. It is encourage through taxation and other time to help give people control over their changes, but if some landlords wish to housing situation, and their futures – and remain landlords, then even if their tenants support their aspiration for a better life. would like to buy, they should be allowed to do so. As one of the founders of the Centre for Policy Studies once declared: ‘If a Tory does not believe that private property is one of the main bulwarks of individual freedom, then he had better become a socialist and have done with it.’ 81

81 ‘My Kind of Tory Party’, Margaret Thatcher, originally published in The Daily Telegraph, 30 January 1975, Margaret Thatcher Foundation cps.org.uk 47 From Rent to Own Appendix - Calculating appreciation in the private rented sector

Appreciation that year. Note here we have excluded the years where the number of private Estimating the amount of appreciation of renters fell, since we’re interested in when properties in the Private Rented Sector properties were purchased not when they (PRS) is difficult because it depends were sold. when the current PRS properties were purchased by their current landlord. Data We then calculated the percentage of on this is not plentiful in an easy to assess private rental properties that landlords format. Therefore, a number of different acquired each year as a proportion of approaches have been used to estimate the total size of the PRS in 2016/17 (4.92 how much properties in the PRS have million households). We then find out the appreciated by, the methods for which are appreciation of average house prices for set out below. each of the last 27 years (back to 1991). Using English house price data from While none of these on their own are the Land Registry office the weighted ideal, all of them are reasonable attempts appreciations are calculated, which to estimate the figures, and the fact that were then summed to estimate average together they tend to come up with a appreciation across the entire PRS. similar set of figures can give us reasonable confidence. In addition, as is discussed However, an adjustment had to be made further down, there is a likelihood that the because according to this method 67.9% properties most likely to be involved in this of the PRS was purchased in or after scheme are likely to be the more expensive 1991, which means that about 32.1% was ones, and the appreciation is likely to be purchased in years prior to 1991. However, higher in high value areas, which means trying to include this 32.1% of the PRS in our that the average appreciation weighted calculations distorts the results, and leads by value is likely to be higher than these to an unrealistically high appreciation (310% methods produce – and so rather than this average appreciation if we go back to 1980 being clearly cost neutral – it is likely to be when tenure trends data begins). valuable. To solve this, we excluded the 32.1% of Method 1: Flow of Private Renters properties bought before 1991, and adjusted (UK-Wide) the weightings (so the 67.9% is now 100% of the sample - i.e. the sample shrinks so Using data from the ONS on English the weights for each individual year will household tenure trends (Section 1: rise). While not ideal because it means that Household tables see here), we took the we are possibly being too cautious with annual change in the number of households this approach, it is preferable to be too who were private renters as a proxy for the number of houses that landlords acquired

cps.org.uk 48 From Rent to Own cautious than too radical. In addition, there analysis (UK Wide) might be hidden churn – where properties are entering the sector in later years, HMRC publish estimates for the UK of cancelling out ones leaving the sector – the value and volume of asset disposals which would reduce the figures in the other chargeable for Capital Gains Tax purposes, direction and make this figure to radical. broken down by asset type and by the Having adjusted the weightings, we get an length of time for which the asset was held estimated average appreciation of 79.8%. (see table 14.8 here). direction and make this figure to radical. Having adjusted the weightings, we get an estimated Methodaverage appreciation of 79.8%. 2: CML 2016 survey of landlords This paper uses the figures released in (England) October 2017, the data itself is based on Method 2: CML 2016 survey of landlords (England) Capital Gains Tax payments going back to Data from The Confederation of Mortgage Lenders on when UK landlords acquired their first Data from The Confederation of Mortgage 2014-15, which are the most recent years property was used as a proxy for how long properties have been held for (see table 19 here). LendersThis data breaks down into 7 categories: <1 year, 1 on when UK landlords acquired -available2 years, 2- 3 years, 3in this format.-5 years, 5-10 years, their first10- 20 years, and >20 yeaproperty was usedrs. Central years were selected for each category, i.e. for the category as a proxy for how long3-5 years, the year 4 was selected. properties have been held for We take the class ‘UK & Foreign residential/ (see table 19 here). This data breaks down land’ as a proxy for properties in the PRS. into 7 categories:Appreciation for each of the categories was then calculated using historical house price data <1 year, 1-2 years, 2-3 For this category of assets held for between from Nationwide (see ‘UK House Prices Since 1952’ from here). Note here that for the years, 3-5 years, 5-10 years, 10-20 years, 15 and 20 years (this is the approximate category >20 years we are conservative and use appreciation for 21 years. and >20 years. Central years were selected median period that PRS properties have for eachWe then category, weighted appreciation for each categ i.e. for the category 3-5 ory according to the percentage of landlords been held by landlords, based on data on years, thethat year had 4 purchased was selected. their first property at that pointhousehold. By doing tenure this we trends can calculate – about an 57% of estimate for the average appreciation that a landlord the PRS in the was PRS purchased will have seen in the on their last 15 years, Appreciationproperty, which this methodology for each of the categoriesgives as 66.3%. was 4% in the 15-20 period, and 39% over 20 then calculated using historical house price years ago), the average chargeable gain Method 3: HMRC Capital Gains Tax analysis (UK Wide) capital gains tax data from Nationwide (see ‘UK House Prices as a percentage of the final disposal valueDeleted: Since 1952’HMRC publish estimates for the UK of the value and volume of asset disposals chargeable for from here). Note here that for was 42%. This means that the property has Capital Gains Tax purposes, broken down by asset type and by the length of time for which capital gains tax the category >20 years we are conservative appreciated in value by 72.4% relative to Deleted: the asset was held (see table 14.8 here). and use appreciation for 21 years. the original purchase price (100-42 = 58.

This paper uses the figures released in October 2017, the data itself is based on 42/58 x 100 = 72.4%). WhileCapital Gains this might be aDeleted: capital gains tax We thenTax weighted payments going back to 2014 appreciation for -each15, which are the most recent years available in this format. slight overestimate given it is not quite the category according to the percentage of median, this is balanced by the fact the landlordsWe take the class ‘UK & Foreign residential/land’ as a proxy for properties in that had purchased their first methodology also includes the PRS. For this commercial category of assets held for between 15 and 20 years (this is the approximate median period property at that point. By doing this we properties which have increased at a that PRS properties have been held by landlords, based on data on household tenure trends can calculate– about 57% of the PRS was purchased in the last 15 year an estimate for the average slowers, 4% in the 15 rate than residential-20 period, and 39% ones, and would appreciationover 20 years ago that a landlord), the average chargeable gain as a percentage of the final disposal value in the PRS therefore pull the figure down. will havewas 42%. This means that the property has appreciated in value by 72.4% relative to the seen on their property, which this methodologyoriginal gives purchase as 66.3%. price (100-42 = 58. 42/58 x 100 = 72.4%). While this might be a slight overestimate given it is not quite the median, this is balanced by the fact the methodology Methodalso includes commercial properties which have increased at a slower rate than residential 3: HMRC Capital Gains Tax ones, and would therefore pull the figure down.

Appreciation methods and average appreciation methods and average appreciation

Appreciation Method Average Appreciation Method 1: Flow of Private Renters 79.8% Method 2: CML 2016 survey of landlords 66.3%

Method 3: HMRC Capital Gains Tax analysis 72.4% Deleted: capital gains tax Average Appreciation 72.8%

53 cps.org.uk 49 From Rent to Own Of course, this figure should be treated with REGIONAL DIFFERENTIALS AND a pinch of salt – the real figure is likely to be WHO IS MOST LIKELY TO SELL between 65-80% or so with a reasonable UNDER THE SCHEME margin of error on either side. But the point We know that the greatest appreciation is that even the low figure is one that would is occurring in parts of the country where more than cover the necessary appreciation values are highest. The graph below shows – and this ignores the fact regional how appreciation has been most extreme differentials asOf course, this figure should be treated with a pinch of salt well as the incentives to sell – the real figure is likely to be between 65-80% or so with a reasonable margin of error on either side.in the South of England But the point is that and especially being strongerOf course, this figure should be treated with a pinch of salt for those who have higher – the real figure is likely to be even the low figure is one that would more than cover the necessary appreciation in London. It uses data taken– and this from the CGT, asbetween 6 discussedignores the fact regional differentials as well as the incentives to sell being stronger for those 5-80% or so below. It with a reasonable margin of error on either side.is very hard to But the point is that Nationwide regional quarterly price index. adjust foreven the low figure is one that would more than cover the necessary appreciation this who have higher CGTdifferential effect, as discussed below. I in regional t is very hard to adjust for this differential effect – and this in regional prices and so we do not attempt to do so, but what is clear is that any differential (See https://www.nationwide.co.uk/about/ prices andignores the fact regional differentials as well as the incentives to sell being stronger for those so we do not attempt to do so, who have higher CGTeffect works in our favour rather than against us, moving us even further over the necessary , as discussed below. It is very hard to adjust for this differential effect house-price-index/download-data). but what is clearthreshold of is that 65%. any differential effect in regional prices and so we do not attempt to do so, but what is clear is that any differential works ineffect works in our favour rather than against us, moving us even further over the necessary our favour rather than against us, moving threshold ofus evenRegional further 65%. differentials over the and who is most likely to sell under the scheme necessary Deleted: A note on regional threshold of 65%.We know that the greatest appreciation is occurring in parts of the country where values are

highest. The graph below shows how appreciation has been most extreme in the South of RegionalEngland and especially in London. It uses data taken from the Nationwide regional quarterly differentials and who is most likely to sell under the scheme Deleted: A note on regional price index. (See https://www.nationwide.co.uk/about/house-price-index/download-data). We know that the greatest appreciation is occurring in parts of the country where values are highest. The graph below shows how appreciation has been most extreme in the South of Regional appreciation 1993 - 2017 England and especially in London. It uses data taken from the Nationwide regional quarterly 600% price index. (See https://www.nationwide.co.uk/about/house-price-index/download-data). 500%

400% Regional appreciation 1993 - 2017 600% 300%

500% 200%

400% 100%

300% 0%

200%

100%

This matters because where the appreciation happens creates a greater or lesser level of 0% capital gain and so Capital Gains Tax liability. It is worth repeating the point made earlier Deleted: capital gains tax about the same 50% appreciation being skewed toward low or high value areas. This matters because where the point made earlier about the same 50% appreciation happensCase 1: 50% a createsppreciation skewed toward high value areas a greater or appreciation being skewed toward low or Low value High Value Average lesser level of capital gain and so Capital high value areas. appreciation Gains Tax liability.100 It is worth repeating the 200 This matters because 125 where the appreciation happens creates a greater or lesser level of 25% 350 75% 50% capital gain and so Capital Gains Tax liability. It is worth repeating the point made earlier Deleted: capital gains tax about the same 50% appreciation being skewed toward low or high value areas. Case 1: 50% appreciation skewed toward high value areas 54 Case 1: 50% a ppreciation skewed toward high value areas Low value High Value Average appreciation 100 200 125 25% 350 75% 50%

54 cps.org.uk 50 From Rent to Own

Case 2: 50% appreciation skewed toward low value areas Case 2: 50% appreciation skewed toward low value areas Case 2: 50% aLow valueppreciation skewed toward low High Valuevalue areas Average appreciation Low value100 High Value200 Average 175 75% 250 25% 50% appreciation 100 200 175 In case 1, the total CGT liable at a rate of 28% 75% 250 - simplifying by just assuming this was the rate 25% 50% In case payable across both 1, the total CGT liable– would be at a rate£67,000 of . In case 2, the CGT liable like Wales andat a rate of 28% would be the North East seeing much just £35,000. In fact, the CGT would be even higher in case 2 anyway, because the annual 28% - simplifying by just assuming this was smaller gains. This is also shown in the table In case 1, the total CGT liable at a rate of 28% exempt allowance and the 18% rate would apply to part of it. - simplifying by just assuming this was the rate payable across both the rate payable across– would be both – would£67,000 be . In case 2, the CGT liable below. at a rate of 28% would be £67,000.What In case is important 2, the CGT is the liable regional at a rate differentials – which again show that there is a clear just £35,000correlation between average capital gain and high value areas . In fact, the CGT would be even higher in case 2- London, then the wider South anyway, because the annual of 28% would be just £35,000. In fact, the This all matters because there is likely to be a exempt allowance and the 18% rate would apply to part of it. lead – areas where housing is more expensive – with cheaper areas like Wales and the North CGT would be even higher in case 2 anyway, East seeing much smaller gains. This is also shown in the tabbias towardle below. those with greater gains wanting What because is important the annual exempt is the regional allowance differentials and –to which take advantage again show of this that scheme, there sinceis a they clear This all matters because there is likely to be a bias toward those with greater gains wanting correlation between average capital gain and high value areas the 18% rate would apply to part of it. are more likely- London, then the wider South to benefit from the substantial to take advantage of this scheme, since they are more likely to benefit from the substantial lead – areas where housing is more expensive – with cheaper areas like Wales and the North relief (and of course 2% estate agent fees will relief (and of course 2% estate agent fees will be higher in absolute terms). The table below East seeing much smaller gains. This is also shown in the tabWhat is is important from Countrywide is the regional estate differentials agents and shows sellers be higher across inle below. England absolute and terms). Wales The mak tableing a below This al– whichl matters because there is likely to be a bias toward those with greater gains wanting profit when selling their buy again show that there is a-to clear-let property. Of these, not all will see the necessary gain of is from Countrywide estate agents and shows correlationaround 60 between to 65 average%, but the average is what matters capital gain sellers– as ca lculated above. across England and Wales making a to take advantage of this scheme, since they are more likely to benefit from the substantial and high value areas - London, then the profit when selling their buy-to-let property. relief (and of course 2% estate agent fees will be higher in absolute terms).88 The table below wider SouthTable on landlord gains lead – areas where on current sales housing across the countryOf these, not all will see the necessary gain is is from more Countrywide expensive – with estate cheaper agents areas and shows sellers of around across 60 to England 65%, but and the Wales average mak is whating a profit when selling their buy-to-let property. Of these, not all will see the necessary gain of matters – as calculated above. around 60 to 65%, but the average is what matters – as calculated above.

Table on landlord gainsTable on landlord gains on current saleson current sales across the countryacross the country8882

It is important to note that the longer a property has been held the greater the gains are likely. According to the Countrywide figures above the average capital gain for landlords is 54% at present as for those selling, the average length of time they calculate the property is held for is 8.5 years – well below the average time held across the whole sector. This shows that those

88 ‘What next for buy-to-let?’, Countrywide, Spring 2018

It is important to note that the longer a calculate the property is held for is 558.5 years

It is important to note that the longer a property has been held the greater the gains are likely. property has been held the greater the gains – well below the average time held across According to the Countrywide figures above the average capital gain for landare likely. According to the Countrywide the whole sector. This shows thatlords is 54% at those who present as for those selling, the average length of time they calculate the property is held for figures above the average capital gain for make particularly substantial capital gains landlords is 54% at present as for those in high demand areas may not want to to is 8.5 years – well below the average time held across the whole sector. This shows that those selling, the average length of time they pay CGT but instead just keep collecting

88 ‘What next for buy-to-let?’, Countrywide, Spring 2018 82 ‘What next for buy-to-let?’, Countrywide, Spring 2018

cps.org.uk 51 From Rent to Own55 rent in places like London where rents have how many landlords own 5 – 9 properties. risen faster. This is why a scheme like this is To test this, we sum the 6 categories we get necessary in order to encourage sales. a figure of 4.637 million houses for the size of the PRS, only 54,000 less than the actual In addition, as we have already noted, some figure of 4.692 million, a difference of just may choose to sell their properties under the over 1%, which should reassure us that the existing Private Residence Relief scheme, and assumptions we have made are reasonably properties which do not have any equity gains approximate to reality. at all and which are valued at over £150,000 would not be able to take part in this scheme. According to data from HMRC (See table While this is not likely to be a huge number 14.8 here) the average chargeable gains – since the Countrywide estimate above on non-financial assets as a proportion of shows less than one-in-ten properties has not the value of the asset at disposal was 32%, risen in value since it was bought as a rental equal to £68,357.76 for the average house property, and many of these are likely to be in (average house price for May 2018 is £213,618 low value areas and worth less than £150,000, according to Nationwide). With the full 33% what it means is that the necessary increase in relief applied to all landlords this would save value will be slightly less than the 60% to 65% the average landlord £6316.26 per house. discussed, because these properties will be excluded from the scheme and therefore this Because the cap works on the total value of will raise the average higher than it otherwise the portfolio being sold, we can ignore those would be. being sold at 18% and so a lower reduction in their CGT bill of 6% (rather than the 9.33% DETAIL ON CAPPING RELIEF FOR CGT reduction that landlords paying the 28% LARGE PROPERTY PORTFOLIOS rate will receive) – they will not be caught by While not related to the appreciation directly, the cap since the number of properties and it is worth showing this calculation in more their value would be low. To take account of detail as it is fairly complex. The number of this we will take all single property landlords landlords was taken from 2013/14 income tax out of the calculation. This is not entirely data (found here). This data stops in 2013/14, accurate, because some single property but the PRS has grown substantially since landlords will pay substantial capital gains then, and if the trend of landlord numbers and other multiple landlord properties may from the 3 years before 2013/14 is used only pay the 18% rate, but it will serve as a to extrapolate an estimate of the number proxy. of landlords today this gives 2.1 million. For reasons of simplicity and to bring our Using the above we calculate the total estimate in line with other estimates (such amount of CGT all the remaining landlords as here) we here round down to 2 million will pay if they receive the full 33% relief, landlords. and then also the total amount of CGT when relief is reduced for large property portfolios. Assuming the distribution of properties is We then take the difference to work out how broadly similar to 2010 and combining this much this cap will save in total. with the total number of landlords in the PRS allows an estimate of how many will fall into each of the relief bands, i.e. we estimate

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